Unity Software (U) Q2 2026 earnings call transcript

Thank you. Good morning, everyone. Welcome to Unity's second quarter, 2026 earnings call. Today, I'm joined by our CEO, Matt Bromberg, and our CFO, Jared Gays. Before we begin, I want to note that today's discussion contains forward-looking statements, including statements about goals, business outlook, industry trends, and expectations for future financial performance, all of which are subject to risks, uncertainties, and assumptions. You can find more information in the risk factor section of our filings at sec. gov.

Natural results may differ, and we take no obligation to revise or update any forward-looking statements. Finally, during today's meeting, we will discuss non-GAP financial measures. These non-GAP financial measures are in addition to and not a substitute for or superior to measures of financial performance, prepared in accordance with GAP. A full reconciliation of GAP to non-GAP is available in our press release and on the sec. gov website. And with that, I will turn it over to Matt.

Thank you, Alice. Good morning, and for everyone on the phone, thank you for joining us this morning as well. It is, as always, a distinct privilege for us to be able to represent the fine work of the unity team from around the world.

Two years ago on this call, we told you that a rededication to our customers' needs, more disciplined execution, and sharply accelerated product velocity would transform our company. Although we were in a difficult moment, we believe we had everything we needed to bring unity all the way back. And we did.

One year ago, we posited that unity had a hidden inflection point in that transformation, and that our efforts would translate to a markedly improved and sustainable series of business results. And they did.

Today, after what was arguably the best water in Unity's history as a public company, we're done looking backwards. The flywheel we've constructed is spinning up, and we expect it to power us into the rents of the most consequential companies of the AI era. And it will.

Why? Because AI has already become the most crucial driver of our product velocity and quality, and is also well on its way to becoming our most crucial driver of demand.

To remind everyone how this AI-powered flywheel works at Unity, as game creation becomes more efficient, more games are being released, more games drive more usage of our integrated authoring platform, and also make new game discovery more challenging, accelerating our ad business. More games, more platform usage, more discovery, all driven by the unique understanding that we derive from approximately three billion people each month playing a game on the Unity runtime, an understanding which we use in turn to help creators build better games, to help them acquire new users, and to help them operate successful live services.

With that as an introduction, let's turn to this quarter's results, you're getting with Unity Vector. In performance marketing, we only win when our customers win, advertise their laser focus on the direct return of their ad spend, and our technology must empower them to hit and exceed their return targets at maximum scale. Through continuous product enhancement, higher quality data, and compounding model improvements, we are now driving significant gains for our customers across every campaign type, genre, geography, and platform, and it's having an exceptionally positive impact on our business results.

Our expectations for growth in Vector in Q2, were robust 12 to 13% growth order over quarter. Instead, our team delivered nearly double that, racking up 23% quarter over quarter growth, and establishing an accelerated momentum that is carried over to elevated results in Q3.

Keep in mind, six quarters ago, the Unity Vector product didn't exist. It is now at substantially over a billion dollars in an annual run rate, two quarters earlier than expected.

And yet, we still consider ourselves to be in the very early stages of product development. Our astounding performance is fueling a 63% year over year increase in our strategic grow business, with our third quarter outlook pointed to an even stronger 70% growth rate.

Overall company, EBITDA margins, are approaching 30% for the first time ever. We don't know of many companies at our scale growing revenue at this velocity, or simultaneously expanding margins 800 basis points year over year.

And the second quarter alone, the Vector team successfully executed over 20 major updates, advancing the capabilities and intelligence of our AI prediction platform, bringing new runtime data online, and transforming how we identify, understand and value game retention.

This incredible rate of change enabled Unity to optimize real time bidding precision for advertisers to a degree that was formerly impossible.

One of the most impactful updates in Q2 has been our day 28 return on advertising spend capability for both in-app advertising and hybrid campaigns, a companion to the in-app purchase product that was released in the first quarter. As the name suggests, day 28 relos enables our partners to measure their return over a longer period than our standard seven day relos product.

