Unity Software Q1 2025 Earnings Call Transcript

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Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

First Quarter twenty twenty five Earnings Call. My name is Alex Giaimo, and I recently joined Unity to lead Investor Relations. I'm thrilled to join the team and look forward to working with all of you. Today, I'm joined by Matt Bromberg, our CEO and Jared Yase, our CFO. Before we begin, I'd like to note that this conference call includes forward looking statements, including statements about goals, business outlook, industry trends, market opportunities, financial performance and similar items, which are subject to risks, uncertainties and assumptions that could cause actual results to differ from those expressed in these forward looking statements.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

We undertake no obligation to update any of our forward looking statements. For more information about factors that may cause results to differ, please refer to the risks described in our most recent Form 10 ks, particularly in the section entitled Risk Factors as updated by additional filings we make with the SEC from time to time. Today's call will include both GAAP and non GAAP financial measures. Non GAAP financial measures are in addition to and not a substitute for or superior to GAAP results. A full reconciliation of GAAP to non GAAP financial results is available in our earnings release, which can be found on our Investor Relations website and on the sec.gov website.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

With that, I'll pass the

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

call over to Matt.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Thanks, Alex. That's really good to have you with us, and good morning, everybody. On behalf of all the people of Unity, I'd like to thank each of you for joining us today. The transformation of our company gained significant momentum in the first quarter.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Through our commitment to building a culture of execution and discipline, reestablishing trust with our customers and the community, and accelerating both the pace and quality of our product innovation, we're creating the conditions to catalyze rapid growth at Unity. In the first quarter, strength across both the Grow and Create segments helped drive results that exceeded expectations, beating the high end of our guidance for revenue by 5% and adjusted EBITDA by twenty nine percent. The progress in our grow business has been particularly encouraging. Last quarter, we announced the intention to migrate the Unity ad network to our new AI platform, Unity Vector, by the end of q two. Today, we're excited to report that this migration has already been fully completed with all the iOS and Android traffic on the Unity ad network now running on Vector well ahead of schedule.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

This is a significant first milestone and a testament to our commitment to rapid continuous product innovation in our advertising business. With Vector now operational, we can begin to leverage data from across the Unity ecosystem to provide deeper insights, optimize performance, and deliver better return on investment for our customers. Our journey to compete in a fundamentally new way has now officially started as our self learning models adapt in real time, helping customers navigate an increasingly competitive mobile marketplace. The accelerated time frame of the vector rollout means that our customers are already experiencing a lift in the return they're seeing from spending with Unity. In iOS, where we've now had enough time to develop reliable data, Vector is providing a 15 to 20% lift in both the number of installs and the value of in app purchases when compared to our old model.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

That means more players and more players who spend more, providing our advertisers with a higher return on their investment with us. Although our Android migration is more recent, it's happily on a similar trajectory to where iOS was during the same period of development. Now we look forward to the next phase of our plan, where we'll work closely with our customers to help optimize and enhance performance of their user acquisition capabilities over time while also continuing to invest in improving the fundamental AI each day. These strong early results not only provide confidence that we're on the right track with Vector, they also enable us to continue to take an aggressive approach with respect to the modernization of our ad business overall. Our primary focus is on creating meaningful, sustainable revenue growth over the long term.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

That means we don't hesitate to move resources to our best performing products, short term revenue impacts notwithstanding. As a consequence, in q two, investors won't yet fully see the vector driven lift in our financial results. That said, our confidence in the future of our Grow business has never been stronger. We're equally excited about progress in the Create business. Uni six, the most stable and performant version of Unity we've ever shipped, has now registered more than 4,400,000 downloads since launch.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

43% of our active users have already moved to Unity six, with recent survey data suggesting that more than 80% of users are currently intending to upgrade. And we can see this enhanced connection to our customers flowing through to our financial results as well, with subscription revenues and create growing double digits year over year in the quarter. In April, we launched Unity six dot one. Six dot one is the first release to leverage our new production testing methodology, which validates our software in real production environments to ensure that our customers never again have to choose between adopting new features and maintaining stability. Unity six dot one also significantly enhances the number of platforms our developers can reach, including day one support for Nintendo Switch two, Meta Quest, Android XR, foldable Android screens, instant games, and web GPU.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

For the Switch two, we battle tested Unity through a first of its kind partnership with Konami, where our internal teams built a full launch title called Survival Kids. The valuable feedback obtained during the development process of this game will drive future enhancements to the Unity engine. We're particularly optimistic about the future potential of AR and VR gaming and entertainment. With recent research from new gen apps predicting the market will reach 216,000,000 players worldwide by 2025. Our goal is to stay at the forefront of this evolution and for Unity to continue to be the go to platform powering AR and VR experiences where we're already powering the majority of the top applications in the marketplace.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

