Q1 2025 Unity Software Inc Earnings Call
So that may cause results to differ please refer to the risk 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 in addition to and not a substitute for or superior to GAAP results. A full reconciliation of GAAP to non-GAAP financial results is available in our earnings release, which can be found on our investor relations website and on the SEC Dot Gov website.
Matt: With that I'll pass the call over to Matt.
Matt: Thanks, Alex that's really good to have you with us and good morning, everybody on behalf of all of the people of unity I'd like to thank each of you for joining us today.
Matt: The transformation of our company gained significant momentum in the first quarter.
Matt: Through our commitment to building a culture of execution and disciplined reestablishing trust with our customers and the community and accelerating both the pace and quality of our product innovation.
Matt: We're creating the conditions to catalyze rapid growth at unity.
Matt: In the first quarter strength across both the grow and create segments helped drive results that exceeded expectations, beating the high end of our guidance for revenue by 5% and adjusted EBITDA by 29%.
Matt: The progress in our <unk> business has been particularly encouraging.
Matt: Last quarter, we announced the intention to migrate the Uni AD network to our new AI platform unity vector by the end of Q2 today.
Matt: Today, we're excited to report that this migration has already been fully completed with all of the iOS and Android apps on the Uni AD network now running on vector well ahead of schedule.
Matt: This is a significant first milestone and a testament to our commitment to rapid continuous product innovation and our advertising business.
Matt: With Vectra now operational we can begin to leverage data from across the unity ecosystem to provide deeper insights optimize performance and deliver better return on investment for our customers.
Matt: Our journey to compete in a fundamentally new way has now officially started as our self learning models adapt in real time, helping customers navigate an increasingly competitive mobile marketplace.
Matt: The accelerated timeframe of the vector rollout means that our customers are already experiencing a lift in the return theyre seeing from spending with unity.
Matt: In iOS, where we've now had enough time to develop reliable data.
Matt: Vector is providing a 15% to 20% lift in both the number of installs and the value of in App purchases when compared to our old model.
Matt: That means more players and more players who spend more providing our advertisers with a higher return on their investment with us.
Matt: Although our Android migration is more recent it's happily on a similar trajectory to where iOS was during the same period of development.
Matt: Now we look forward to the next phase of our plan, where we will work closely with our customers to help optimize and enhanced performance of their user acquisition capabilities over time.
Matt: We'll also continuing to invest in improving the fundamental AI each day.
Matt: These strong early results not only provide confidence that we're on the right track with vector.
Matt: They also enable us to continue to take an aggressive approach with respect to the modernization of our AD business overall.
Matt: Our primary focus is on creating meaningful sustainable revenue growth over the long term.
Matt: That means we don't hesitate to move resources to our best performing products short term revenue impacts notwithstanding.
Matt: As a consequence in Q2 investors won't yet fully see the vector driven lift in our financial results that said our confidence in the future of our <unk> business has never been stronger.
Matt: We're equally excited about progress in the creative business.
Matt: Unit six the most stable and performance version of Uni, we've ever shipped is now registered more than $4 4 million downloads since launch.
Matt: 43% of our active users have already moved to unit six with recent survey data, suggesting that more than 80% of users are currently intending to upgrade.
Matt: And we can see this enhanced connection to our customers flowing through to our financial results as well with subscription revenues and create growing double digits year over year in the quarter.
Matt: In April we launched unique six dot one.
Matt: Six that went wrong as the first release to leverage our new production testing methodology, which validates our software and real production environments to ensure that our customers never again have to choose between adopting new features and maintaining stability.
Matt: Unit six that one also significantly enhances the number of platforms. Our developers can reach including day, one support for Nintendo switch to meta quest, Android XR Foldable, Android screens instant games and web GPU.
Matt: For the switch to we battle tested unity through a first of its kind partnership with Konami.
Matt: Where our internal teams both the full launch title called survival kits.
Matt: The valuable feedback obtained during the development process of this game will drive future enhancements to the end of the engine.
Matt: We're particularly optimistic about the future potential of AR and VR gaming and entertainment with recent research from new Gen apps predicting the market will reach 260 million players worldwide by 2025.