Initially released at the end of Q1, the full rollout has now seen day 28 campaigns spend growing nearly three X from the first quarter. Over 25% of our advertising base has adopted this new campaign strategy and the demand is scaling rapidly as a result of our delivering extremely strong performance.

Q2 also contains another transformational milestone. We are speaking, of course, about the first incorporation of runtime data into the vector platform. As we have emphasized, many times, there are currently over three billion in so-asage month planning in May with Unity Game, and the connection with those billions of players through our runtime has been an untapped capability that we have long believed should deliver unique value across our platform.

Towards the end of the second quarter, we began for the first time in our history to unlock this advantage by incorporating signals from our runtime directly into our vector AI models.

While this effort remains very early, the results are extremely encouraging and again, more and more confidence each day that runtime represents a deep and sustainable competitive advantage for Unity.

Let's transition now to the create business. The future of game creation no longer belongs only to those who can marshal the most resources, but rather to those who can best use the technology to amplify the resources they have. Two weeks ago, at our Unite Conference in Seoul, we announced the release of Unity Set, a new generation of our software designed for this future, an open collaborative platform where developers, artists, producers, and coding agents work together across the full development lifecycle.

We've made our MCP free and opened our API, which enables developers to use the command line and coding agents to control Unity directly from inside their old workflows.

What this all means is that you no longer have to know all the intricacies of our application to access the power of our full offering platform.

What's even more exciting is that this platform, including the downstream revenue enabling services, that are our commerce solutions and our live game operation services are all now configured automatically on day one. There are no instructions, there are no SDKs, there's no engineering time required.

Remember what I referenced slightly earlier, remember our flywheel, more games, more platform usage, more discovery, all driven by runtime and vector AI.

We believe UNI-7, which launched in beta in Q4 of 2026 and the full release in Q1 of 27, holds the potential to be the most exciting and impactful release in our history in that it points the way to a fundamentally different future. One where the top of the funnel gets bigger and bigger to accommodate the increased interest in the creation of interactive entertainment.

Before leaving Create, I did want to highlight a new partnership UNI-concentated in Q2 with Netflix. We're so thrilled about it. And I want to highlight because it exemplifies the kind of innovation we live to help support. The partnership calls for us to comprehensively support the Netflix multi-platform games ecosystem with the UNI engine of the years ahead. Netflix has launched something potentially revolutionary, presenting a social game experience for consumers on the biggest screen in the house, instantly, without asking them to download, register or buy anything with the potential to add an entirely new engagement path for their customers.

This is the kind of advancement that UNI exists to support. Consumer habits are changing. Distribution platforms are evolving and will continue to evolve. But UNI's role remains straightforward and constant. Make it easier for studios to build great games and get them the hands of players wherever they are. We're proud that Netflix has chosen to do that work with us.

Thank you again very much for taking the time to be with us this morning. We are incredibly proud of UNI's performance in Q2. The continued acceleration of the vector, coupled with our world-plus product load that we create, has us more excited than we've ever been about our future.

I'll now pass the call over to Jared for a deeper discussion of our financials. Jared?

Thanks, Matt, and good morning, everyone. UNI delivered a truly exceptional second quarter with strategic revenue growth of 38%, and adjusted the EBITDA growth of 77%, along with record margins.

Strategic growth revenue was 329 million, up 63% year over year. Growth accelerated both quarter-round quarter and year over year based on tremendous momentum at Unity Vector.

Of note, the sun setting of the Iron Source ad network had a negligible positive impact on vector growth in the quarter, with only 3 million in Q2 vector revenue growth from Iron Source customers as a result of the shutdown.

In create, strategic revenue was 157 million, up 14% year over year, when excluding the impact of a one-time revenue item in the prior year.

Create momentum continues to be driven by RPU growth, supported by price increases, and minimum annual customer commitments, as well as strong growth in China. Ultimately, these results are the direct outcome of products that deliver the innovation and performance our customers demand, steadily enhancing Unity's core value proposition.