As one measure of Unity's continued strength with the next generation of game developers, Not four or five, but all nine of the nine game categories at the Independent Gaming Festival Awards of twenty twenty five went to games made with Unity. In addition, Niva by Nomada Studios and Thank Goodness You're Here by Cole Supper, both won twenty twenty five BAFTA Awards with Made with Unity titles, an incredible recognition of the talent and creativity in our community. And finally, the growth of the Unity platform beyond games into other industry verticals continues to represent the fastest growing part of our subscription business. Consistent strong demand across a wide variety of industries and use cases has resulted in both nine straight quarters of sequential revenue growth as well as meaningful year over year revenue growth as well. New customers include Philips using Unity for minimally invasive surgery simulation, Siemens, who's modernizing its training and workforce development, and Toshiba Elevator and Building Systems, who's creating digital twins of installation sites.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

The Unity platform has tremendous potential outside of gaming, and we are increasingly optimistic about our ability to capitalize on this opportunity at scale. I'd like to thank all of our teams globally for their relentless efforts as we continue to transform Unity and earn our customers' trust each day. As the only company we know of that is capable of supporting developers across the full life cycle of development, Unity plays a unique role in helping our customers move from prototype to profitability faster and more efficiently than ever before. It's a role we feel privileged to play. Thank you again for your time and attention this morning.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

With that, I'll pass it over to Jared for an overview of our financial performance. Jared?

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Thanks, Matt. I'm pleased to report that Unity exceeded the top end of our guidance on all measures in the first quarter. Revenue exceeded the top end of our guidance by 20,000,000, with adjusted EBITDA coming in 19,000,000 above the top end of our guidance. Grow revenue in the first quarter was $285,000,000 down 4% year over year, with revenue upside compared to our guidance, partially driven by an acceleration of the rollout of Unity Vector, where we're seeing better performance than expected at this early stage. In Create, revenue was a hundred and 50,000,000, down 8% year over year driven by our transition away from the low margin professional services business.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Through this deliberate transformation, we've optimized our revenue mix with high margin subscription business now representing nearly 80% of Create revenue. Our core subscription business continues to demonstrate strong momentum, delivering double digit year over year growth this quarter, positioning us for sustainable, profitable expansion. Turning from revenue to non GAAP profitability. Adjusted EBITDA for the quarter was $84,000,000 with 19% margins. Adjusted EBITDA margins expanded 200 basis points year over year in the first quarter, driven by operating leverage in the platform and solid cost management across expense lines, particularly in g and a and sales and marketing, where total expense was down roughly $2,020,000,000 year over year.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

R and d costs are up 10,000,000 over the last few quarters as a result of heavy investment in Unity Vector. We would expect those costs to normalize in the back half of the year as we transition away from running both our legacy and new Unity ad models in parallel. Free cash flow in the first quarter was 7,000,000, an improvement of $22,000,000 year over year. The first quarter is traditionally the most modest seasonally from a free cash flow standpoint, given the concentration of prepaids, personnel costs, as well as payments to the supply side of the Gro network. As we focus on driving per share returns, in the first quarter, we've started to report out on adjusted EPS in our disclosures.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Adjusted EPS in the first quarter was $0.24 and investors should expect to see a sharper focus on minimizing shareholder dilution and stock comp expense, which came down nearly $45,000,000 year over year as we lapped M and A related vestings. In terms of our balance sheet, cash at the end of the quarter was $1,500,000,000 and debt was $2,200,000,000 In February, we priced a $690,000,000 convert and the offering was extremely well received. The deal was upsized and priced with zero coupon and a capped call with a cap price of $47.74

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

We used the proceeds of the offering to repurchase $688,000,000 of principal balance of $20.26 notes and effectively extend those maturities into 2,030.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

This transaction ensures that Uniti has the capital structure with a smoother debt maturity profile, and we now feel extremely comfortable with where we are from a financing standpoint. That, I'd now like to turn to guidance for the second quarter. We're expecting total second quarter revenues of 415,000,000 to 425,000,000 and adjusted EBITDA of 70,000,000 to 75,000,000. In Grow, we expect steady sequential revenues driven by improved performance of Unity Vector. This revenue growth is expected to be offset by declines in select legacy ad products in the second quarter.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

However, as the performance of Vector continues to improve, we expect to see the overall Grow business return to revenue growth with the performance improvement from Vector outpacing any other headwinds we face. In Create, we expect continued momentum in our subscription business across the gaming and industry verticals. However, we're forecasting a slight sequential decline in Create due to an expected runoff in nonstrategic revenues. Before turning the call over for questions, I'd like to extend a warm welcome to Alex Giamo, who recently joined Unity as our new head of investor relations. And with that, I'd like to thank you for joining us on Unity's first quarter twenty twenty five conference call.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

And let me turn the call over to Alex so that we can take your questions.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Jared. We'll now open the call up for questions. If you'd like to ask a question, please click the raise hand button on the bottom of the screen. So we'll take a few moments here. We'll take our first question from Matt Cost at Morgan Stanley.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Matt, go ahead.

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Hi, everybody. Can you hear me?

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Hello?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yes. Go ahead, Matt.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Matt, we can hear you.

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Yeah. Sorry about that. Yeah. Yeah. Sorry.

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Great. Well, thanks for taking the question. I guess, on the on the Vector rollout, I guess if we could just dig down one level deeper there. Are you seeing the customers that are on Vector respond to that 15 to 20% lift in installs in IAP by by increasing their spend? And are you seeing customers shift overspend from legacy ad products onto the vector enabled products?