Matt: Our goal is to stay at the forefront of this evolution and for you need to continue to be the go to platform powering AR and VR experiences we're already powering the majority of the top applications in the marketplace.
Matt: As one measure of Unis continued strengths with the next generation of game developers not four or five but all nine of the nine game categories at the independent Gaming a festival awards of 2025 went to gains made with unity. In addition, NEVA by know modest studios and thank goodness youre here by coal.
Matt: Suffer both one and 2025 BAFTA awards with made with unique titles and incredible recognition of the talent and creativity and our community.
Matt: And finally.
Matt: The growth is a unique platform beyond games into other industry verticals continues to represent the fastest growing part of our subscription business.
Matt: <unk> strong demand across a wide variety of industries and use cases has bolstered in both nine straight quarters of sequential revenue growth as well as meaningful year over year revenue growth as well.
Matt: New customers include Philips using Uni for minimally invasive surgery simulation, Siemens who is modernizing its training and workforce development and Toshiba elevator and building systems, who is creating digital twins of installation sites.
Matt: The unity platform has tremendous potential outside of gaming and we are increasingly optimistic about our ability to capitalize on this opportunity at scale.
Matt: I'd like to thank all of our teams globally for their relentless efforts as we continue to transform unity and earn our customers' trust each day.
Matt: As the only company, we know of that is capable of supporting developers across the full lifecycle of development unit plays a unique role in helping our customers move from prototype to profitability faster and more efficiently than ever before it's a role we feel privileged to play.
Jared: Thank you again for your time and attention. This morning with that I'll pass it over to Jared for an overview of our financial performance shared.
Jared: Thanks, Matt I'm pleased to report that unity exceeded the top end of our guidance on all measures in the first quarter.
Jared: Revenue exceeded the top end of our guidance by $20 million with adjusted EBITDA coming in $19 million above the top end of our guidance.
Jared: Grow revenue in the first quarter was $285 million down 4% year over year with revenue upside compared to our guidance, partially driven by an acceleration of the rollout of unity vector, where we're seeing better performance than expected at this early stage.
Jared: And create revenue was $150 million down 8% year over year, driven by our transition away from the low margin professional services business.
Jared: Through this deliberate transformation, we've optimized our revenue mix with high margin subscription business now representing nearly 80% of create revenue.
Jared: Our core subscription business continues to demonstrate strong momentum delivering double digit year over year growth this quarter positioning us for sustainable profitable expansion.
Jared: Turning from revenue to non-GAAP profitability adjusted EBITDA for the quarter was $84 million with 19% margins.
Jared: Adjusted EBITDA margins expanded 200 basis points year over year in the first quarter driven by operating leverage in the platform and solid cost management across expense lines, particularly in G&A and sales and marketing where total expense was down roughly 20 20 million year over year.
Jared: R&D costs are up $10 million over the last few quarters as a result of heavy investment and unity vector.
Jared: We would expect those costs normalized in the back half of the year as we transition away from running both our legacy and new Unity AD models in parallel.
Jared: Free cash flow in the first quarter was $7 million, an improvement of $22 million year over year.
Jared: The first quarter is traditionally the most modest seasonally from a free cash flow standpoint, given the concentration of prepays personnel costs as well as payments to the supply side of the grow network.
Jared: As we focus on driving per share returns in the first quarter. We started to report out on adjusted EPS in our disclosures.
Jared: Adjusted EPS in the first quarter was 24.
Jared: And investors should expect to see a sharper focus on minimizing shareholder dilution and stock comp expense, which came down nearly $45 million year over year as we lapped M&A related vesting.
Jared: In terms of our balance sheet cash at the end of the quarter was $1 5 billion and debt was $2 2 billion.
Jared: In February we priced $690 million convert and the offering was extremely well received.
Jared: The deal was upsized and priced with zero coupon and a capped call with a cap price of $47 74.
Jared: We used the proceeds of the offering to repurchase $688 million of principal balance of 2026 notes and effectively extend those maturities into 2030.