Shifting from revenue to profitability, adjusted EBITDA on Q2 was 160 million. Adjusted EBITDA margins were 29% with margins expanding 800 basis points year over year. Rapid revenue growth, high gross margins, and discipline cost management resulted in significant operating leverage. Disoperating leverage is the primary reason why adjusted EBITDA grew 77% year over year, more than two times the growth rate of strategic revenues.

We experienced operating leverage across all major expense lines in the second quarter. In addition, adjusted sales and marketing and adjusted G&A were down not only in percentage terms, but in dollar terms. We're making strong progress in optimizing our cost structure and simplifying our business, and using that freed up capital to reward high growth businesses like Vector, while aggressively investing in our product roadmap.

Rapid growth and adjusted EBITDA is converting into exceptional free cash flow. Unity had 202 million in free cash flow in the second quarter, an increase of 59% year over year. This brings our cash balance to 2.36 billion, with Unity flipping from a debt position to a net cash position this quarter.

Our near-term capital plans center around de-levering our balance sheet, and we expect to pay off our 2026 convert in November.

Longer term, the record cash generation we are experiencing combined with the de-lever balance sheet opens up tremendous flexibility from a capital allocation standpoint.

Outside of cash expenses, the discipline approach we're taking to equity resulted in stock comp expense down 25% year on year. Stock comp expense was 14% of revenues for the quarter, it's lowest level ever.

Before moving on to guidance, I'd like to provide three recent strategic updates. Firstly, during the quarter, we made a strategic investment in mobile measurement leader apps flyer, along with investment partners Meta, Google, and Miloco. This was a unique opportunity to invest in a market leading asset, while simultaneously allowing apps flyer to preserve competition, choice, and innovation in the mobile attribution and measurement ecosystem.

Secondly, we're pleased to report that we closed on August 4th, the sale of Supersonic to Triple Dot Studios. With this transaction, Supersonic finds an outstanding home with Triple Dot, one of the largest and most successful mobile game publishers in the world.

And lastly, during the quarter, we substantially completed the closure of our Iron Source ad network, effective April 30th. The sale of Supersonic and the sunset of the Iron Source ad network will benefit our margins in the second half of the year.

With these actions, Unity becomes a more focused company, positioned for faster revenue growth and dramatically higher levels of profitability. With that, let's now turn to our guidance for the third quarter.

For the third quarter, we're guiding to strategic revenue, a 540 million to 550 million, implying year over year revenue growth of 44% to 47%. This represents a material acceleration from the growth rates we saw in the second quarter.

In strategic growth, we expect year over year revenue growth of 68% to 70%. Driven by continued exceptional performance in Unity Vector.

Our guidance assumes 19% to 21% sequential growth rates for Unity Vector. In strategic create, we expect 7% to 10% year over year revenue growth, driven by continued ARPOO growth and strengthened China. And we expect 20 million in non-strategic revenue in the third quarter, driven primarily by the July contribution of Supersonic.

We're guiding the third quarter adjusted EBITDA of 185 million to 190 million, implying adjusted EBITDA margins of 33% and adjusted EBITDA growth of 69% to 74%. The third quarter is expected to be our sixth straight quarter of adjusted EBITDA margin expansion with margins up 400 basis points from the second quarter alone. And up 1000 basis points year on year.

Expected margin expansion is a function of additional operating leverage amplified by cost reductions enabled by our strategic actions, resulting in a structurally more profitable business.

Lastly, we're pleased to report that we're pulling forward our expectation for achieving gap net income profitability from the fourth quarter of 2026 to the third quarter of 2026. In closing, we are incredibly pleased with Unity's second quarter financial results and outlook for the third quarter. Unity has now entered a new chapter, structurally faster revenue growth, combined with enhanced profitability, powered by a flywheel of more gains, more platform usage and more discovery, all driven by runtime and vector AI.

And with that, I'd like to thank you for joining us on Unity's second quarter 2026 conference call. I'd now like to turn the call over to Alex so that we can take your questions.

Thank you, Jared, operator, we're ready for questions.

