Unity Software - Earnings Call - Q2 2025
August 6, 2025
Executive Summary
- Q2 2025 revenue of $441M and adjusted EPS of $0.18 both exceeded guidance and beat Street consensus; adjusted EBITDA of $90M (21% margin) also topped guidance, driven by Unity Ad Network strength and cost discipline. Revenue consensus was $426.7M and EPS consensus was $0.148; both were beats*.
- Grow Solutions revenue was $287M (-4% YoY), but Unity Ad Network grew 15% QoQ and now represents 49% of Grow; Create Solutions revenue was $154M (+2% YoY), aided by ~$12M term license. Management called Q2 an “inflection point” tied to AI platform Vector.
- Q3 2025 guidance: revenue $440–$450M and adjusted EBITDA $90–$95M; Grow expected to grow mid‑single digits sequentially, Create to decline slightly due to a large Q2 deal timing.
- Operational KPIs improved: free cash flow hit a record $127M and operating cash flow was $133M; China revenue rose ~$20M sequentially, reflecting Create and Grow strength.
Values retrieved from S&P Global: revenue and EPS consensus means and estimate counts.*
What Went Well and What Went Wrong
What Went Well
- “Results once again exceeded expectations, substantially beating the high-end of our guidance for both revenue and Adjusted EBITDA.” CEO highlighted Vector and Ad Network performance as catalysts.
- Unity Ad Network grew 15% QoQ in Q2 and is ~49% of Grow; management expects continued double‑digit sequential growth in Q3 inside the Ad Network.
- Create: double-digit subscription growth and momentum in Unity 6 adoption; 6.6M Unity 6 downloads, up 50% QoQ, plus new partnerships with Tencent, Scopely, Nintendo, BMW, and Mercedes.
What Went Wrong
- Grow Solutions revenue fell 4% YoY due to declines in select Ads products outside Unity Ad Network during Vector’s rollout, tempering overall segment growth.
- Adjusted EBITDA ($90M) and adjusted EPS ($0.18) declined YoY vs Q2 2024 ($113M; $0.22), reflecting the portfolio reset and reduced contributions from non‑strategic items.
- Create revenue growth included ~$12M of non‑recurring term license; management guided Create down slightly QoQ in Q3 due to the large Q2 customer win timing.
Transcript
Speaker 2
Ladies and gentlemen, thank you for joining us and welcome to the Unity Software Inc. Q2 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press *9 to raise your hand and *6 to unmute. I will now hand the conference over to Alexander Joseph Giaimo, Head of Investor Relations. Alex, please go ahead.
Speaker 0
Thanks, Nicole. Good morning, everyone. Welcome to Unity Software Inc.'s second quarter 2025 earnings call. I'm joined this morning by Matthew Samuel Bromberg, our CEO, and Jarrod Yahes, our CFO. Before we begin, I'd like to note this conference call includes forward-looking statements, including statements about goals, business outlook, industry trends, expectations for future 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. We undertake no obligation to update any of our forward-looking statements. For more information about factors that may cause actual results to differ, please refer to the risks described in our most recent Form 10-K, 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 an 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. With that, I'll pass it over to Matt.
Speaker 1
Thank you, Alex, and good morning, everybody. On behalf of everyone at Unity from across the globe, I'd like to thank each of you for joining us today. It's a distinct pleasure and a privilege for me to showcase our team's progress each quarter. After a full year leading this company, my enthusiasm about the opportunity we have in front of us has never been more profound. We believe that the second quarter of 2025 will be remembered as an inflection point, where accelerated product innovation and enhanced delivery of customer value came together to spark demonstrable sustainable growth, led by the full emergence of Unity Vector, which has far exceeded our expectations at this early stage of its development.
Strengths in the second quarter across both Grow and Create helped drive results that once again exceeded expectations, substantially beating the high end of our guidance for both revenue and adjusted EBITDA. Let's begin in the Grow segment. To fully understand our enthusiasm, it helps to narrow the focus a little bit. Vector-led performance inside the Unity Ad Network sparked 15% sequential revenue growth in the second quarter, growth which we are seeing continue into the third quarter as well. You'll recall we anticipated some softness across our other ad products during Q2, driven in part by redeployment of technical and go-to-market resources towards the launch of Vector. That dynamic did indeed temper the impact of the Unity Ad Network's growth on the overall ad segment revenue in Q2. However, we're anticipating that the third quarter will evidence a very different trajectory for three primary reasons.
First, we're now seeing clear stabilization outside of the Unity Ad Network, as product enhancements and greater operating discipline bring results back into line, and we begin to spread our AI-driven capabilities across our broader ad portfolio. Second, the Unity Ad Network now comprises approximately half of total Grow revenue, and we expect that percentage to continue to increase. As a consequence, our fastest growing product should have a greater impact on overall results in the quarters ahead. Finally, we're seeing continued increases in the value that Vector is bringing to our customers as we continue to invest in the development of the quality of our AI. Last quarter, we talked about the 15% to 20% lifts we are seeing in both the volume and quality of new users delivered through Unity Vector. In the second quarter, those results continue to climb.