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Or is this a dynamic where you're you're kind of losing business on one hand but trying to offset it by growing wallet share and increasing spend for the people who are who are on the new the new product?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Hey, Matt. Thank you very much for the, for the question. Good to hear from you. The advertising business is a very competitive business, and there are which means there's internal competition and external competition. And I think the best way to think about it is not to try to get too cute.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

What's really important is that performance of Vector is really positive. It's much more positive than than even we had expected, and it's driving return for advertisers. And what that means is they spend more. And we're seeing across the broad set of our customers, we're seeing customers begin to spend more with us. As as as all of you know, we're following the company.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Folks in the in performance based advertising do not have fixed budgets. So they will spend up to the point they they they hit their ROAS targets. And when we perform better and provide more players and more high value players, they spend more with us. And so I would imagine that, you know, that that that they are customers are moving budgets around all the time. But the point is that it's not capped.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

It's it's it's it's not a winner take all business. And so we're really excited about about the broad growth we're seeing across our across the segment.

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Great. Thanks. And then on the subscription side, you know, you noted kind of strong growth in the subscription revenue. You're seeing a lot of adoption of Unity six, it seems, which is great. Is is this mostly being driven by people being customers becoming subject to the higher pricing on Unity six, or is there a meaningful element of of subscriber growth in that subscription revenue growth as well?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

You will start to see the impacts of some of the significant price increases that that we made recently until the back half of the year. So that's that's not what you're seeing there. You're seeing, you know, both growth in the core business as well as some of the impacts of of some older pricing increases that we've made.

Matthew Cost
Matthew Cost
Executive Director, Equity Research at Morgan Stanley

Great. Thank you.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Matt. We'll go next to Andrew Boone at JMP Securities.

Andrew Boone
Managing Director at Citizens JMP

Hi. Thanks so much for taking the question. I wanted to ask again on Vector. Matt, you talked about incorporating data across the Unity ecosystem and optimizing performance. Can you just speak to the trajectory of the improvements to the model that we should be expecting for the back half of the year?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. I think, you know, we're we're we're being prudent about how we're guiding this business, Andrew, just simply because it's it's a new it's a new business for us. It's a new system. And we just we we wanna be really we really wanna be thoughtful about how we think about it as we go, which is why we reverted to quarterly guidance at this point. I guess what I what I what I can tell you is that it continues to pace out in front of our expectations authentically so that, as I said, we were able to pull in the launch of Vector by by quite a number of weeks, which is gonna have a, you know, a positive impact on our business.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

It's just not one that we anticipated. As the nature of this business, and you've you've heard me say this many times, is it an iterative one? So we the the business starts with small improvements, small daily iterative improvements, and then we continue to work on the models. The models learn. They adapt.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We we find new sources of data for those models, and they get better over time. And at some point, you cease you begin to see step change functions. But, you know, we're sort of learning right along with our, you know, with our self learning model. So what I would tell you at this point is that, again, we're ahead of schedule. We're we're seeing measurable increases of about fifth as I said, about 15 to 20% both in the scale that we're able to provide advertisers and in the quality of the users they're obtaining.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

And as a consequence, we have customers who, on a broad basis, are beginning to spend more. As I as I mentioned, you know, in the preamble here, that's that's really positive. But what it's also doing is giving us the ability to go back and fully get into modernizing the whole advertising business. So, you know, back to what Matt was asking, you know, a couple of minutes ago, we're focused on really driving vector and vector revenues. And if there's some movement of from one product to another inside, that's fine with us.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

But we're investing really heavily in the vector business because we are very confident that over the long term, we'll be able to fundamentally compete in a different way. And, you know, a couple of quarters ago when we were just beginning this build, you know, there was there's a lot on the line for us. And I guess what I just wanted to say how how how pleased I am and and proud of our team that we've been able to deliver a brand new system that is now delivering measurable improvements for customers, and we're just really excited about continuing to lean into that over time.

Andrew Boone
Managing Director at Citizens JMP

That makes sense. And then I wanna ask the obligatory macro question. Have you guys seen anything to date, and is there anything that we should keep in mind just given the the spectrum of potential outcomes for the broader economy as we think about the back half of twenty five? Thanks so much.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. I mean, you know, we're obviously really closely monitoring the situation as everybody is. We have not seen any noticeable impact thus far on our business from some of the the the macro factors that we're seeing out in the world. A couple of of just notes on that. The vast majority of our customers are obviously game makers.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

In general, historically, gaming has been relatively insulated from sort of macroeconomic moves. It's a it's a very efficient and effective form of entertainment on a kind of per hour basis for for folks historically, and so that may be part of it. The other thing I'd I'd direct you to is that the vast majority of our of our advertising spenders, for example, are are promoting mobile games and and principally free to play mobile games. So if there is any product that one would expect to be resilient in difficult times, there would be free mobile products. And, you know, the the last thing I'd say is that I'd reiterate the question the answer from the question a couple minutes ago, which is that as long as we're we're with advertisers who are spending on ROAS.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So they don't pull back spend based on sentiment like a brand advertiser would. And so I I think those are all probably partial reasons that we're just not seeing anything yet, but but, you know, we we wanna be prudent about that, and and we're obviously watching it very, very closely.