Thanks, Matt. Thank you for the question. We were incredibly excited, obviously, about the performance of vector in the quarter. We've now had four straight quarters, 15% growth, which then stepped up to nearly 23% growth in the second quarter. And we're really excited looking forward as well.

It's incredibly important that what we've been able to do through continuous product enhancement and improvement quality of our data and compound or model improvements that we've been able to drive significant gains for customers, which therefore drives our business. We're really, really pleased about that. I mentioned one of the product enhancements in the prepared remarks, our D28 Ross product. They were many, many more.

And to your point, we did call out runtime, which was, as I mentioned, a historic achievement for us, something that's been long discussed. We have always believed that this will be the primary strategic advantage for us going forward in this business. Every major participant in this world has an approach. If you're meta, you own your apps. If you're us, you have access to the three billion people playing the game with you again. And that's going to put us in a really good spot over the long term.

So we began implementing signals from the runtime into vector towards the end of the second quarter. We're super pleased with what we're seeing.

We are having continued success around customers, continuing to opt into our data development framework, which sits underneath all these efforts in runtime. That's going to continue. Although it's still very early, we're just, we're very, very excited about what we're seeing.

The, I don't know if there's any analytical value for anyone to single out the impact of runtime data. Our performance, as we've noted, is the sum of the impact of all the product enhancements, the higher quality data, and the compounding model improvements. And these impacts are self-perpetuating as our system continues to learn in real time. So we expected to be a driver of success over the long term. And as you guys remember, there were many, many times I said that look, what we're going to see is solid incremental growth followed occasionally by step change functions.

And so, and that's exactly what we experienced into exactly what we expected. Finally, to your point about the flywheel, I did want to spend some time on it in our opening remarks because I do think that historically folks have thought about our businesses as separate. And of course, we reported in separate segments, but in a matter of strategy and at the level of product usage and how we connect with customers, these businesses are not separate.

And what we're really excited about it is that we can see the fundamental value of our platform really coming into play. So if you think about it this way, as we open up unity, as we have with unity set and as more games are created and more creators come into the margin and game ratio comes more efficient, there are a lot more games that get released.

We are thrilled about that dynamic. We don't care how people access the Unity UI, the application itself. The application layer is just the surface piece, what's really important is we drive as many people as possible into our full integrated authoring platform, which helps creators deploy and monetize and grow their experiences at scale. As more games enter this platform, we benefit because we're able to deliver vector, our commerce solutions, and our live service solutions.

And then finally, as more and more games come on to our platform and become successful and go into the marketplace, the need for discovery becomes ever more important because it's harder and harder for consumers to figure out what is the next game they want to play, but there's just some of our games in the market.

And our ability to help our customers predict which one of those consumers is good and install their game accelerates our ad business.

So that's the flywheel. Folks, historical are very focused on the Unity application and it's just not how we think about it. It's not how it works.

More folks create interactive entertainment, more folks on the platform, more need for advertising. And this process is one that is still a relative to game. As I've noted before on the call, and I think we discussed before, AI is going to make the creation of interactive entertainment much easier over time. And so you're gonna see a massive expansion of TAM for the interactive creation marketplace.

And so although we haven't talked about that a lot today, it is very much on the horizon for us and very much something we're thinking about. And we'll probably end up talking about that a lot more in the future. So thanks for your question.

Great, thank you.

Hey, thank you so much for the question. So let me take you to AI first. Our Unity AI product went into open beta and made, just so everyone's on the same page. It's an integrated agent that's tuned specifically for union development. It's still very early, just still in beta, but the results have been really encouraging.

For many tasks, because of the hardest we've built, we've been able to build with our unique insight into our software. Unity AI is very often more effective than outside frontier models. And virtually always more efficient, which is key than frontier models. So the product really helps our developers leverage the full power of Unity. And our goal and our strategy here is to give developers a choice.

You can use our bespoke AI or use your own. We don't care. Our primary goal is to maximize the usage of the authoring platform that I was just describing to Matt. So we're not looking to restrict our customers and which is why we opened up both our CLI, enter API, and UU7.

I also wanna let you know that we are really currently just seeing a fraction of the functionality that we have planned in Unity AI.