Jared: This transaction ensures that unity has the capital structure with a smoother debt maturity profile and we now feel extremely comfortable with where we are from a financing standpoint.
Jared: With that I'd now like to turn to guidance for the second quarter.
Jared: We're expecting total second quarter revenues of $415 million to $425 million and adjusted EBITDA of 70 million to $75 million.
Jared: And grow we expect steady sequential revenues driven by improved performance of unity vector.
Jared: This revenue growth is expected to be offset by declines in select legacy AD products in the second quarter.
Jared: However, as the performance of vector continues to improve we expect to see the overall grow business returned to revenue growth with the performance improvement from vector outpacing any other headwinds we face.
Jared: And create we expect continued momentum in our subscription business across the gaming and industry verticals. However, we're forecasting a slight sequential decline in create due to unexpected runoff in non strategic revenues.
Speaker Change: Before turning the call over for questions I'd like to extend a warm welcome to Alex GMO, who recently joined <unk> as our new head of Investor Relations.
Speaker Change: With that I'd like to thank you for joining us on <unk> first quarter 2025 conference call and let me turn the call over to Alex So that we can take your questions.
Alex GMO: Thanks, Sarah we'll now open the call up for questions if you'd like to ask a question. Please click the raise hand button on the bottom and will take a few moments here.
Speaker Change: We will take our first question from Matt cost at Morgan Stanley Matt Go ahead.
Matt Cost: Everybody can hear me.
Speaker Change: Hello, Yes go ahead, Matt Matt we can hear you, yes, sorry about that.
Matt Cost: Great well, thanks for taking the question.
Matt Cost: Yes on the on the vector rollout I guess, we can just dig down one level deeper there.
Are you seeing the customers are on vector response about 15% to 20% lift in installed in IOP by by increasing their spend.
Matt Cost: And are you seeing customers shipped over spend from legacy AD product onto the vector enabled product or is this dynamic where you're kind of losing business on one hand, but trying to offset it by growing wallet share and increasing the people who are who are on the new the new product.
Matt: Hey, Matt. Thank you very much for the for.
Matt Cost: For the question.
Matt Cost: Good to hear from you.
Matt Cost: The advertising business is a competitive business and there are which means there's a internal competition and external competition and I think the best way to think about it is not to try to get too cute.
Matt Cost: What's really important is that for.
Matt Cost: Performance of vector is really positive much more positive than even we had expected and it's driving refresh return for advertisers and what that means is.
Matt Cost: They spend more and we are seeing.
Matt Cost: Across the broad set of our customers, we're seeing customers begin to spend more with US as is as all you know who are following the company.
Matt Cost: Folks on the.
Matt Cost: And performance based advertising do not have fixed budget. So they will spend up to the point they they they hit their ROI targets and when we perform better and provide more players and more high value players they spend more with us.
Matt Cost: And so I would imagine that the.
Matt Cost: The debt.
Matt Cost: They are customers are moving.
Matt Cost: Budgets around all the time, but the point is that it's not capped.
Matt Cost: It's it's not a winner take all business.
Matt Cost: And so we're really excited about about the broad growth, we're seeing across our cross segment.
Matt Cost: Great. Thanks, and then on the subscription side, you noted kind of strong growth in the subscription revenue.
Speaker Change: Youre seeing a lot of adoption of unity fix it teams, which is great is this mostly being driven by people being customers, becoming subject to the higher pricing on unity <unk> or is there a meaningful element of subscriber growth in that subscription revenue growth as well.
Speaker Change: We'll start to see the impacts of some of those significant price increases that we made recently until the back half of the year. So that's not what you're seeing there.
Speaker Change: You are seeing.
Speaker Change: Both growth in the core business as well as some of the impacts of of some older pricing increases that we've made.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Matt We'll go next to Andrew Boone of JMP Securities.
Andrew Boone: Alright, thanks, so much for taking the question.
Speaker Change: I wanted ask Ken on vector.
Speaker Change: Matt you talked about incorporating data across the energy ecosystem and optimizing performance can you just speak to the trajectory of the improvements to the model that we should be expecting.