We now believe that the combined impact of these three factors should drive mid-single-digit sequential growth across the total combined growth segment in the third quarter of this year. It's worth taking a moment to understand precisely how delivering stronger results to our partners translates directly into a willingness to scale spend with Unity. Remember that performance advertisers are not allocating budget in the traditional sense, nor are they necessarily pulling share from competitors. Performance advertisers consistently increase spend up to the limit of their return requirements all the way across the efficient frontier. We are already working with 85 of the top 100 mobile games in the world. As we strive to deliver better returns, we expect our partners will continue to invest in growth, and our business will grow alongside.
We also anticipate that Vector will move from strength to strength in the years ahead, as the quality and efficiency of the AI that powers our performance engine continues to improve, and we continue to extend Vector's capabilities to enhance some of the other ad products in our portfolio. The increase in confidence we have in the future of our business is actually partially derived from the fact that we've not yet tapped into our biggest competitive advantage, the deep consumer understanding we possess by virtue of Unity's position as the operating system for games globally. Unity is the leading provider of the software used to build, distribute, and run gaming applications used by billions of consumers worldwide. 70% of the top mobile games in the world are built on Unity.
In our advertising business, this unique vantage point will provide our Vector AI engine access to new and highly differentiated behavioral data, but will provide a significant potential future catalyst for enhanced performance and growth. We anticipate seeing the impact of our work in this area beginning in 2026 and extending well into the future. As excited as we are today about Unity, we're equally sure that this is just the beginning. The foundation for this next generation of Unity is being launched this summer with the release of Unity 6.2, which includes the introduction of the Developer Data Framework. The Developer Data Framework is a unified system featuring privacy dashboards that allow developers to control how data is collected, shared, and used in the production and operation of the interactive applications they build with Unity.
This launch marks a critical step to ensure transparency, safety, and privacy as we improve the quality and utility of the tools that game developers use to build and grow their audiences. Since we're discussing Unity 6.2, let's take the opportunity now to transition to the discussion of our Create segment, where a transformation in the way we build and support our software is now well underway. Our rededication to quality, stability, and improving the developer experience is catalyzing strong financial results in Create, including another quarter of double-digit subscription growth in Q2. We're also seeing momentum around the continued adoption of Unity 6, the most stable and performant version of Unity we've ever shipped, which has now registered more than 6.6 million downloads, up 50% from last quarter.
The transition we're making from Unity 6 from prior versions is taking place quickly and far more smoothly than at any previous point in our history. The beta feedback we received for the Unity AI in 6.2, which is still in very early stages of development, has been both positive and extraordinarily helpful. With Vector now successfully underway, you'll see us substantially ramping our ambitions for the role AI will play in the core Unity content creation experience. Within the financial parameters we've already established, we're making significantly increased investments in talent and product in this area and expect to be talking about it much more in the quarters ahead.
Just as data from applications that are distributed on the Unity runtime have the potential to provide a long-term competitive advantage in our ad business, data from applications developed in Unity will enable our AI to transform the content creation experience, leveraging our awareness of each product and each project to predict the needs of each developer, transforming the way content is built and powering the future of our Create business. As Unity reconnects with its customers and community and fully embraces the role it plays as the operating system for games, the opportunities available for partnerships in Create also move into new territory. This quarter, we were proud to announce major multi-year partnerships with Tencent, one of the largest developers and publishers of games in the world, and Scopely, creator of one of the world's top-grossing mobile games, Monopoly Go.
With Tencent, our expanded multi-year partnership will keep Unity at the core of some of the most popular multi-platform titles in the world for many years to come. It also highlights the continued strength of our business in China, the largest market for games in the world. We are the only company we know of able to support development seamlessly across the entire ecosystem in China, including with Open Harmony, a rapidly growing mobile operating system in that country. With Scopely, we're embarking on a new multi-year agreement that includes a long-term technical partnership across both Create and Grow, designed both to support the growth and operation of Scopely's games, as well as to improve the Unity Engine for all of our customers. On the platform side, we announced an exciting multifaceted partnership with Nintendo, who's experiencing tremendous success with the launch of the Switch 2.
Our collaboration ensured that Unity 6 would be fully optimized on day one for the release of the Switch 2, so that Unity could play a foundational role in the growth and support of Nintendo's ambitions for third-party game development, commerce, and live service operation on their platform. These new partnerships are not built around selling seats. Rather, our goal is to create new business opportunities for our partners by leveraging our platform and portfolio of products in new ways. Finally, on industry, we remain extremely excited about the momentum we are seeing outside of gaming, which once again was our fastest growing subscription business, increasing sequentially for the 10th straight quarter. In automotive, this quarter, we announced a deepening of our relationship with BMW, who uses Unity Asset Manager to power its groundbreaking 3D asset management platform globally.
