Unity Software Inc. (U)·Q1 2025 Earnings Summary

Executive Summary

• Q1 2025 revenue was $435.0M, down 6% YoY but exceeded the top end of prior guidance by $20M; Adjusted EBITDA was $84.0M (19% margin), ~29% above the high end of guidance, driven by cost control and earlier-than-expected contribution from Unity Vector .
• Adjusted EPS was $0.24 and GAAP diluted net loss per share improved to $(0.19), versus $(0.75) in Q1 2024, reflecting margin expansion and lower stock-based compensation .
• Management completed the full migration of the Unity Ad Network to its new AI platform, Unity Vector, ahead of schedule; iOS performance is delivering a 15–20% lift in installs and in-app purchase value versus the prior model, with Android on a similar trajectory .
• Q2 2025 guidance: revenue $415–$425M and Adjusted EBITDA $70–$75M; gross margin expected to be relatively stable sequentially. Vector improvements should be offset near-term by declines in select legacy ad products, with Grow returning to revenue growth as Vector performance scales .
• Potential stock catalysts: rapid Vector adoption/performance lifts, accelerating Unity 6 migration (4.4M downloads; 43% of active users migrated; >80% intend to upgrade), and subscription growth in Create driven by pricing and industry verticals .

What Went Well and What Went Wrong

What Went Well

• Unity Vector rollout: “migration has already been fully completed… now running on Vector well ahead of schedule,” delivering a 15–20% lift in installs and IAP value on iOS; Android is tracking similarly .
• Create momentum: Subscription revenue grew double digits YoY; Unity 6 downloads reached 4.4M, 43% of active users migrated, and >80% intend to upgrade; Unity 6.1 expanded platform support (Switch 2, Quest, Android XR, foldables, instant games, webGPU) .
• Profitability discipline: Adjusted EBITDA margin expanded 200 bps YoY to 19%, with G&A and Sales & Marketing down ~$20M YoY; free cash flow improved $22M YoY to $7M in seasonally soft Q1 .

What Went Wrong

• Top-line decline: Revenue fell 6% YoY to $435.0M due to the portfolio reset; Create revenue declined 8% YoY, Grow declined 4% YoY .
• Near-term product mix friction: Management expects Q2 Grow Vector gains to be offset by declines in select legacy ad products; Create faces a slight sequential decline due to runoff of nonstrategic revenue .
• Elevated R&D/cloud costs in transition: R&D up ~$10M over recent quarters as Unity ran legacy and new ad models in parallel; management expects cloud costs to normalize in H2 as the legacy model sunsets .

Financial Results

Revenue and EPS vs prior periods and consensus

Margins vs prior periods

Segment breakdown

KPIs

Results vs Wall Street consensus (S&P Global)

Values retrieved from S&P Global.*

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “Migration has already been fully completed with all of the iOS and Android traffic on the Unity Ad Network now running on Vector well ahead of schedule… Vector is providing a 15% to 20% lift in both the number of installs and the value of in-app purchases” — Matt Bromberg, CEO .
• “Adjusted EBITDA for the quarter was $84 million with 19% margins… expense was down roughly $20 million year-over-year… R&D costs are up $10 million… we would expect those costs to normalize in the back half” — Jarrod Yahes, CFO .
• “Unity 6… has now registered more than 4.4 million downloads since launch, 43% of our active users have already moved to Unity 6… more than 80% of users are currently intending to upgrade” — Matt Bromberg .

Q&A Highlights

• Vector monetization pacing: Advertisers are increasing spend as ROAS improves; evaluation cycles vary, but performance gains should translate to higher budgets over time .
• Legacy vs new ad models: Internal mix will cause near-term puts/takes (ironSource, Tapjoy); management is “aggressively pushing resources into Vector,” with legacy models sunset following cutover .
• Create trajectory: Double-digit subscription growth continues; slight sequential decline expected in Q2 from nonstrategic runoff; industry verticals accelerating .
• Gross margin/EBITDA: Gross margin expected stable sequentially; EBITDA trajectory stable with focus on resourcing Vector while maintaining operating discipline .
• Nonstrategic revenue: ~$17M in Q1; FY 2025 expected ~$30M with trail-off in Q2 and beyond; now under 2% of total revenue, simplifying disclosures .

Estimates Context

• Q1 2025 beat: Revenue $435.0M vs S&P Global consensus $416.6M*; Adjusted EPS $0.24 vs S&P Global Primary EPS consensus $0.11* — significant beats on both top-line and EPS .
• Q2 2025 setup: Company guides $415–$425M revenue and $70–$75M Adjusted EBITDA; consensus revenue is $426.7M* and consensus EPS $0.15* — guidance implies a tight revenue range around consensus and profitability consistent with continued investment in Vector .

Values retrieved from S&P Global.*

Key Takeaways for Investors

• Vector is delivering measurable performance lifts (15–20% iOS), with full network migration completed ahead of schedule, supporting a thesis of improving Grow monetization efficiency into H2’25 and FY’26 .
• Create subscription growth is durable, aided by Unity 6 adoption, pricing actions, and industry vertical momentum (new wins in healthcare, industrial, and building systems), supporting mid-teens subscription growth over time .
• Profitability mix is improving: 200 bps YoY Adjusted EBITDA margin expansion to 19%, SBC down ~$45M YoY, and cloud costs expected to normalize as the legacy ad model is fully sunset in H2 .
• Q2 guidance balances Vector improvement against legacy ad product declines; management expects Grow to return to revenue growth as Vector performance outpaces headwinds, while Create declines slightly from runoff in nonstrategic revenue .
• Capital structure de-risked: 0% 2030 convert upsized, $688M of 2026 notes repurchased, capped call ($47.74) mitigating dilution; management “extremely comfortable” on financing .
• Near-term narrative likely focuses on Vector scaling signals, Unity 6 adoption milestones, and margin stability; expect estimate revisions reflecting Q1 revenue/EPS beats and refined Q2 profitability outlook .
• Execution remains the key driver: management emphasizes ROAS-driven advertiser budgets and platform data advantages, suggesting Unity’s integrated Create/Grow strategy can compound as cross-product insights are productized across the ecosystem .