Speaker Change: For the year.
Speaker Change: Yes.
Speaker Change: We're being prudent about how we're guiding this business Andrew just simply because it's a new it's a new business for us its a new system.
Speaker Change: And we just we wanted to be really are we really want to be thoughtful about how we think about.
Speaker Change: As we go which is why we reverted to quarterly guidance at this point I guess, what I, what I can tell you is that.
Speaker Change: It continues to pace out in front of our expectations authentically so that.
Speaker Change: As I said, we were able to pull in the launch of vector by by quite a number of weeks, which is going to have a positive impact on our business is just not one that we anticipated hum.
Speaker Change: The nature of this business and you've heard me say this many times is it an iterative one so we the business starts with small improvements small daily iterative improvements and we continue to work on the models. The models learned they adapt we we find new sources of data for those models.
Speaker Change: And they get better over time and at some point you see you begin to see step change functions, but we're sort of learning right along with our with our self learning models. So what I would tell you at this point is that.
Speaker Change: Again, we're ahead of schedule, where we're seeing measurable increases of about 50, as I said about 15% to 20% both in the scale that we're able to provide advertisers and in the quality of the users. They are obtaining and as a consequence, we have customers who were on a broad basis are beginning to spend more.
Speaker Change:
Speaker Change: As I as I mentioned.
Speaker Change: In the preamble here, that's that's what really positive, but what it's also doing is giving us the ability to go back and fully get into modernizing the whole advertising business. So back to what Matt was asking.
Speaker Change: Couple of minutes ago.
Speaker Change: We're focused on really driving vector and vector revenues and if theres some movement of from one product to another inside.
Speaker Change: That's fine with us, but we're investing really heavily in the vector of business. Because we are very confident that over the long term, we will be able to fundamentally compete in a different way.
Speaker Change: And you know a couple of quarters ago. When we were just beginning this bill.
Speaker Change: You know there was there is a lot on the line for us and I guess, what I just wanted to say, how how how pleased I am and proud of our team that we've been able to deliver a brand new system that is now delivering measurable improvements for customers and we're just really excited about continuing to lean into that over time.
Speaker Change: That makes sense and then I wanted to ask the obligatory macro question.
Speaker Change: Have you guys seen anything to date and is there anything that we should keep in mind, just given that the spectrum of potential outcomes.
Speaker Change: The broader economy, as we think about the back half of 'twenty. Thanks, so much.
Speaker Change: Yeah I mean.
Speaker Change: Obviously really closely monitoring the situation as everybody is.
Speaker Change: We have not seen any noticeable impact thus far on our business from some of the the macro.
Speaker Change: Factors that we're seeing out in the world.
Speaker Change: A couple of.
Speaker Change: Just notes on that.
Speaker Change: The vast majority of our customers.
Speaker Change: Our obviously game makers in general historically gaming has been relatively insulated from sort of macroeconomic moves that say.
Speaker Change: It's a very efficient and effective form of entertainment on a per hour basis for for folks historically and so that may be part of it. The other thing I direct you to is that.
Speaker Change: The vast majority of our of our advertising Spenders. For example are are promoting mobile games and principally free to play mobile games. So.
Speaker Change: If there is any product that one would expect to be resilient.
Speaker Change: In difficult times, they would be free mobile products.
Speaker Change: And the last thing I'd say is I'd reiterate.
Speaker Change: Oh, the question or the answer on the question a couple of minutes ago, which is that.
Speaker Change: As long as we are.
Speaker Change: We're dealing with advertiser spending on Ross so they don't pull back spend based on sentiment like a brand advertiser would and so I think those are all probably.
Speaker Change: Partial reasons that we're just not seeing anything yet, but but.
Speaker Change: We want to be prudent about that and we're obviously watching it very very closely.
Speaker Change: And thank you and we'll go next to Tom champion of Piper Sandler.
Tom Champion: Hi, guys. Good morning, Good morning, hopefully you can hear me.
Matt Cost: Matt I just wanted to.
Speaker Change: You're right.
Matt Cost: Timing and sequencing of events here between vet.