Andrew Boone
Managing Director at Citizens JMP

Thank you.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

We'll go next to Tom Champion at Piper Sandler.

Thomas Champion
Thomas Champion
Director & Senior Research Analyst at Piper Sandler Companies

Hi, guys. Good good morning. Hopefully, you can hear me. Matt, I just wanted to get your perspective on the the timing and sequencing of of events here between Vector, Legacy, Unity, and and IronSource. What where where are we in in kind of kind of the staging of of this transition to to vector to the extent you can you can provide some color on that?

Thomas Champion
Thomas Champion
Director & Senior Research Analyst at Piper Sandler Companies

And then and then how how does that map to your r and d staff and and resourcing behind that growth? And and just maybe a a broader comment on organizationally, do you do you do you feel like the company structure is is is where you wanna be and and and in a good place to to move forward? Thank you.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Great. Thank you so much for for the question. I appreciate it. Yeah. Listen.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We've been really we've been really focused on making all the investments we need to ensure that that, you know, vector and the and the kind of fundamental power that that brings to our ad stack is gonna have everything it needs. And to enable that transformation, we we significantly increased our investment across the board in machine learning. We brought in new leadership. We hired new teams. We're obviously allocating money to to to to GPU and CPU resources and infrastructure and tooling.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So we're making all the investments we feel that that that we need to. And that includes, you know, as as Jared mentioned in his his preamble, some increases in cloud costs that we expect to to normalize in the back half. But but we feel really good about those investments and the impact that it's having. We also reorganized our go to market teams a while back, splitting our revenue organization into two global teams, supply and demand, to be able to to to provide focus on both some of the newer ad products that we have and also some of the more legacy ad products. But as I said also in in, you know, my opening remarks, this we're really focused on having the full advertising segment grow.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

I'm agnostic with respect to the how that what that mix is, and I'm not gonna be overly precious or cautious in the immediate term about about trying to optimize that. We're structuring ourselves for swift, sharp, long term growth. I'm sure there will be some movement of customers from our internal products, but the fact is that there's movement across the whole market, and that's what's really important. We're gonna take, hopefully, as much share externally, if not more than we are gonna take internally. And in the end, we're gonna we're gonna have a fast growing ad business, and so that's sort of how we think about it.

Thomas Champion
Thomas Champion
Director & Senior Research Analyst at Piper Sandler Companies

Thank you.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Tom. We'll go next to Brent Thill at Jefferies.

Brent Thill
Brent Thill
Tech Sector Leader, Software/Internet Research at Jefferies Financial Group

Thanks, Alex. Welcome. Matt, if you can just maybe give us your your mile markers for the rest of the year on Vector. What are what are the big milestones you would like to hit through through this year at at a high level? And and for Jared, really good margin upside.

Brent Thill
Brent Thill
Tech Sector Leader, Software/Internet Research at Jefferies Financial Group

Maybe discuss the the the cost base and where you see the the continued opportunity to drive continued margin efficiency. Thank you.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. Listen. I I the way to think about Vector is that in in a way, we've just begun. Right? In some ways, it's a sort of vector one point o as what I you know, what I've shared with you today is that we literally just completed the migration of, know, a couple weeks ago, and we're now up and running fully for the first time in these models.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

It is the very, very early innings for us on this. By definition, this process is a process of investment and learning, and we're gonna continue at that process. So I guess the first thing I'd say is as I think about milestones is we are just very much at the beginning, and that's really, really important. As I look forward sort of strategically, I I think the the I guess what I'd what I'd reiterate, and we've talked about this on prior calls, is that we're not just an ad network. We're a platform provider.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We're we have a first party relationship with all of our customers who are frequently building their games on our platform as well as a direct connect to billions of customers through our runtime. And it has always been our contention that that provides some fundamental advantages to us in this business. And the real upside for Unity is as we begin to take advantage of those opportunities, And those still sit out in front of us. Not way out in front of us, but they're the kinds of things that in the back half of this year and into '26, the the the kinds of opportunities that that we'll be really focused on. So I guess the way I you know, we think about this internally is, like, we're at the starting gate.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We're just beginning to run, and it's all in front of us. I'll let Jared pick up some of the some of the the cost commentary, but but just just to say as as we mentioned that that we do have some increased cloud costs in as we've been running the the the the two models in parallel, the old model and the new model. And one of the advantages of sort of getting to the starting gate and moving is that we'll only be operating one model, which is really helpful from a cost perspective.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Yeah,

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Brent. You know, we feel great about where we started the year with 19% EBITDA margins. There's a couple hundred basis points of year over year margin expansion. But as we think about profitability for the business, first and foremost, the priority is to be able to resource the business to accelerate the growth, particularly of our ad business. That's extremely important.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

As Matt pointed out, we are putting a lot of resources into Vector, and we think there's a great opportunity there. With 80% plus gross margins, there's a lot of operating leverage in our business. And as you've seen, as ad businesses scale, they can really drop that to the bottom line and significantly improve EBITDA margins over time. We're being thoughtful. We're being prudent about the way we run and operate the business operationally.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

There's lots of opportunity for automation. We're taking a prudent approach to headcount, and we're rationalizing our software spend, which are all the things you'd expect us to do quarter in and quarter out. But, again, first and foremost, we think there's a great revenue growth acceleration opportunity, and we're making sure to resource that appropriately while keeping an eye on the bottom line.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Brent. We will go next to Parker Lane at Stifel.

