Executive Summary / Key Takeaways

• Unity Software is undergoing a significant transformation, refocusing on its core Create and Grow businesses after a period of strategic reset and addressing past controversies.
• The company's new AI platform, Unity Vector, is a critical technological differentiator for the Grow segment, showing promising early results with a reported 15-20% lift in iOS installs and in-app purchases compared to the legacy system.
• The Create Solutions segment, particularly the subscription and industry verticals, demonstrates robust double-digit growth, supported by strong adoption of the new Unity 6 engine and strategic price increases rolling out.
• Recent financial performance, including exceeding Q1 2025 guidance for revenue and adjusted EBITDA, reflects improved execution, cost discipline, and early benefits from strategic initiatives like the accelerated Vector rollout.
• While near-term guidance remains prudent due to the ongoing transition in the ad business and non-strategic revenue runoff, management expresses increasing confidence in achieving sustainable, profitable growth and leveraging Unity's unique platform position across the entire development lifecycle.

The Platform Powering Interactive Worlds

Unity Software Inc. stands at the intersection of creativity and technology, providing the foundational tools that empower developers to build immersive, interactive experiences across a multitude of platforms. From its origins as a game engine provider nearly two decades ago, Unity has evolved into a comprehensive platform aiming to support creators throughout the entire product lifecycle – from initial concept and development through live operations, user acquisition, and monetization. This ambition positions Unity uniquely in the market, seeking to be the single destination for developers looking to move from prototype to profitability.

The company's business is structured around two core segments: Create Solutions and Grow Solutions. Create Solutions provides the engine, editor, and related services for building 2D and 3D content, while Grow Solutions offers tools primarily focused on helping developers monetize and expand their audience, particularly through advertising. This integrated approach is central to Unity's strategy, leveraging insights gained from its broad reach – touching billions of players monthly through applications built with its runtime – to inform and enhance both creation and monetization efforts.

In recent years, Unity has navigated a period of significant change, including a controversial pricing policy proposal that strained relationships with its developer community. Under new leadership, the company has embarked on a strategic reset, streamlining its portfolio to focus on core, high-potential areas and prioritizing re-establishing trust, enhancing execution, and accelerating product innovation. This transformation is now gaining momentum, with recent results and strategic initiatives signaling a potential turning point.

Technological Edge: The Engine and the AI

At the heart of Unity's offering is its powerful real-time 3D engine. This technology provides developers with a flexible and efficient environment to build experiences once and deploy them across diverse platforms, from mobile and PC to consoles and emerging extended reality (XR) devices. The recent launch of Unity 6 is a testament to the company's renewed focus on core product quality. Described by management as the most stable and performant version shipped to date, Unity 6 has seen rapid adoption, with over 4.4 million downloads since launch and 43% of active users already migrated, significantly outpacing prior releases. A new production testing methodology, first leveraged in the Unity 6.1 release, aims to ensure stability while enabling developers to access new features, addressing a key pain point for the community. The engine's continued relevance is underscored by its day-one support for upcoming hardware like the Nintendo Switch 2 and its strong positioning in the growing AR/VR market, powering the majority of top applications and supporting platforms like Meta Quest and Android XR. This technological foundation in creation provides a durable competitive advantage, fostering a loyal developer base and driving subscription growth.

Complementing its creation tools, Unity is making a significant technological leap in its Grow segment with the development and rollout of Unity Vector, a new AI platform for its advertising network. This initiative is crucial for enhancing Unity's competitiveness in the mobile marketing landscape. Vector is designed to leverage the vast amounts of data available across the Unity ecosystem, integrating self-learning AI models to provide deeper insights into player behavior, optimize ad performance, and deliver better return on investment (ROI) for advertisers. The early results are compelling: management reported a 15-20% lift in both the number of installs and the value of in-app purchases on iOS traffic running on Vector compared to the old model, with Android showing a similar trajectory. This quantifiable improvement is a tangible benefit for advertisers, directly impacting their user acquisition efficiency. While still in its early stages ("Vector 1.0"), this platform is seen as foundational to Unity's long-term strategy in Grow, enabling it to compete in a fundamentally different way by leveraging its unique first-party data connection to billions of runtime users – an advantage that management believes "dwarfs the size of other networks." The investment in Vector's R&D, including increased cloud costs expected to normalize later in the year, is a strategic priority aimed at unlocking this data advantage and driving future revenue acceleration.