Unity's 3D technology has also been integrated into the Mercedes-Benz operating system to enhance the in-car experience of the new Mercedes-Benz CLA. In healthcare, Spectrum Medical is redefining pre-surgical planning and patient communication through immersive 3D visualization tools built on Unity. The use cases continue to expand, and we're more confident than ever in the long-term growth opportunity across a broad range of categories and applications. I'd like to thank all of our teams globally for their relentless effort as we transform Unity and earn our customers' trust each day, and express our continued gratitude for the support of our partners and our community worldwide. We believe Unity is just one of a few companies in the world poised to benefit from the incredible opportunities that abound at the intersection of AI, digital content creation, digital advertising, and interactive entertainment.
All of us here are dedicated to making that future a reality. Thank you again for your time and attention this morning. With that, I'll pass it over to Jarrod for an overview of our financial performance. Jarrod?
Speaker 3
Thanks so much, Matt, and good morning, everyone. I'm pleased to report that Unity exceeded the top end of our guidance on all measures in the second quarter. Revenue exceeded the top end of our guidance by $16 million, with adjusted EBITDA coming in $15 million above the top end of our guidance. Grow revenue in the second quarter was $287 million, down 4% year over year and up 1% sequentially, with revenue upside compared to our guidance driven by strong performance from the Unity Ad Network, where we are seeing significantly better results than expected at this early stage from Unity Vector. As expected, the growth of the Unity Ad Network was partially offset by declines in other ad products.
In Create, revenue was $154 million, up 2% both year over year and sequentially, reflecting strength in our subscription business, which once again delivered double-digit year-over-year growth in the quarter. I'd also like to remind investors that we lapped $21 million in non-strategic Create revenues as compared to the second quarter of 2024. Adjusting for the non-strategic revenue, Create grew 16% year over year in the second quarter. Non-strategic Create revenue in Q2 2025 was minimal, and we expect it to remain so moving forward. Turning from revenue to non-GAAP profitability, adjusted EBITDA for the quarter was $90 million, representing 21% margins. Adjusted EBITDA exceeded the high end of our guidance, driven by continued operating leverage in the model from faster revenue growth, combined with tight controls around headcount costs and cloud spend.
Our aggressive stance on improving efficiency is also allowing us to simultaneously invest behind high-impact initiatives, such as driving an aggressive roadmap around Unity Vector and incorporating AI throughout the editor experience. We continue to see opportunities for further margin expansion and operating leverage over time, particularly as we scale and grow our ads business. Unity had record free cash flow in the second quarter, coming in at $127 million and representing an improvement of $47 million year over year, partially driven by larger restructuring payments we incurred last year. The dramatic uptick in free cash flow from the first quarter was driven by strong profitability, combined with the timing of publisher payments, which were concentrated in the first quarter. In terms of our balance sheet, cash at the end of the quarter was $1.7 billion, and convertible debt was $2.2 billion.
With our strong free cash flow profile and modest leverage, we have an extremely flexible capital structure that allows us to invest against our key initiatives to drive accelerated organic growth for shareholders. With that, I'd now like to turn to guidance for the third quarter. We're expecting total third quarter revenues of $440 million to $450 million and adjusted EBITDA of $90 million to $95 million. In Grow, we expect mid-single-digit sequential revenue growth, driven by continued performance in the Unity Ad Network, where the strong momentum has continued into Q3. Outside of the Unity Ad Network, we are seeing stabilization and expect sequentially steady revenues from Q2 to Q3. As Matt mentioned, the Unity Ad Network now represents about half of total Grow revenue, and we expect that % to grow over time.
In Create, we are forecasting a slight sequential decline from Q2 to Q3 due to the impact of a large customer win in Q2. I would note that excluding the impact of this deal, our strategic Create revenue is expected to be up in the third quarter from both Q1 and Q2, as well as up high single digits on a year-over-year basis. Our adjusted EBITDA guidance factors in the deliberate controls we're implementing around G&A and R&D spend, including efficiencies we're driving around cloud spend. Unity is also just starting to benefit from improved operating leverage supported by adjusted gross margins of 83%. The return to revenue growth with high adjusted gross margins, combined with a lean operating structure, should result in expanded operating margins over time, even taking into account aggressive investments in Unity Vector, AI, and other high-potential R&D investments.
With that, I'd like to thank you for joining us on Unity's second quarter 2025 conference call. Let me turn the call over to Alex so that we can take your questions.
Speaker 0
Nicole, I think we're ready for questions.
Speaker 2
We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press *9 to raise your hand and *6 to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matthew Andrew Cost with Morgan Stanley. Your line is open. Please go ahead.
Morning, everyone. Thanks for taking the questions. Is there a potential to expand the strength that you have on the Unity Ad side to the other products that grow? Is there anything preventing you from taking the technology that's driving the stronger performance at Unity Ads and just deploying it across the rest of the Grow portfolio? I have one follow-up. Thank you.
Speaker 1
Hey, Matt, thanks for the question. Unity Vector is a highly modular system, and there is nothing that prevents us from taking that modular system and using it to improve select parts and, in fact, maybe sometimes significant parts of our other ad products.