Parker Lane
Parker Lane
Director at Stifel Financial Corp

Hey, guys. Thanks for taking the question. Can you hear me okay?

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Yep.

Parker Lane
Parker Lane
Director at Stifel Financial Corp

Perfect. Jared, was wondering if you could deconstruct the sequential decline that you're looking for and create a little bit more coming off a double digit subscription growth there, strong industries momentum, pricing benefits. Is it simply the the nonstrategic revenues that are influencing that that number down quarter over quarter? Are there other things that we should be looking for that would explain that away?

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

No. That's that's that's right, Parker. We experienced another quarter of strong double digit subscription revenue growth. Industry continues to grow at an accelerated basis. If you think back to the fourth quarter, we had about $15,000,000 of nonstrategic revenue that we disclosed.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

We also spoke about $30,000,000 of nonstrategic revenue for the full year, so a bit of a step down from the run rate. And you're really just seeing some of that come off the business in the second quarter.

Parker Lane
Parker Lane
Director at Stifel Financial Corp

Got it. And, Matt, maybe just a follow-up on some earlier answers here. So it doesn't sound like there's a hard line in the sand for the transition away from the legacy models. Is that correct? You're you're kinda just waiting and seeing on the performance of Vector as opposed to setting that date, you know, that influencing the way you think about the cost structure in the second half?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

No. I wouldn't I I let me clarify that. This cutover means that we will no longer be running the two models in parallel. So we do we expect to see this cost some of this cloud cost come off in the back half of the year. You'll see the effectively, the additional cost that that we're seeing, you'll see that come out.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So that just I wanna be super clear about that. Is is it if is it principally that the cost piece that you're interested in?

Parker Lane
Parker Lane
Director at Stifel Financial Corp

Yes. Just wondering if there's a specific date where you're where you said this is when they'll no longer support or run the the legacy models or if it's sort of a moving target based on the performance of Vector?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. No. We the the with the launch of Vector that we've talked about today on the UniEd network, we are now no longer running on legacy models.

Parker Lane
Parker Lane
Director at Stifel Financial Corp

Got it. Thanks for the clarification.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Yep. Thanks, Parker. We'll go next to Clark Lampin at BTIG. Clark, do you hear us?

Clark Lampen
Managing Director at BTIG

Maybe with that. Hey, can you guys hear me?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Oh, now we got you.

Clark Lampen
Managing Director at BTIG

Yes.

Clark Lampen
Managing Director at BTIG

About that. I had two more on Vector. I'm just curious in Q1, did you see any pressure on IronSource or TapJoy or any of the legacy products? Or is that something where maybe you're anticipating for a different reason in Q2 that that's going to materialize or there's greater concentration of resources now around vector? And then, Matt, going back to the comment you made around data and ROAS improvements, I'm curious if you could help us understand, how the data flow is going to improve potentially as vector continues to season and the model evolves.

Clark Lampen
Managing Director at BTIG

At one point, you guys had sort of talked to us generally about cross stats as a product. I'm curious if that's something that you guys have revisited or in the process of sort of introducing. And if so, could you give us a general sense for maybe what you'll have access to and how it could be accretive? Thank you.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yes. Thanks, Kirk. Really appreciate the question. So let me take it one at a time. The you you are right.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Your observation is correct. We are aggressively pushing resources into Vector both from a go to market perspective as well as a technical perspective, and that does have some impact on the IADS business. In addition, again, the IADS business and the UniADS business operates in a free marketplace with every other ad network in the world. And so we hope, in fact, to move some share both from IaaS, and we are seeing some of that. But but we also, much more importantly, are expecting to move share from others as well.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So and, again, also, as we as we provide more return, we expect overall ex expenditures to be up with us. So but there's no question there is some movement inside inside those inside those products inside our ad segment. Absolutely. In terms of your second question, you'll begin to see from us beginning in the back half of the year, but then continuing onward, a real focus on trying to bring to bear the additional insights that we have into consumer behavior on our platform and to bring that to bring that value to bear, not just for our advertising customers, but also for customers of our editor and engine. And what I mean by that is the opportunity that we have to unlock across the company is this.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We have billions of customers who interact on our platform, and we have not historically used that insight to develop really clear, valuable insights at a consumer level as to who folks are and how they behave and and and to think about how we provide value back to our customers. Just let me give you an example from the create side, and then we we can move to the grow side. The vast majority of our big customers are operating live services with us. Right? There's these are games with millions of players, and we can provide much greater insight to them on the behavior of those players, how they're pathing through the game, what they're spending, why things are crashing, why the game might be performing better in one geography than another, all these insights that we have not yet begun to package and offer back to our customers.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Again, that's an example on the create side that is gonna enable them to fully optimize the live services they that they're making with us. At the same time, on the grow side, those insights and that understanding of live players obviously has an impact potential impact on understanding how to better and more efficiently acquire the right kinds of players who are gonna be happy inside the game, that you're building, and who are gonna convert well and and engage and spend over time. This is a sort of a fundamental wellspring of insight that historically we've not brought to bear on either side of our business. It is our primary strategy. Again, you'll start to see this in the back half of the year, but it's it will be the work of the next several years in total.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

It's our primary strategy to deliver that value, which we think nobody else in the world can do in back to our customers.

