Unity Software Inc. (U) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals positive financial performance with strong growth in Vector and reduced stock compensation expenses. The Q&A highlights strong demand for new products, positive market positioning, and strategic advancements in AI and commerce tools. Despite some unclear responses, the overall sentiment is optimistic, especially with the expected growth in AR/VR and strategic positioning in China. These factors suggest a positive stock price movement over the next two weeks.
Key Financial Performance
Vector Revenue Growth Vector revenue grew 53% in the first 3 quarters since its launch. January was Vector's best revenue month ever, 72% larger than January of last year. This growth is attributed to its scaling and value delivery to customers.
IronSource Ad Network Revenue IronSource Ad Network revenue declined sharply and represented less than 6% of total Unity revenue in Q1 2026. The decline is due to a shift from lower-margin ad network revenue to higher-margin AI platform revenue.
Create Business Revenue Growth Create business revenue grew nearly 50% in China in 2025, driven by interoperability with local platforms like Open Harmony and compatibility with consumer channels like WeChat.
Grow Revenue Grow revenue in Q4 2025 was $338 million, up 6% sequentially and 11% year-over-year. The growth was driven by Vector's exceptional performance, which added more incremental dollars in Q4 than in any prior quarter.
Create Revenue Create revenue in Q4 2025 was $165 million, up 8% year-over-year. Excluding $10 million in non-strategic revenue from Q4 2024, Create business grew 16% year-over-year, driven by subscription business strength and price increases.
Adjusted EBITDA Adjusted EBITDA for Q4 2025 was $125 million, representing 25% margins, an improvement of 200 basis points year-over-year and sequentially. This was achieved despite increased sales, marketing, and R&D expenses.
Free Cash Flow Free cash flow grew 41% in 2025 to over $400 million, with free cash flow margins expanding by 600 basis points. This growth was driven by positive working capital contributions and reduced restructuring charges.
Stock Compensation Expense Stock compensation expense decreased by 19% in 2025, reducing from 33% of revenues in 2024 to 21% in 2025. This reduction contributed to progress toward GAAP profitability.
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Operating Highlights
Vector: Vector experienced its third consecutive quarter of mid-teens sequential revenue growth, with revenue growing 53% in the first 3 quarters since its launch. January 2026 was its best revenue month ever, 72% larger than January of the previous year. By the end of 2026, the quarterly revenue run rate for Vector is expected to exceed $1 billion annually.
Unity 6: Unity 6 is being adopted more quickly than any previous version, with 90% of active creators using it for free. It integrates infrastructure, monetization, and content optimization tools, supporting both Unity-developed and third-party tools.
Unity AI: Unity AI is being integrated into the creation process, making Unity easier to use and drawing more customers into interactive content creation. A new upgraded Unity AI will be unveiled in March 2026, enabling developers to create casual games using natural language prompts.
China market expansion: Create business revenue in China grew nearly 50% in 2025, driven by interoperability with local platforms like Open Harmony and compatibility with consumer channels like WeChat.
Global market positioning: Unity's tools allow developers to create content compatible with multiple platforms, such as WeChat mini-games and high-end iPhone releases, enhancing global market reach.
IronSource Ad Network: The IronSource Ad Network's revenue declined sharply and now represents less than 6% of Unity's total revenue. Unity is shifting from lower-margin ad network revenue to higher-margin AI platform revenue.
Financial performance: Unity achieved its fastest growth and highest margins in two years, with Q4 2025 adjusted EBITDA at $125 million (25% margin). Free cash flow grew 41% in 2025 to over $400 million, with free cash flow margins expanding by 600 basis points.
Web-based collaboration: Unity authoring workflows will become accessible via web browsers in 2026, enabling seamless collaboration among developers, artists, designers, and other stakeholders. Unity Studio, a no-code 3D editor, is already in beta.
AI-driven authoring: Unity will unveil a new AI-driven authoring tool in 2026, allowing developers to create games using natural language prompts. This tool aims to lower barriers to entry and democratize game development.
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Risk or Challenges
IronSource Ad Network decline: The sharp decline in the IronSource Ad Network has impacted Unity's advertising business, though it is expected to become a smaller component of revenue over time. This decline has at times masked growth in other areas, such as Vector.