Great, thank you. In terms of just the rate of improvement with Unity Vector, it's been a sort of a fast deployment over the course of the year. I think it was in May that you rolled it out across Unity Ad Network. Unity Vector was fully rolled out there. Unity Vector itself, what is the pace of improvement that we can expect from Unity Vector over time? It seems like we're not even necessarily going to see the benefits of runtime data until 2026. How much low-hanging fruit is there left to drive these potential improvements just in the performance of the model?
Thanks, Matt. Yeah, listen, Vector was a really important inflection point for our business, and we implemented what was effectively a generational upgrade of our capabilities, and we moved them to a brand new neural network-based platform. It's more powerful, it's more versatile, it's more scalable than our old systems, which means that it can handle more data, can handle more complex types of data, and it can respond in real time to changes in data. These are capabilities that will continue to grow as the model continues to learn because we can process more features, both dense and sparse, and we can find important signals in what would otherwise be a vast sea of noise for us. We expect that this investment, which to your point is really just very much at the beginning, will continue to provide lifts for us for years.
Indeed, even in the immediate term, we are already seeing lifts above the 15% to 20% improvements that we saw in installs and user value last quarter. Again, these are quarter-to-quarter moves. To your point, this is a long-term shift that we think is going to transform our business for many years to come.
Great, thank you.
Speaker 2
Your next question comes from the line of Brent John Thill with Jefferies. Your line is open. Please go ahead.
Good morning, Matthew. On Grow, maybe if you could just characterize the next steps you're going to take in the evolution of the product. What areas are you pleased with? What areas would you like to see more improvement? How do you characterize the next chapter, if you will, over the next few months for the rollout of the solution?
Speaker 1
Yeah, as we've indicated and Matt pointed out, we are still very, very early in the process of rolling Vector out. We have what we think is an extraordinary team investing in improvements and aiding the learning process for our AI. It is very, very early for us. What the future looks like is we continue to invest and we're going to continue to see improvements over time in our existing capabilities.
To your point, as I noted in my preparatory remarks, we really believe there's also another inflection point for us that sits out in the future where some of the natural structural advantages that we have in the marketplace, having to do with our position as the operating system for games globally, as those insights into consumer behavior for billions of consumers that are using made-with-Unity applications, as we begin to bring that insight into our AI, we're going to see enhanced performance. As we indicated, we expect to see that beginning in 2026 and then continuing out for many, many years to come. In a way, this is what's so exciting for us.
Very, very early on to a major transition, immediately seeing enhanced performance, enhanced spend, and still at the very beginning of a technical development roadmap and not yet having taken advantage of some of the unique position that we have in the marketplace. That is what accounts for our great enthusiasm in this business.
OK, and just a quick follow-up maybe for Jarrod, just on the $12 million perpetual deal in Create. Can you just describe what happened there, why that's not recurring, what you saw there that maybe just doesn't is an anomaly? Give us a sense of the color of the background. Thank you.
Speaker 3
Sure. We're excited about some of the larger partnerships that we signed during the quarter. Matt mentioned several of them, namely Tencent and Scopely. There are several others that we didn't mention by name. Those contracts are fairly far-reaching. They touch multiple parts of our business. There are some elements of those contracts whereby, by virtue of the way that they are structured, there is an upfront recognition of the revenue component of them, with the majority of that revenue being a traditional SaaS-based subscription revenue that continues to benefit the business over time. We felt it necessary to call out this one component of one of the contracts. It is less than the totality of the contract by far. It's a small component of it, just because it did positively benefit the second quarter and wouldn't continue on into the third quarter.
As I mentioned, the Create business continues to see strength on strength, double-digit subscription revenue growth, 16% growth year over year of the strategic revenue in Create. We're feeling really good about the growth in Create with and without this particular element of one of the contracts.
Great, thanks.
Speaker 2
Your next question comes from the line of Andrew M. Boone with Citizens. Your line is open. Please go ahead.
Thanks so much for taking the questions. I wanted to go to Grow guidance. You guys talked about an improvement in the non-Unity Ad Network portion of the business in terms of kind of stabilization there. If I think about kind of mid-single-digit growth, does that imply that Vector gains or Unity Ad Network gains are slowing as I think about 3Q compared to 2Q? Can you guys just break that apart? Matt, as I think about the data potential of you guys incorporating more data in the Developer Data Framework that's coming out with Unity 6.2, can you just help us understand how customer conversations are going in terms of including more data within your ad products? Thanks so much.
Speaker 1
Let me take the second one first, and then Jarrod will take your first question. The importance of the Developer Data Framework, Andrew, is that the interaction around what data is shared and how we use it, and we're putting that control completely in the hands of customers, and we're doing it in a highly automated fashion in a way that's deeply integrated into the product. The sort of mental model you want to have here is not lots and lots of conversations with folks all over the world, but rather, just as with every other technology product that customers interact with in the world, there are toggles and menus where you can control what data you share with us and how we use it. Folks will have different predilections about that, but conversation is not really required. That's really the goal here.
It's just to completely normalize this, to put control into the hands of our customers, and allow them to work with us in whatever way they'd like.