And so we're just really excited about the future of that product. And ultimately our ambition is to use the UDAI and run time data to offer a complete tool set for game developers. And what I mean is recall that UDAI is useful for developers, not just in coding a system, but ultimately it's gonna enable real-time personalization of content creation at scale, so that customers can change the way they build games, to optimize experiences for players at an individual level. There's so much more interesting going on here than just coding in UI assistants where the product is currently, as happy as we are about it, it's really still very much at the beginning.

On the commerce product, we're really pleased to announce that the product went into general availability on June and June 30th. This is an amazing opportunity for us, the opening of commerce opportunities and things are moving really fast. A lot of estimates are showing the direct to consumer monetization within mobile gaming is already around 15% of the overall market. Just to remind everybody, our product is completely free to developers.

We're really pleased with their early feedback. We're actively onboarding new partners. We recently published an example of a new partner, a terrific game publisher in Hutch, who's using the UADP product to add direct to consumer purchasing for one of their top games, top drives. Like many customers, they're able to achieve this without any added complexity or the need to manage multiple or separate SDKs or stores. It's sort of the perfect example of how our platform can provide their value in the games ecosystem over the long term.

There are three main benefits to the commerce product. It expedites and simplifies the process for publishers to circumvent high fees. It gives us visibility to the rich, purchase behavior data, which first further optimizes our add models, and there is some small economic benefit to us as well, which scales over time. So the price has been really well received. This is a long-term growth opportunity, and we're really pleased to be able to have successfully integrated into our offer.

Thank you for the question, Clark. The short answer is yes. So in my prepared remarks, when I noted that AI's real driver of product velocity and quality, this is one of the areas that I was thinking of. As I noted, we delivered more than 20 product enhancements to the vector during the second quarter. It's just an incredible rate of progress.

And the way I would think about this business is that progress comes across all three of the important elements of a performance model. So you need continuous product enhancement, which we are accelerating, the velocity which is accelerating, in which we feel we have lots more to do. Now, every quarter won't be as busy as this quarter in terms of product enhancements. We're having new 20 product enhancements every quarter. But we are going to continually enhance the product as quickly as we possibly can.

But product enhancements are just one leg of that stool. The second leg of the stool is higher quality data, better signal.

That's what I'm referencing when we talk about the long term benefits of runtime as an example. But there's also lots of other routes for us to improve the quality of our signal and the depth of our signal. And then when you have product enhancements and you have higher quality data, you also give your model the opportunity to learn and improve.

And two, itself, as a self learning model does. And each time you make product improvements and improve data, your model has an opportunity to get more efficient.

It's all three of those drivers that are driving significant gains for customers. And we just were very confident that we're going to be able to continue that process over time as we continue to benefit from what we think is a long term strategic mode we have around runtime.

As I mentioned up front, what we love about the Netflix relationship is that it's emblematic of the kinds of significant platform relationships we have with virtually all of the major gaming platforms in the world. So it's a very rewarding and we're really pleased that it's an important multi-year deal that calls for us to invest in support of their gaming initiatives on their platform and ensure that those games work well, that our developers can easily build games that function on the Netflix platform, which helps us expand the opportunities for our developers, which we're all about, and expand access to games for a new set of consumers that haven't had the opportunity to play on that platform.

What's interesting and exciting about Netflix is that it's important to rely folks that there are always new platforms developing and that interactive entertainment is a fundamental human desire. Consumers love and will always love playing games and platforms rise and fall, they grow and trade. There's all sorts of cycles, but new platforms and innovation always come to the fore and players will always love playing games.

And we are really excited to be in a position to help platforms, ending in all platforms be optimized for unity because you use by far the leading platform for game making in the world. And that's what I'm so excited about.

Thank you, Jenna.

Thank you, Vasily. I'm happy to do it. Yeah. I could talk about Unit 7 all day. Very, very excited about the bottom of the list. I think the most important thing to remember is that this isn't just another engine upgrade for us. It's a complete change in how developers are going to interact with our technology and how they're going to utilize coding agents in concert with Unity and how they're going to collaborate with their teams.