Clark Lampen
Managing Director at BTIG

Thanks very much.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Clark. We'll go next to Chris Kinturuk at UBS.

Chris Kuntarich
Chris Kuntarich
Internet Equity Research at UBS Group

Great. Can you hear me okay?

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

We can hear you. Yes.

Chris Kuntarich
Chris Kuntarich
Internet Equity Research at UBS Group

Great. Thanks. Just wanted to go

Chris Kuntarich
Chris Kuntarich
Internet Equity Research at UBS Group

back to Vectra here and how it's going to play with IronSource specifically. Curious if this better than expected progress that you're seeing today has changed how you're philosophically thinking about the need for for IronSource ad network.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. So so let me let me back up and and offer a little bit of context. We're in the market with both our ad networks, the UniAd network and the IronSource ad network, and they are different, and they they they offer different value to different kinds of customers. So on any one individual geography or genre of game or actual game, you will you will see different performance across different networks. And that's true not just of our network, but with all the networks in the marketplace.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So we're currently really happy and and really proud of the of the IronSource team and the network in terms of the value they're providing. And we're out in the in the marketplace offering both products to customers, and we continue we plan to continue to do that. And so I, you know, I wouldn't think of this kind of as a zero sum game in the world between the two networks that we own. I just I don't know that that's the that's really the way this marketplace plays out. We want all our networks to perform the best they possibly can, and then customers will move spend accordingly across the whole marketplace.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So we're gonna continue to to operate in that way. As I said, we have four or five different ad products. They have they provide different value to different sets of customers, and we're gonna keep we're gonna keep selling those products really aggressively and and happily.

Chris Kuntarich
Chris Kuntarich
Internet Equity Research at UBS Group

Got it. And maybe just one follow-up on gross margin. If I heard you correctly, you're gonna be sunsetting the legacy Unity model here, so you're gonna be running on one model through the entirety of February. Are there any puts and takes with some of the nonstrategic revenue that's gonna be coming off in February that would cause gross margin to be down sequentially from January?

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

No. I don't think there's anything that we'd expect in that regard, Chris. I think we should expect relatively stable gross margins into the second quarter, and I think there's there's no reason why the trajectory of our EBITDA shouldn't be stable to our current EBITDA performance in the first quarter.

Chris Kuntarich
Chris Kuntarich
Internet Equity Research at UBS Group

Great. Thank you.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Chris. We'll go next to David Mack at Arete Research.

David Mak
Equity Research Analyst at Arete research

Hi. Thanks for taking my question. Just one more on on Vector from me. Just really to drill into the detail on the time line of these new Vector powered DSP products. Is there a reason why there's no discernible financial impact quite yet, maybe due to advertisers still testing, dipping their toes, needing sales support, for example?

David Mak
Equity Research Analyst at Arete research

Or is it more the case that these models still need to improve further to be truly competitive on, say, a ROAS basis versus the other offerings out there? And I have a a short one for Jared as well after that.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Hi, David. Thanks for your call. No. I listen. I think it's just two things.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

One, it's still very early for us. So we've literally just launched these new models, and we're just rolling them out to customers. But and so there's a timing element here. But but to be really clear, we are already seeing better ROAS, as I said. We're seeing more installs.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We're seeing at so we're seeing more scale, and our advertisers are seeing better returns. But we're just at the beginning of bringing this to market. So there is a timing element as well. And then the second element is really just and we've talked about it a couple times over the last few minutes is there is some there are some internal puts and takes on the new Unity ad network versus the IronSource ad network as we've identified, and we're investing really aggressively. And and so we're gonna see some movements there.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

And so it's really timing and some of the internal revenue mix that that is masking some of that upside at this stage.

David Mak
Equity Research Analyst at Arete research

Great. Thanks. And just the one for Jared is just are are we able to just quantify the nonstrategic revenue in the first quarter across create and grow? And then what is embedded for each of those in the two q guidance? I think you mentioned 30,000,000 for 2025.

David Mak
Equity Research Analyst at Arete research

Is this mostly in q one and then trailing off after that? That would be helpful. Thanks very much.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Yeah, David. There was about $17,000,000 of nonstrategic revenue in the first quarter, and, our expectation of $30,000,000 for the full year is consistent. And so, yes, there will be a trail off in in in q two and beyond, and we'll see a bit of a step down in that regard. And I think the good news is that this has now become a small part of our revenues. It's under 2% of the company's total revenues.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

So it gives us the opportunity to be a little bit more clear and transparent and straightforward in our disclosures and really just talk about total revenue and growth and create and grow.