Speaker 3
To the second part of your question on the Grow guidance, we've guided for mid-single-digit sequential revenue growth in Grow, comparing Q2 to the third quarter. We do expect stabilization in the non-Vector part of our ad business, which, as we talked about, is about 50% of the business. If half the business is basically going to be stable from Q2 to Q3, and the aggregate of that business is going to grow mid-single digits, let's call it 5%, what that implies is that there's double-digit growth that we are set up for sequentially in the Unity Ad Network. What's exciting about that is we're seeing 10% or more sequential growth on top of the 15% sequential growth we saw the preceding quarter, or at least 25% growth inside of a couple quarters.
That's really exciting for us and something that we are truly pleased about in this early stage of Vector's development.
Speaker 1
We're not expecting to break that number out every quarter as we go forward, but we thought it was important to do it this quarter just so you could understand the drivers of what we're seeing and understand our enthusiasm about the direction of the business.
Thank you.
Speaker 2
Your next question comes from the line of Vasily Karasyov with Cannonball. Your line is open. Please go ahead.
Thank you very much. I wanted to follow up on what you said earlier on the call here. I think you mentioned that you see a strong growth in installs. Can you help us understand what it is that you're seeing Unity Vector doing differently? Is it finding more impressions? Is it finding impressions that are underpriced? Are you seeing more installs per 1,000 impressions bought? We'd appreciate you if you could help us dimensionalize this.
Speaker 1
Yeah, the short answer is yes, which is to say we're seeing broad-based improvement against all of the drivers that indicate we're delivering more value to ad customers. The best way to gauge that is just to gauge the continued increased enthusiasm on spend. It's really that simple. Our models will continue to improve as we continue to invest in the quality and efficiency of the models and as we continue to provide more and unique data signals over time. That's a kind of process that we feel really comfortable with.
Thank you. Quick follow-up. Is the take rate changing compared to Unity Ad Network?
Speaker 3
No, Vasily, we're not seeing sort of material shifts in the way we're thinking about take rate and installs. We're seeing broad-based growth in installs and value per customer, with no significant changes in the margin profile of the business to generate net revenue.
Thank you very much.
Speaker 2
Your next question comes from the line of Tom Champion with Piper Sandler. Your line is open. Please go ahead.
Hi, this is Jim on for Tom. Thanks for taking the question. Curious on the China piece. It looks like the revenue by GEO, there was a big sequential step up in China spend. Is this Vector related or something else?
Speaker 1
Let me take the first part of that, and Jarrod, you can jump in on the second part. We're really excited about the opportunities we have in China, as I mentioned. The vast majority of that activity is really related to improvements in our core Create business, where we've expanded our relationships with some major customers in that space and where the utility of the Unity Engine and its ability to work across all the platforms in China are really kind of starting to take root to help us grow that business.
Speaker 3
Yeah, and Jim, I would just add to that that our business in China was up about $20 million sequentially, which is truly very exciting. Some component of that growth was due to growth in the Create element, and other parts of the growth was due to growth in Grow. We are seeing broad-based growth in China across both the platform side of our business as well as the advertising side of our business.
Great, that is helpful. Just a point of clarification on the 49% for Unity Ads, is this solely the DSP?
Not exactly sure what you mean, Jim, but this is the entire Unity Ad Network component of the Grow business. The other portion of the Grow business that is not related to the Unity Ad Network is the piece where we are later to introduce Unity Vector, and that comprises a number of different ad products. I think the Unity Ad Network is really the DSP side that you're referring to.
OK, got it. Thank you.
Speaker 2
Your next question comes from the line of Alec Reid Brondolo with Wells Fargo. Your line is open. Please go ahead.
Yeah, hey guys, thank you so much for the question. Maybe I'll say, I think the debate on the stock this morning is the extent to which the better Unity Ad Network growth in the second quarter was cannibalizing ironSource spend as opposed to incremental to kind of like Unity corporate or the business overall. Any thoughts on that concept, kind of incrementality relative to cannibalization would be helpful. Perhaps a sense check on your level of confidence that as ironSource or the non-Vector portion of Grow revenue starts to stabilize, we won't see a deceleration or deterioration in the improvement in the rate of growth of the Unity Ad Network. That would be super helpful. Thank you.
Speaker 1
I'll take a piece of that. Jarrod, if you have anything else to add, let me know. We're quite clear that the cannibalization, that there is really no meaningful cannibalization impact at all. It's important to understand that our ad products operate in a big, broad competitive marketplace with some of the largest, most sophisticated companies competing every day. It is not Unity against Unity. Spend flows to where the return is. We estimate that the cannibalization of our other ad network to Unity is less than 10%. That's just demonstrably not what's happening. What's happening is that as we continue to increase the value we provide to customers, they will continue to spend, and that will drive growth. I don't think there are any natural structural barriers to that continuing.
All we need to do is continue to improve the quality of the AI we use to deliver that value, which we'll do, and we'll continue to grow the quality and base of the data that's provided.
