Unity 2Q26 First Take: Q2 finally turned the corner, delivering a rare, clear beat for Unity in recent years and validating the post-restructuring effort. Driven by a major outperformance in ads, both revenue and profit improved meaningfully, and Q3 guidance also topped Street expectations.

1) Grow accelerates

With the biz at an inflection, recent quarters have hinged on one metric. Specifically, QoQ growth in the Grow segment.

In both last quarter and this quarter, investors expected Vector to grow >15% QoQ (~75% annualized YoY). That implies, after offsetting the IronSource wind-down and the slower Supersonic contribution, the strategic Grow segment should grow >12% QoQ (~57% annualized YoY).

In reality, Q2 strategic Grow revenue rose 18% QoQ. Guidance implies 16% QoQ for Q3, well above the 10% bar investors were using.

As long as ads beat, their high GPM and strong cash generation can materially improve the company's operating profile. That provides operating leverage across the P&L.

On the call, watch management's breakdown of ad revenue drivers. With IronSource winding down at end-Apr, how much of Q2 ad growth came from share released vs. organic Vector gains warrants parsing. If organic Vector growth dominates, the beat is higher quality.

2) Create faces near-term pressure

Create was mediocre this quarter, and RPO trends suggest near-term pressure. We see two drivers.

1) The Unity 6 launch sales cycle has largely passed. That naturally tempers near-term bookings.

2) Some AI substitution may be emerging, especially for small and mid-sized developers building solo hyper-casual titles. Large models can replace parts of the workflow, lowering costs.

In late Jul, the company unveiled Unity 7, with testing planned for early next year. Until then, we expect Create to at best hold flat, with app store fee concessions offset by AI substitution. $Unity Software(U.US)