So what we did effectively was re-architect Unity so that a team of both creators and coding agents could work together side-by-side across every stage we gave them all together using Unity.

Previously, that was not possible. You could not, it was very difficult to connect your coding agents to Unity and it was impossible to really collaborate with multiple parties. Very much a single use experience. So being able to partner with other people and with coding agents in unlimited numbers to make interactive entertainment is a fundamental shift to the way Unity works.

At the same time, a big part of Unity 7 was that we accelerated every part of the development process. Because one of the things we discovered is that when you expose Unity to coding agents, which are working extremely quickly and relentlessly, we saw that sometimes our software was the bottleneck in the speed of development. So we also have to go back into the laboratory to accelerate lots of parts of the development process. So we were never the thing that was making developers wait.

Maybe even most importantly, we've done all of this in a way that will not require our customers to do a traditional upgrade.

Nothing will break. Everything that works in Unity 6 will work in Unity 7. There is no languages to learn. There is no barrier whatsoever.

That is a major change in the way we have built Unity in the past. I would also know that I believe the weight between Unity 5 and Unity 6 was something like 7 years.

We were closer to 18 months. And that's going to continue to accelerate. So it is a very different product than it was before. You asked for me to be clear and simple. So I'm not going to talk about each in too much that they're on each one of the really important technical features that we upgraded, but suffice it to say that we spend the quality and the fundamental nature of the way games are rendered.

And as I mentioned, enhanced the collaboration, enhanced the ability for folks to make live changes so that you can be building a game, you make a change in code, and you can literally see it running in the game you're building in real time. Make a change, see the change in the game. If you think about how fast that is, especially if you're encoding agents or multiple coding agents and multiple people together, all these advancements are really a fundamental change. And it kind of opens Unity to folks beyond engineers.

Those agent workflows are going to enable faster iteration, which ultimately, and this is the most important part, is going to enable people to make deeper and more beautiful games and more of them.

Because none of this technology is designed to replace people. Great interactivity entertainment will always have the spark of human creativity. Great entertainment entertainment is not going to be built by sort of the average of all the games that have been built before, which is effectively what language models are giving you. But what this does is open up all those tools to accelerate innovation.

And folks are going to create amazing differentiated new things that we have never seen before with this. And that's going to drive growth in the industry. And we're really excited to be a part.

Thank you.

Let me just admit of history that I'll let Jared take the rest of that question, Eric, and thank you for the question. It is like exciting for us to take a step back for a moment and think that, you know, two years ago a vector wasn't even a thing. Six quarters ago wasn't a thing. It's now by far our biggest and fastest growing business, significantly more than a billion dollars on a run rate.

Two years ago our create business was in decline. It's at a healthy growth business with a product roadmap. We're incredibly excited about the fives with straight quarters of sequential growth and acceleration. A couple years ago our adjustment is already a little 20s. We're now approaching 30.

And as Jared noted, we expect to get profitable for the first time ever. Our free cash flow on a quarterly basis is what doubled as Jared mentioned in his remarks.

And we're really excited about the mix of businesses we're operating and very excited to your point about having shed slower growing less profitable businesses. So as I noted, we've been able to grow, significantly grow revenues while also growing profitability.

And we expect to continue to be able to do that. That is our strategy. We expect to have our cake and eat it too.

There are continued efficiencies. We can find our business. We will have continued revenue growth and we continue to look for ways to structure our business so that we continue to invest in high growth activities by making choices and prioritizing the things that we do, which is the most critical piece of a well operated business. That's as true in lead times as it is in good time. In fact, it's even more true when things are going well.

That's when folks have the inclination to want to start doing everything. We are not going to fall into that job. We're going to continue to apply capital to our fastest growing businesses and prioritize those and not get distracted by things that are not creating growth and profitability. That's our strategy.

Yeah. I think that's well said. I think the only thing I'd add to what Matt reviewed was, you know, unity is blessed with structurally high contribution margins.

We're going to be able to do that.