Speaker 3
Alec, I think we've done some detailed analysis around this, and it really supports the number that Matt put out there with respect to cannibalization. I think the other proof point I would look to is, as you look to the third quarter, we're seeing ongoing continued significant growth in the Unity Ad Network and stabilization in some of the non-Vector ad elements. It is really starting to come through for us, and we're really excited about what we're seeing.
Speaker 1
Yeah, just to add again, part of the reason in my prepared remarks where I spent a little bit of time trying to explain the dynamic with customers is because I do think there's often this mental model where folks are thinking about share shifts and cannibalization and other things. I just don't think that's the best way to understand the dynamics in our business.
Perfect. The 10% data point is really helpful. Thank you, guys.
Yep.
Speaker 2
Your next question comes from the line of Dylan Tyler Becker with William Blair. Your line is open. Please go ahead.
Hey, gentlemen. Appreciate it here. Maybe Matt, since you called out kind of the content creation side of the equation, I wonder how your view on kind of like the strategic importance of the Create platform evolves around kind of the proliferation of content, particularly in kind of managing quality and relevance and kind of reducing friction around that kind of user and publisher experience, if that makes sense.
Speaker 1
Are you interested mostly in the role the AI is going to play in Create in terms of helping folks make games, or are you more interested in the—just maybe clarify for me.
In this kind of proliferation of content, the strategic importance that Unity can play in that ecosystem of helping publishers navigate and sift through that to maintain optimal user experiences, if that makes sense.
Yeah, I mean, look, one of the things that we're really excited about is how much AI and how quickly AI has moved to the center of our future. You know, we've talked a lot about Unity Vector, and we've talked a lot about how our investments in AI are driving our Grow business. On the Create side, the AI opportunity is also really enormous because remember, as I've said before, Unity's greatest strength is its extensibility and openness. We're an assembly point for folks who create interactive content. We're agnostic as to which tools they use and where 3D assets come from. We're going to be the platform, the orchestration layer for AI-led interactive content creation going forward.
The fact that we are context-aware of the project, the fact that we're the platform where the project is being built, is going to give us unique insights that will allow our customers both to make games more quickly and efficiently and to be able to apply much more innovation and have much more time to create because we're going to take away over time some of the drudgery and complexity of content creation. At the same time, when it comes time for customers to then reach out and grow those games and to find new customers, the fact that the game is being distributed on our runtime is going to give us unique capability to power our AI to enable folks to acquire new users more efficiently and more effectively. We are extraordinarily excited about sort of how the world is developing around us.
We're really excited to see how, having made some investments in core capabilities at the company, we're able to bring those capabilities to bear for our customers over time.
OK, that's helpful. Thank you, Matt. Maybe, Jarrod, I think the Vector point has kind of been hammered home here as well, too. As we think about the performance improvements on the Grow side of the business, understanding the opportunity to reinvest and really kind of double down on some of those initiatives, we'd be kind of thinking about the incremental flow-through from a margin perspective within the Grow side. Thank you.
Speaker 3
We spoke about this a little bit in our prepared remarks, but the company is blessed with very high contribution margins. Our adjusted gross margin in the business is 83%, with the incremental contribution margins probably higher than that. We expect fully and are beginning to see meaningful operating leverage in our business. We've done some of the hard work of getting the cost structure to the right place to make ourselves more efficient, more effective in the way we run and operate the business, to really prepare ourselves for benefiting from that operating leverage as we return to growth. We're excited about that. We think there's a lot of potential for upside in the margin structure of the business.
I think we're doing the right things to make sure the cost structure is lean and mean to benefit from the return to revenue growth that we're starting to experience in Grow.
Speaker 1
I think that's a great point. I would just add and amplify that part of what's really exciting about the way the opportunity is laying out for us is that, despite making really aggressive investments in everything that we feel like we need to invest in to create future growth, we're seeing substantial and sharp improvement in margins as we go. That's not always the case. To Jarrod's point, a combination of making really tough choices and prioritizing what is important to us as a business and some quality execution of our teams around the world are enabling us to have a little bit of our cake and eat it, too. That's really exciting.
Great, thank you both.
Speaker 2
Your next question comes from the line of Bernard McTernan with Needham. Your line is open. Please go ahead.
Great, thanks for taking the question. Just a couple of follow-ups on Grow. One's asked on bringing Vector to the other parts of the Unity Ad Network, and just simply, like, when will you know it's the right time to do so, and what do you need to see or what are you looking to see to eventually make that change or bring it over?
Speaker 1
Yeah, that's going to be a gradual and constant process. Bernard, thanks for your question. That's going to be a gradual and constant process. As I said, the Vector technology is highly modularized, and we are going to see opportunities to use it to improve our other businesses. We see some now. We are already investing and starting to see some of the impact. That will be a process that's ongoing for many years. The idea of bringing AI-inflected performance enhancements to data-driven products, just that concept, that's going to be a theme for us forever. The mental model is not one where it's like, hey, there's going to be some day where we see this opportunity and then we're going to hit it and it's going to begin and end. It is going to be a process of constant improvement.