Competitive Dynamics and Market Positioning

Unity operates in highly competitive markets. In the Create segment, it competes with established players like Autodesk (ADSK) with its professional 3D tools and Epic Games (Unreal Engine), which also offers a powerful engine. While competitors like Autodesk may excel in specific areas of professional design workflows and Epic Games in high-fidelity graphics for AAA titles, Unity's strength lies in its accessibility, ease of use, broad platform support (especially mobile and XR), and its extensive ecosystem of developers. Its strategic focus on stability and performance with Unity 6 and the new testing methodology directly addresses developer needs, aiming to enhance platform stickiness. The growth in the industry vertical, applying its 3D technology to areas like automotive (Toyota (TM), BMW (BMWYY)), manufacturing (Raytheon (RTX), Bosch Rexroth), and healthcare (Phillips (PHG)), demonstrates the engine's versatility and opens up new avenues for growth beyond traditional gaming, where competition may be less direct or Unity's offering is uniquely suited for interactive visualization.

In the Grow segment, Unity faces intense competition from other ad networks and monetization platforms, including those operated by large tech companies and specialized ad tech firms. Historically, Unity's ad business faced challenges in competitiveness. The development of Unity Vector is a direct response to this, aiming to build a more modern and effective machine learning stack. By leveraging ecosystem data, Unity seeks to differentiate itself from competitors who may lack the same depth of insight into player behavior across the entire development lifecycle. While competitors like Electronic Arts (EA) have proprietary engines and monetization within their ecosystem, Unity's open platform approach and its connection to a vast network of developers and billions of runtime users provide a unique data asset. The success of Vector in delivering measurable ROI improvements is critical to gaining market share in user acquisition, which management views as a higher priority than mediation, where Unity's platform-based data advantage is less pronounced compared to being solely an ad network. The competitive landscape is dynamic, with emerging AI tools also posing potential disruption, but Unity's strategy is to integrate AI into its platform to enhance developer workflows rather than viewing it solely as a competitive threat.

Financial Performance Reflecting Transformation

Unity's recent financial performance provides tangible evidence of its ongoing transformation, albeit with the expected lumpiness associated with strategic shifts. In the first quarter of 2025, the company reported total revenue of $435 million, a decrease from $460.4 million in Q1 2024. This decline was primarily driven by decreases in both Create and Grow Solutions revenue year-over-year. Within Create, the decrease was attributed to lower professional services and consumption services revenue, partially offset by double-digit growth in subscription revenue. Grow Solutions revenue saw a decrease driven by market competition and resource allocation decisions as the company prioritized the Vector transition. Non-strategic revenue, which contributed $17 million in Q1 2025 (down from $34 million in Q1 2024), is expected to decline further, impacting overall revenue in the near term.

Despite the top-line pressure, profitability showed significant improvement. Gross profit increased to $321 million in Q1 2025 from $316 million in Q1 2024, with gross margin expanding to 74% from 69%. Adjusted gross margin remained stable at 82%. Operating expenses saw a substantial reduction, falling to $449 million in Q1 2025 from $691 million in Q1 2024. This was largely a result of aggressive cost management and workforce reductions implemented as part of the strategic reset, particularly impacting R&D, Sales and Marketing, and G&A expenses. Stock-based compensation expense also decreased significantly, partly due to lapping prior M&A-related vestings.