Matt Cost: Vector legacy unity and an iron source.
Matt Cost: Where are we in in kind of the staging of this transition to <unk>.
Matt Cost: <unk> vector to the extent you can you can provide some color on that and then and then how does that map to.
Matt Cost: Your R&D staffing and Resourcing.
Matt Cost: And that growth and and just maybe a broader comment on organizationally do you feel like the company structures is is where you want to be in a good place to.
Matt Cost: To move forward. Thank you.
Matt Cost: Great. Thank you so much for the question I appreciate it.
Matt Cost: Yes, listen we've been really.
Matt Cost: We've been really focused on making all the investments we need to ensure that that.
Matt Cost: Vector in the end the kind of fundamental power that that brings to our AD stack is going to have everything it needs.
Matt Cost: It has enabled that transformation, we we significantly increased our investment across the board in machine learning we've.
Matt Cost: We brought in new leadership, we hired new teams were obviously allocating money to two to two GPU and CPU resources and infrastructure in tooling. So we're making all the investments we feel that that we need to and that includes as Jared mentioned in his preamble some increases in cloud costs that we.
Matt Cost: Back to normalize in the back half, but but we feel really good about those investments and the impact that it's having we also reorganized our go to market teams awhile back splitting our revenue organization into two global team supply and demand.
Matt Cost: <unk> been able to to to provide focus on both some of the newer AD products that we have and also some of the more legacy ad products.
Matt Cost: But as I said also in my opening remarks.
Matt Cost: This but we're really focused on having a full advertising segment grow I'm agnostic with respect to the how that what that mix is and I'm not going to be overly precious are cautious.
Matt Cost: In the immediate term about about trying to optimize that.
Matt Cost: We're structuring ourselves for Swift sharp long term growth.
Matt Cost: I'm sure there will be some movement of customers from our internal products, but the fact is that there is movement across the whole market and that's what's really important and we're going to take hopefully as much share externally if not more than we are going to take internally and.
Matt Cost: And in the end, we're going to we're going to have.
Matt Cost: I add business and so that's sort of how we think about it.
Matt Cost: Thank you.
Speaker Change: Thanks, Tom We'll go next to Brent Thill of Jefferies.
Speaker Change: Thanks, Alex welcome Matt If you can just maybe give us your your mile markers for the rest of the year on vector what are what are the big milestones you would like to hit.
Speaker Change: Through through the Sierra and at a high level in for Jared do you really good margin upside.
Speaker Change: Maybe discuss the cost base and where are you seeing the continued opportunity to drive continued margin efficiency. Thank you.
Speaker Change: Yeah listen I, the way to think about that or is that.
Speaker Change: And in a way we've just begun right in some ways, it's a sort of vector 1.0 as well.
Speaker Change: Share with you today is that we literally just completed the migration of Indiana, a couple of weeks ago.
Speaker Change: And we're now up and running fully for the first time in these models is the very very early innings for us on that.
Speaker Change: By definition. This process is a process that process of investment and learning.
Speaker Change: And and we're going to continue at that process. So I guess the first thing I'd say is as I think about milestones is we are just very much at the beginning and that's really really important.
Speaker Change: As I look forward to a strategically.
Speaker Change: I guess, what I would I'd reiterate and we've talked about this on prior calls is that we're not just an AD network.
Speaker Change: We're a platform provider.
Speaker Change: Where will that we have a first party relationship with all of our customers were truly building their games on our platform as well as a direct attack to billions of customers for our runtime.
Speaker Change: And it has always been.
Speaker Change: Contention that that provides some fundamental advantages to us in this business.
Speaker Change: The real upside.
Speaker Change: For unity is as we begin to take advantage of those opportunities and those still sit out in front of us.
Speaker Change: Got way out in front of us.
Speaker Change: But they are the kinds of things that in the back half of this year and into 'twenty six.
Speaker Change: The kinds of opportunities that that will be really focused on.
Speaker Change: I guess the way we think about this internally is like we're at the starting gate.
Speaker Change: We're just beginning to run in.
Speaker Change: It's all in front of us.