What is exciting for us is that as we get past the Vector launch, it is providing some additional bandwidth for us to start to look at other opportunities across our business to invest more in using AI to drive the Creation experience on the Create side, to continue to invest in other ad products, and sort of pick our heads up and start to kind of spread some of that goodness throughout the whole company. The launch of Vector has provided some additional bandwidth there, but that's going to be a constant thing.
Speaker 3
Hey, Bernie, one thing I would add is it's not just using what we've learned in Vector and the other ad products that will enable us to get those products back to growth. Each of those products has a right to win in their own individual place. There are a series of operational improvements, go-to-market changes, and R&D innovations where we think that those products each have great potential opportunities. It's not just the application of machine learning and AI to those products, but there are roadmaps for clear returns back to growth for each of those products that we're now, as Matt mentioned, able to return our attention to to reinvigorate the growth in those areas.
Understood. Thank you. Just one more, if I could, understood the guidance on the sequential increase on Unity Ad Network. I just wanted to level set, just, you know, given this is new, like, are we assuming no additional improvement in Unity Vector from here? Basically, any continued model improvements would be upside to the guide potentially, or just kind of wanted to understand the guidance methodology given this is still relatively new.
I think we have the benefit of having been through the month of August as we provide this guide. We're partly there, and we're seeing the benefit that we received also in the month of July. We're probably six weeks in and have that experience. We really like what we're seeing. We're looking at the run rates. We are continuing to make improvements each and every day. Right now, we're guiding based on what we see with six weeks into the quarter. We are consistently being surprised, and we're really thrilled with what we're seeing. I would also note that we are early.
We are early in this journey, so we are appropriately weighing the risk of future opportunities, but we're also considering the fact that we're early in this journey, and we don't want to get too far ahead of our skis in terms of the way we're thinking about the future quarterly growth of the Vector in the Unity Ad Network.
Understood. Thanks, Jarrod. Thanks, Matt.
Speaker 2
Your next question comes from the line of Christopher Louis Kuntarich with UBS. Your line is open. Please go ahead.
Great, thanks for taking the question. Can you talk a bit about the scalability of ad spend on Unity Vector? We've heard in our checks about the strong performance improvement, but we've also heard a bit of pushback on Unity Vector on the scalability side of things. Is there an opportunity to invest in product to improve ease of spend? Thanks.
Speaker 1
Yeah, listen, just to echo the point that Jarrod just made, it's important to remember that we are just a very few short weeks into having rolled out this system. The answer, the short answer to your question is yes. Let's be clear, while we're really pleased with the results we're seeing, we also see nothing but work ahead of us. I mean, we are just scratching the surface here. Yes, many customers are seeing lifts, and yes, those lifts are being seen across genres and across geographies. There are also some customers that have not yet seen those lifts or where those lifts have hit a point of diminishing returns where they can't get the scale they want. Every advertiser wants infinite scale at their return requirements.
We want to deliver those, but that's work that needs to be done, both in the quality of our systems and the fine-tuning that we do with each customer in terms of how we manage those accounts. That's the day-to-day work of our lives. That's part of what these channel checks that you guys are all doing don't really capture. Each customer has a team. We have a team on each customer. We're working with each customer, and each customer has its own story. We deliver better capabilities across our systems, and then we work with each customer in each genre and each geography to try to optimize those returns. That is a, and by the way, the macro environment is changing every day as well, right? This is just what it is to be in this business. We're feeling really good about it. There's nothing but opportunity.
Got it. Very helpful. Maybe just one follow-up. Can you just talk a bit about the pacing throughout 2Q? I just want to make sure I understand the 15% sequential growth in 2Q, and now you're trending to double-digit growth quarter to date in 3Q. Were you, through the months of April, May, and June, trending to that 15% sequential growth, or was there accelerating spend dynamics as you moved throughout the quarter? Thanks.
Let me just say at a high level, again, it was our goal in sort of getting a little bit granular this quarter and talking about this. We wanted to provide as much transparency as we could about what we're seeing so that you guys would understand the overall trajectory of the business. What I don't think would be helpful would be to break this down any further. As I said, we're not going to be delivering this level of detail going forward because I don't think it's particularly helpful. I think the most important thing to understand is that, yes, we're very early in this. We're seeing very good early returns. We're seeing those returns build, and we expect that we have effectively unlimited runway to continue to build on those returns. Beyond that, I think just our general guidance is what we would lean back on.
That's helpful. Thank you.
Speaker 2
Your next question comes from the line of Jeffrey Parker Lane with Stifel. Your line is open. Please go ahead.
Yeah, hi. Good morning, guys. Thanks for taking the question here. Jarrod, nice to see dollar-based net expansion get back to 100%. You know, the changes in the composition of the Create revenue base and the new Vector model, I was just wondering how you could characterize DV&E across the two businesses. When we look at the upside potential, are you thinking something in line with what we saw towards the end of 2022 in the data sheet, or is it potentially a higher upside as studies date?