David Mak
Equity Research Analyst at Arete research

Great. Thanks very much. Thanks, Alex. Welcome as well.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, David. We will go next to Martin Yang at Oppenheimer.

Martin Yang
Senior Analyst at Oppenheimer & Co. Inc.

Hi. Thank you for taking my question. My question is about subscription growth trend. Can you maybe talk about how subscription revenue was trending on a sequential basis, and how do you see the key drivers for subscription revenue overall in 2025, both on the user and, user per revenue perspective? Thank you.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Sure, Martin. Thank you so much for your question. So subscription revenue growth in the first quarter was 13% year over year, so another double digit growth quarter for us. We feel really great about the trajectory. There are several tailwinds that are driving that subscription growth.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

I think number one, you've heard about some of our success in the industry segment. Matt spoke about some of the new customer wins in areas outside of gaming. We're seeing a lot of new seat growth and expansion in that area. We have very good efforts across the company in order to ensure that we are executing on our strategy around price improvements, and we're seeing that start to flow through the p and l. That'll be a bit of a waterfall.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

And so the impact of those price improvements will increase over the course of the year, and we'll continue to benefit from that. But I think broadly speaking, we feel really good about with subscription being 80% of our create segment at this point and getting larger, that over time, there's the ability to achieve consistent double digit growth in, in create.

Martin Yang
Senior Analyst at Oppenheimer & Co. Inc.

Thank you. That's it for me.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Martin. We'll go next to Alec Brondolo at Wells Fargo.

Alec Brondolo
Alec Brondolo
Director - Equity Research at Wells Fargo

Hey. Thanks. Can you hear me okay?

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Yeah. We can hear you.

Alec Brondolo
Alec Brondolo
Director - Equity Research at Wells Fargo

Yeah. So maybe first, I would love to ask what percent of grow revenue Unity ad network represents. I think what you guys are describing is there's a little bit of noise as Vector improves the performance of Unity ad network, but there's a little bit of noise as kind of maybe IronSource seeds some shares, some of the other products fall off. Is there any kind of rough math or or rough mix you could give us to help us understand what percent of the base, vector might be impacting?

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

Yeah. So, Alec, while we're not breaking down into more granularity sort of the individual reporting areas of of create and grow, What we can say is that UnityVector is by far the largest ad product that we have, in that growth segment, and we have a number of other ad products that are are are meaningfully smaller than that. So this is impacting a very substantial portion of the revenues, and, that's why it's garnering the heavy investment that we're making. What I would also add is this investment that we're making, Unity Vector, and this capability that we've developed in machine learning is going to benefit all of the Unity ad products and Grow products over time. And there's a tremendous opportunity to leverage some of the intellectual property and the capabilities that we've developed.

Jarrod Yahes
Jarrod Yahes
Senior VP and Chief Financial Officer at Unity Software

And so we are focused on what is the largest area in our Grow segment with the most growth potential, but we expect that to eventually trickle down and benefit the grow, segment in its entirety.

Alec Brondolo
Alec Brondolo
Director - Equity Research at Wells Fargo

If I can maybe follow-up on that point. I guess it's clear that the first priority here was improving the performance of, Unity ads on the demand side. Could you maybe help us think about, where Level Play, where mediation kind of falls on your list of priorities for the business, Matt? Is that is that something that, you know you know, maybe you wanna improve in '25? Is that more of a medium term story?

Alec Brondolo
Alec Brondolo
Director - Equity Research at Wells Fargo

Any any feedback there would be helpful.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. Absolutely. Thanks for the question. To your point, our our primary focus is on improving user acquisition both because we think that's the the largest opportunity for us in the immediate and the long term, but also because strength in mediation often a function of strength in a user acquisition. So it's it's clearly the the best place to start.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

But secondarily, I would say that, you know, we don't view mediation as as as strategic as maybe some other folks in the market do. As I and and the reason is really simple. As I've said many times before, we're not an ad network. We're we're a development platform, and we have first party connections to customers and data. And and so while mediation is helpful, it is not the only source of of of that insight for us.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

And so while we're we're we're proud of our product and and and we're excited about about how it's operating, it's perhaps less important to us than others. And and as a consequence, we're we're really focused on the on on the UA side.

Alec Brondolo
Alec Brondolo
Director - Equity Research at Wells Fargo

Perfect. Thank you so much.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Alex. We'll go next to Bernie McTernan at Needham.

Bernie Mcternan
Senior Research Analyst at Needham & Company

Great. Thanks for taking the question. Just wanted to ask about just where the current performance of vector rates relative to prior peak performance levels for the Unity and IronSource ad networks. And I know it's a tough question, but but how would you expect that 10 to 20% improvement to to trend over time?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. I would I I thank you for the question. I'd say this. You know, last weekend, we saw some of the peak days for ad spend that that we'd seen in many years. So just at a at a high level, the the the growth and the performance is is encouraging, not just respect with respect to where we were yesterday or the day before, but but but overall in terms of the trajectory trajectory of our business.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

And can you repeat again the second part of your question? I'm sorry.

Bernie Mcternan
Senior Research Analyst at Needham & Company

Oh, yeah. No. Just just the, you know, the 15 to 20% improvement that that you called out. You know, how should we expect that to to trend over time? You know, you called out, you know, marrying more of the data between create and grow.