Matt Cost: Jared pickup of some of the some of the the cost commentary but.
Matt Cost: But just just to say is as we mentioned it that we do have some increased cost in as we've been running the two models in parallel the old model, a new model and one of the advantages of sort of getting to the starting gate in moving is that we'll only be operating one model, which is really helpful from a cost perspective.
Matt Cost: Yes, Brian we feel great about where we started the year with 19% EBITDA margins. There's a couple of hundred basis points of year over year margin expansion, but as we think about profitability for the business first and foremost the priority is to be able to resource the business to accelerate the growth, particularly of our AD business that is extremely important.
Matt Cost: As Matt pointed out we are putting a lot of resources in to vector and we think theres a great opportunity there with 80% plus gross margins. There's a lot of operating leverage in our business and as you've seen us add businesses scale. They can really drop that to the bottom line and significantly improve EBITDA margins over time.
Matt Cost: We're being thoughtful we're being prudent about the way, we run and operate the business operationally theres lots of opportunity for automation we're.
Matt Cost: We're taking a prudent approach to head count and we're rationalizing our software spend which are all the things you'd expect us to do.
Matt Cost: Order in and quarter out, but again first and foremost we think theres a great revenue growth acceleration opportunity and we're making sure to resource that appropriately while keeping an eye on the bottom line.
Speaker Change: Thanks, Brent we will go next to Parker Lane at Stifel.
Parker Lane: Hey, guys. Thanks for taking the question can you hear me Okay, yes.
Speaker Change: Perfect. Jared I was wondering if you could deconstruct the sequential decline that you are looking for and create a little bit more you know coming off of double digit subscription growth there strong industry's momentum pricing benefits is it simply the nonstrategic revenues that are influencing that number down quarter over quarter or are there other things that we should be looking for that.
Parker Lane: What explained that away.
Jared: No. That's that's that's right Parker, we experienced another quarter of strong double digit subscription revenue growth. Our industry continues to grow at an accelerated basis. If you think back to the fourth quarter, we had about $15 million of non strategic revenue that we disclosed we had also spoke about 30 million.
Jared: Of nonstrategic revenue for the full year, so a bit of a step down from the run rate and you're really just seeing some of that come off the business saw in the second quarter.
Jared: Got it and Matt maybe just a follow up on some earlier answers here. So it doesn't sound like there is a hard line in the sand for the transition away from the.
Jared: Legacy models is that correct youre kind of just waiting and seeing on the performance of vector as opposed to setting that day.
Jared: That influencing the way you think about the cost structure in the second half.
Jared:
Jared: No I wouldn't let me clarify that.
Jared: This cutover means that we will no longer be running the two models in parallel so we do.
Jared: We expect to see this caught some of the cloud cost come off in the back half of the year Youll see the definitely the additional cost that we're seeing youll see that come out.
Jared: So that just I want to be super clear about that.
Speaker Change: Is it is it principally that the cost piece that you are interested in.
Speaker Change: Just wondering if there's a specific date, where you're where you said this is one that will no longer support.
Speaker Change: The legacy models or if it's sort of a moving target based on the performance of vector.
Speaker Change: With the with the launch of factor that we've talked about today on the Uni AD network. We are now no longer running on legacy models.
Speaker Change: Got it thanks for clarification.
Speaker Change: Thanks, Parker well go next to Clark Lantern at <unk>.
Speaker Change: Part of the Earth.
Speaker Change: Maybe with that can you guys hearing about.
Speaker Change: <unk>, yes.
Speaker Change: Yes, sorry about that.
Speaker Change: I had two more on vector I'm just curious in Q1 did you see any pressure on iron source or tap joy or any of the legacy product or is that something where maybe you're anticipating for.
Speaker Change: A different reason in Q2 that that's going to materialize or there's greater concentration of our resources now around vector and then Matt going back to the comment you made around data and ROA improvement area. If you could help us understand.
Speaker Change: How the data flow is going to improve potentially adds vector continues to season and the model evolves.