Speaker 3
We are pleased with what we're seeing in terms of net revenue retention, which is the disclosure we've made. We've seen it go up quarter on quarter for the last several quarters. That's really a function of the underlying business health being there both in Create and Grow because that metric is ultimately an output that comes from improvements in ARPU for our existing Create customers, as well as improvements in spend for our Grow revenue business. As you think about the future potential for upside, the scale of our Grow business is such that improvements in that metric are really going to come from customer spend increases in Grow. The pace of price improvements in Create is going to be modest and stable. We expect to be able to give our customers predictability and stability.
You would expect that the improvements in that metric will largely be driven by meaningful improvements in our Grow business and meaningful improvements in customer spend through our platform.
Understood. Thank you.
Speaker 2
Your next question comes from the line of Richard Alan Kramer with Aret. Your line is open. Please go ahead.
Speaker 3
Thank you very much. Matt, one of the big questions or debates with investors seems to be over the strategic importance of mediation in collecting signal on ad pricing and inventory. Can you talk about that as part of your Unity Grow offering, and whether you see deeper integration and mediation with other Grow features like the DSP as unlocking more potential in inventory and sales?
Speaker 1
Yeah, hey, Richard, thank you for the question. We believe that we are uniquely positioned in this marketplace, as I've described, by virtue of being providing the operating system for games globally. It's not our contention that mediation isn't helpful. It's just that it's our contention that we don't need to win a mediation in order to prosper and grow the business. We have first-party relationships with billions of players, of end users already, as well as with the creators of those games. By the way, I'm not at all sure that the future of that mediation ought to be a system which locks customers into mediation by virtue of their use of user acquisition. We'll have to see how that plays out over time. What we're focused on now mostly is continuing to deliver value in user acquisition.
Providing more value in user acquisition is sort of the path through which all goodness takes place. We're going to continue to build out the value and usefulness of our platform, and we'll take it from there.
Speaker 3
OK, and then maybe just a very quick follow-up, you know, mentioning partnerships with the likes of Tencent and Scopely. They're obviously huge names in mobile gaming and gaming generally for Tencent. Can you give us a sense of the timeline when these sort of partnerships are likely to yield actual deeper integrations or games which build in all of your SDK elements and how you see those progressing? Because they're obviously, both of them are really leading lights in the industry.
Speaker 1
Yeah, I won't comment specifically about those customers and the timelines related to those customers, but let me back and just speak a little bit more general. What the announcements there, as well as the conversation we're having around Nintendo, is really meant to point out is that for the first time, I think maybe in our history, we've been able to begin to package the full value of our platform for customers and have really high-level strategic conversations about how we can partner to both help them grow out, to help them grow their user base, as well as build games more effectively and more efficiently. There are deep connections between those two things, as we've talked about this morning and we've talked about many times before.
Our ability to bring those to bear with customers and these broad relationships marks a change in our strategy and our ability to execute, which will enable us to take advantage increasingly of our position as a platform, as a meaningful platform in this ecosystem. That's the piece I think that over the years has promised that Unity has always had, but we haven't been able to access. Because each customer is different, again, I won't go so much into the details there, but generally, the process is not an incredibly lengthy one. It's a process of optimization. As I referred to in a question that we had a couple of questions ago, when you work with customers at an individual level every day to enhance returns, and the more connected you are at the level of information and data exchange, the more opportunity there is to optimize.
That is something that takes place over time, and you work on it every day. All it needs to do is get better and better every day, and you're going to be in really good shape.
Speaker 3
OK, thanks.
Speaker 2
Your final question comes from the line of Martin Yang with Oppenheimer. Your line is open. Please go ahead.
Hi, thank you for taking my question. First, on Grow, can you talk about maybe intra-quarter trajectory of Vector's benefit for Unity Ad Network? Do you see a pretty consistent sequential run rate increase for Unity Ads in the second quarter? Has that trend continued in July and August to date?
Speaker 3
Sure, Martin, this is Jarrod. Let me take that. We are extremely pleased with the 15% sequential growth we experienced in the second quarter. I would remind investors that we did not have all components of Unity Vector fully rolled out over the course of the second quarter. That's really exciting. We saw strength on strength. I think each month was better than the last over the course of the second quarter. That strength has continued in the month of July and into August, which really gives us the confidence to talk about mid-single-digit sequential growth in our overall Grow business in the third quarter. We're really pleased with what we're seeing. We're pleased with the ongoing momentum. More importantly, we understand that we have a really robust product roadmap and enhancement roadmap ahead of us.
There's a lot of investments and improvements yet to come, followed by the introduction of some of the unique data that we have and data assets that we expect to avail of that should positively impact our business in 2026. We're really pleased with where we are, pleased with the investment roadmap in front of us, and pleased with what we're setting ourselves up for for next year.
Got it. Thank you. That's it for me.
Speaker 2
This concludes the question and answer session. I will now turn the call back to Alexander Joseph Giaimo for closing remarks.
Yeah, we want to thank everyone for joining this morning. We look forward to catching up with everyone throughout the quarter. Have a great day.