Bernie Mcternan
Senior Research Analyst at Needham & Company

Just, you know, how should we expect that improvement?

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. Listen. I I I mentioned this a little bit earlier, but I it's it bears repeating. We are so much at the very beginning of this process. I mean, keep in mind, I'm what I'm literally saying to you is we just launched this product.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So the fact that we're and by the way, we would have launched the product if all it did was provide the same performance. We still would have launched it because we would want to begin learning as quickly as possible and because it's more efficient from a cost perspective. So, you know, that was one possible outcome here. Instead, what we're seeing is much greater than expected performance even really early on. But this business the nature of this business is daily learning that goes on forever.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

So I would I hope that, you know, this is you know, as we pull back the camera over time, that this will be the low point of the of the performance of this business. It's certainly our intention. And as I said, particularly with respect to some of the larger and more strategic opportunities we have that we've not yet brought to bear, we think there's a real we we think there's a really exciting long term opportunity here.

Bernie Mcternan
Senior Research Analyst at Needham & Company

Great. And just one follow-up if I could. Just we know performance marketing budgets can can shift quickly and and and publishers are constantly evaluating. But that evaluation time, like, are we talking, like, days or weeks? Just trying to get a sense given the platform is so new, kind of what the evaluation period that is on the other side.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

You know what? It depends on the nature of the advertiser. I think it's it's important to remember for us that the vast majority of our advertisers are game publishers and developers who are who are purchasing based on return on advertising spend in their games, and different publishers have different time horizons that they're optimizing for. But, you know, these are there these are long term return based advertisers. And, you know, the I I wouldn't expect that when you see shifts, you're gonna you you're gonna see them, you know, immediately or sharply.

Bernie Mcternan
Senior Research Analyst at Needham & Company

Got it. Thanks, Matt.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Vernie. We'll take our final question from Faith Brunner at William Blair.

Faith Brunner
Equity Research Associate at William Blair

Hey, guys. Can you hear me?

Thomas Champion
Thomas Champion
Director & Senior Research Analyst at Piper Sandler Companies

Yes. Yes.

Faith Brunner
Equity Research Associate at William Blair

Oh, beautiful. Kind of diving deeper on what you just said, but looking at your advertiser base, so you mentioned that those budgets don't really move the same way we would expect typical brand advisers. So any additional color you can add on the spending behavior and potential downtimes, and then maybe how Vector layers an additional durability into that spend given the ROI you're seeing.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

Yeah. Absolutely. Here's the here's the thing. And I and believe me, I understand this as well as the next person some of the the the disruptions and frictions in the macro marketplace. The for us, our performance is gonna be principally driven by the quality of our execution.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We're not, generally speaking, moving up and down with macroeconomic trends. That's just not where we are as a business right now. So I can tell you that when we provide meaningfully and markedly better performance, we see increased advertiser spend. As we increase that performance, we will see more advertiser spend. That's expectation.

Matthew Bromberg
Matthew Bromberg
CEO & President at Unity Software

We're seeing we're already seeing that across a broad base of our customers, and it's something that we've we've been seeing over the prior weeks right in the midst of, again, of all this macroeconomic uncertainty and friction. So that's the the beauty of of what we do is if we deliver, we ex you know, we'll customers can see that. They can see it very quickly, and we expect over time for that to trend up.

Faith Brunner
Equity Research Associate at William Blair

Alright. Great. Thank you, guys.

Alex Giaimo
Alex Giaimo
Head of Investor Relations at Unity Software

Thanks, Faith. With that, we'll wrap up today's call. We wanna thank everyone for joining this morning, and we look forward to connecting with you all in the coming days and weeks. Have a great day.

Executives
    • Alex Giaimo
      Alex Giaimo
      Head of Investor Relations
    • Matthew Bromberg
      Matthew Bromberg
      CEO & President
    • Jarrod Yahes
      Jarrod Yahes
      Senior VP and Chief Financial Officer
Analysts

Key Takeaways

  • Unity’s Q1 results beat the high end of guidance, with revenue coming in 5% above estimates and adjusted EBITDA exceeding guidance by 29%.
  • The Unity ad network migration to the AI-powered Unity Vector platform is fully complete ahead of schedule, delivering a 15–20% lift in both install volume and in-app purchase value on iOS.
  • Unity 6 has registered over 4.4 million downloads with 43% of active users migrated, and Create segment subscription revenue grew in double digits year-over-year; Unity 6.1 launch adds production testing and support for new platforms like Nintendo Switch 2 and Meta Quest.
  • Non-gaming industry subscriptions have driven nine straight quarters of sequential revenue growth, with new enterprise wins including Philips for surgery simulation, Siemens for workforce training, and Toshiba for digital twins.
  • Q2 guidance calls for $415–$425 million in revenue and $70–$75 million in adjusted EBITDA as Grow revenues hold steady amid Vector rollout gains while Create sees a slight sequential decline due to nonstrategic revenue runoff.
A.I. generated. May contain errors.
Earnings Conference Call
Unity Software Q1 2025
00:00 / 00:00

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