Dependence on Vector for growth: Unity's advertising business is heavily reliant on the success of Vector, which, while growing, may face challenges in sustaining its trajectory or meeting expectations.
Economic uncertainties and seasonality: Seasonality, such as the post-holiday decline in Q1, and broader economic uncertainties could impact revenue growth, particularly in the advertising segment.
Increased R&D and operational costs: Elevated R&D spending, including cloud costs and AI hiring, as well as significant sales and marketing expenses, could pressure margins and profitability.
Integration and execution risks: The integration of new technologies, such as runtime engine data into Vector and AI-driven authoring tools, poses execution risks. Delays or underperformance in these initiatives could impact Unity's strategic objectives.
Competition in AI and gaming tools: Unity faces competitive pressures in the AI and gaming tools market, which could impact its ability to attract and retain customers.
Geopolitical and regulatory risks in China: While Unity has seen strong growth in China, geopolitical tensions and regulatory changes could pose risks to its operations and revenue in the region.
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Guidance & Outlook
Vector Revenue Projections: By the end of 2026, the quarterly revenue run rate for Vector is expected to exceed $1 billion annually. Vector is anticipated to grow 10% sequentially in Q1 2026 and continue to drive growth in the advertising business.
IronSource Ad Network: The IronSource Ad Network will represent less than 6% of total Unity revenue in Q1 2026 and will continue to decline as a component of the financial profile over time.
Advertising Business Outlook: The advertising business is expected to see enhanced growth rates and profitability as lower-margin ad network revenue is replaced by differentiated AI platform revenue. Runtime engine data will be integrated into Vector in Q2 2026, improving behavioral data and compounding model improvements over time.
Create Business Growth: Double-digit year-over-year revenue growth is forecasted for the Create business in Q1 2026, driven by subscription business strength. Growth is expected to continue throughout 2026, excluding non-strategic revenue impacts.
Collaboration and AI Offering: In 2026, Unity will introduce web browser accessibility for authoring workflows and AI-driven authoring tools, including a beta of upgraded Unity AI in March 2026. These initiatives aim to expand the addressable market and democratize game development.
Financial Guidance for Q1 2026: Total revenues are projected to be $480 million to $490 million, with adjusted EBITDA of $105 million to $110 million. Adjusted EBITDA margins are expected to expand by 300 basis points year-over-year.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Where is Unity in the process of harvesting low-hanging fruit for Vector, and what are the ongoing breakthroughs for Unity ads? How much of a drag will IronSource be through 2026?
A:Unity's Vector business has shown strong growth, exceeding expectations with over 70% growth in January. Management believes there is no natural ceiling for Vector's growth and highlighted that IronSource, a legacy business, will become less material over time, driven by Vector's growth.
Q:What is the demand and uptake for Unity's commerce tools as they approach a GA launch in Q2?
A:Customer reaction to Unity's commerce tools has been extremely positive. The tools accelerate adaptation to regulatory changes, enhance Vector models, and are easy to integrate into Unity's platform. The product is moving into early access next week and will be generally available by Q2.
Q:What has been observed in the market from Meta in Q1, and has it impacted Vector's growth? What is Unity's view on CloudX's entrance into the mediation market?
A:Meta has been competitive in iOS traffic for some time, but it has not had a meaningful impact on Unity. Unity supports open and transparent mediation platforms like CloudX but does not see mediation as central to its strategy. Unity's focus remains on first-party connections through its engine and runtime.
Q:What are Unity's thoughts on Google Genie and its implications for the video game industry?
A:Unity sees AI, including Google Genie, as a massive tailwind for the video game industry. AI will make game creation more efficient and allow creators to focus on innovation. Unity views AI advancements as complementary to its engine, enhancing workflows and enabling creators to build interactive experiences more effectively.
Q:What are the economics and potential benefits of Unity's cross-platform commerce management solution?
A:Unity participates in commerce transactions at a high margin but modest scale, aiming to deliver value to customers. The solution enhances engagement and revenue optimization, benefiting Unity's operations and Vector's value by providing a clearer understanding of gamer behavior.
Q:What is the growth trajectory of Unity's Grow business, particularly Vector, in Q1 and beyond?