These operational efficiencies contributed to a positive adjusted EBITDA of $84 million in Q1 2025, significantly exceeding the top end of the company's guidance by $19 million and representing a 200 basis point margin expansion year-over-year. While the company continues to report GAAP net losses (a net loss of $77.9 million in Q1 2025, a substantial improvement from a $291.5 million loss in Q1 2024), the focus on adjusted profitability metrics highlights the underlying operational improvements.

Liquidity remains robust, with $1.5 billion in cash and cash equivalents as of March 31, 2025. The company actively manages its debt profile, including issuing new convertible notes to repurchase existing ones and extend maturities, as seen in the Q1 2025 issuance of $690 million in 2030 notes and the repurchase of $688 million in 2026 notes. Free cash flow in Q1 2025 was $7 million, a notable improvement year-over-year, although Q1 is seasonally the weakest quarter for cash flow. Management believes existing liquidity is sufficient for the next 12 months and expects to meet longer-term obligations through operating cash flows and potential future financing, while also aiming to gradually de-lever.

Outlook and Forward Momentum

Unity's outlook reflects a balance between the near-term impacts of its transformation and increasing confidence in its long-term growth potential. For the second quarter of 2025, the company guided for total revenue between $415 million and $425 million and adjusted EBITDA between $70 million and $75 million. This guidance anticipates steady sequential revenue in Grow, driven by the improved performance of Unity Vector, but offset by expected declines in select legacy ad products. In Create, continued momentum is expected in the subscription and industry businesses, but a slight sequential decline is forecast due to the runoff of non-strategic revenues.

Management's decision to transition to quarterly guidance in 2025 underscores the dynamic nature of the current period, particularly the ongoing evolution of the ad business with the Vector rollout. They explicitly stated that while the accelerated completion of the Vector migration is positive, the full revenue benefits will take time to materialize and may be partially masked by declines in legacy areas in the immediate future. However, the expectation is for the overall Grow business to return to revenue growth as Vector's performance continues to improve and outpace other headwinds.

The Create segment is expected to remain a source of strength, with management reiterating expectations for continued double-digit growth in the core subscription business, supported by the adoption of Unity 6 and the rolling implementation of recent price increases throughout 2025 and 2026. The industry vertical, in particular, is highlighted for its consistent sequential and year-over-year growth, demonstrating the expanding applicability of Unity's technology beyond gaming.

Longer term, Unity maintains its focus on achieving the "Rule of 40," aiming for a combination of attractive revenue growth and meaningful profitability. While the exact timing is not yet specified, the strategic investments in Vector and the focus on operational efficiency are geared towards this goal. Risks remain, including execution risk for the Vector rollout, intense competition in both segments, potential impacts from macroeconomic conditions and international trade policies, and ongoing litigation. However, management's focus on execution, product innovation, and leveraging Unity's unique platform position provides a clear strategic direction to address these challenges and capitalize on the significant market opportunities in interactive 3D content and mobile monetization.

Conclusion

Unity Software is in the midst of a critical transformation, moving past a challenging period to refocus on its core strengths and strategic opportunities. The successful and accelerated rollout of the Unity Vector AI platform represents a significant technological advancement for its Grow business, offering tangible performance improvements that could fundamentally enhance its competitive standing in the mobile advertising market over time. Coupled with the continued double-digit growth in its Create subscription business, fueled by the adoption of Unity 6 and expansion into industry verticals, the company is building a foundation for future growth. While near-term financial guidance reflects the complexities of this transition and the wind-down of non-strategic areas, the improvements in profitability and cash flow generation demonstrate enhanced operational discipline. For investors, the story of Unity is one of a powerful platform leveraging its unique ecosystem data and technological innovation to drive sustainable growth, provided it can successfully execute on its strategic priorities and navigate the dynamic competitive landscape. The early signs from the Vector rollout and Create momentum suggest the transformation is gaining traction, positioning Unity for a potentially brighter future.