A:Vector grew mid-teens in Q4, with January revenues up over 70% year-over-year. Unity expects Q1 2026 to see an incremental 10% sequential growth for Vector. The business is transforming and accelerating, with strong market success.
Q:What is Unity's long-term strategic positioning for its Create business, and how is it addressing investor concerns?
A:Unity's Create business has shown strength, growing 16% year-over-year. Unity 6 is being adopted faster than any previous release. Enhancements like collaboration tools and AI integration are expected to unlock new opportunities and appeal to a broader user base, addressing investor concerns about its strategic positioning.
Q:What is Unity's perspective on the potential pricing impact of AI-driven accessibility and the growth of its commerce business?
A:Unity believes AI-driven accessibility will open opportunities to monetize non-paying users and expand its addressable market. Unity is flexible with its business model and sees potential in evolving beyond a seat-based SaaS model, leveraging its advertising and commerce products.
Q:What are the implications of IronSource's headwinds drawing to a close for Unity's operations and margins?
A:As IronSource becomes a smaller part of Unity's portfolio, the business will simplify and streamline, leading to higher margins and greater scalability. Unity expects operating margins to improve, with Vector becoming a larger and more profitable part of the business.
Q:How will Unity benefit from the growth of mini apps in China on both the Create and Grow sides?
A:Unity is well-positioned in China, the largest and fastest-growing game market. It has strong relationships with local developers and compatibility with local platforms. Growth in Chinese-built games released in the West provides additional opportunities for Unity's Vector product and other tools.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the contribution of the Developer Data Framework to the ad model in 2026, stating only that testing is ongoing and integration is planned for Q2. Additionally, while discussing the potential pricing impact of AI-driven accessibility, management did not provide concrete plans or timelines for evolving the business model.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI authoring
Ad Network
Conference
Create China
IronSource Ad
Unity AI
Unity platform
Unity tool
WeChat
asset
basis point
beta
bridge
browser
business Unity
click
code
comp expense
content
context
creation
creator
decline IronSource
expansion Unity
flow Create
flow cash
foundation
game development
holiday
improvement course
install
margin
model quality
physic
profitability cash
project
runtime
shift
signal
spend
teen
user game
U Transcript
Unity Software Inc. (U) Q4 2025 Earnings Call Transcript
Positive2-11
The earnings call reveals positive financial performance with strong growth in Vector and reduced stock compensation expenses. The Q&A highlights strong demand for new products, positive market positioning, and strategic advancements in AI and commerce tools. Despite some unclear responses, the overall sentiment is optimistic, especially with the expected growth in AR/VR and strategic positioning in China. These factors suggest a positive stock price movement over the next two weeks.
Unity Software Inc. (U) Q3 2025 Earnings Call Transcript
Positive11-5
Unity's earnings call highlights several positive elements: strong financial performance with high gross margins, strategic partnerships with major companies like Tencent and Nintendo, and investments in AI and product development. The guidance and market strategy, although lacking some specifics, indicate confidence in growth. The Q&A session did not reveal significant negative trends, and management's focus on long-term opportunities and efficiency improvements supports a positive sentiment. Despite some unclear responses, the overall outlook is optimistic, suggesting a positive stock price movement in the near term.
Unity Software Inc. (U) Q2 2025 Earnings Call Transcript
Positive8-6
Unity's earnings call reveals strong financial metrics, with better-than-expected revenue and EBITDA, a robust cash flow, and a solid cash balance. The successful launch of Unity Vector and its promising potential, coupled with the expansion into AR and VR markets, indicates positive growth prospects. Despite some management vagueness in the Q&A, the overall sentiment is optimistic, with strategic partnerships and ongoing improvements in AI and ad technology expected to drive further growth. Given these factors, the stock price is likely to see a positive movement in the short term.
Unity Software (U) Q1 2025 Earnings Call Transcript
Unknown5-7
The earnings call presents a mixed outlook. Positive aspects include the successful share repurchase program and improved EBITDA margins. However, revenue declines in major segments and increased R&D costs pose risks. The Q&A revealed cautious optimism about Unity Vector's performance but lacked clear guidance on the transition timeline. The absence of significant macroeconomic impact is a positive, but overall, the cautious guidance and lack of clarity on financial impacts balance out the positives, leading to a neutral sentiment.
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Frequently Asked Questions
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