Speaker Change: At one point you guys had sort of talk to us generally about cross stats out of product I'm curious if that's something that you guys have revisit and are in the process of sort of introducing and if so could you give us a general sense for maybe what youll have access to and how it can be accretive. Thank you.
Speaker Change: Yeah. Thanks, guys really appreciate the question. So let me take them one at a time.
Speaker Change: The you're right.
Speaker Change: Your observation is correct, we are aggressively pushing resources into vector both from a go to market perspective, as well as a technical perspective and that does have some.
Speaker Change: Impact on the eye ads business in.
Speaker Change: In addition, again, the <unk> business and the year the ads business operates in a free marketplace with every other.
Speaker Change: That network in the World and so we hope in fact to move.
Speaker Change: Some share both from <unk>, and we are seeing some of that but but.
Speaker Change: We also much more importantly are expecting to move share from others as well so and again also as knee as we provide more return we expect overall.
Speaker Change: Expenditures to be up with us so, but there's no question. There is some movement inside inside those.
Speaker Change: Inside those products inside our AD segment absolutely.
Speaker Change: In terms of your second question.
Speaker Change: Youll begin to see from us beginning in the back half of the year, but then continuing onward.
Speaker Change: A real focus on trying to bring to bear the additional insights that we have into consumer behavior on our platform and to bring that.
Speaker Change: To bring that value to bear not just for our advertising customers, but also for.
Speaker Change: Are customers of our editor and engine what I mean by that is the opportunity that we have to unlock across the company. It is this.
Speaker Change: We.
Speaker Change: Have billions of customers, who interact on our platform and we have not historically.
Speaker Change: Use that insight to develop really clear valuable.
Speaker Change: Insights at a consumer level as to who folks are and how they behave and and and.
Speaker Change: And to think about how we provide value back to our customers. Just let me give you. An example from the creative side and then we can move to the growth side.
Speaker Change: The vast majority of our big customers are operating live services with US stripe. There is these are games with millions of players.
Speaker Change: And we can provide much greater insight to them on behavior of those players how they're passing through the game, but you're spending why things are crashing why the gain might be performing better in one geography or another all these insights that we have not yet begun to package and offer back.
Speaker Change: To our customers.
Speaker Change: Again, that's an example on the creative side that is going to enable them to fully optimize the live services. They.
Speaker Change: That theyre, making with us at.
Speaker Change: At the same time on the growth side, those insights and the understanding of life players, obviously has an impact potential impact on understanding how to better and more efficiently acquire the right kinds of players who are going to be happy inside the game that you're building anywhere in a convert well and earnings.
Speaker Change: Gage and spend over time this is sort of fundamental wellspring of insight that historically, we've not brought to bear on either side of our business and is our primary strategy again, you'll start to see this in the back half of the year, but it will be the work of the next several years in total so our primary strategy to deliver that.
Speaker Change: That value, which we think nobody else in the world can do.
Speaker Change: In the back to our customers.
Speaker Change: Thanks very much.
Speaker Change: We'll go next to Chris <unk> at UBS.
Chris: Great can you hear me okay.
Speaker Change: Yeah.
Speaker Change: We get area great. Thank you.
Speaker Change: Just wanted to go back to Victor here and how it is going to play with iron source specifically.
Speaker Change: I'm curious if this better than expected progress that youre seeing today has changed how you're philosophically thinking about the need for iron source AD network.
Speaker Change: Yeah. So let me, let me back up and offer a little bit of context.
Speaker Change: We are in the market with both our AD networks the Union network in the Iron source AD network and.
Speaker Change: At noon.
Speaker Change: They are different and they they they offer different value different kinds of customers. So on any one individual geography or genre game or actual game.
Speaker Change: You will you will see different performance across different networks, and that's true not just of our network, but with all the networks in the marketplace. So we're currently really happy and really proud of the or the iron source team and the network in terms of the value, they're providing and we are out in the in the marketplace.
Speaker Change: Offering both products to customers and we continue we plan to continue to do that.
Speaker Change: And so I.
Speaker Change: I wouldn't think of this as kind of a zero sum game in the world between the two networks that we own.
Speaker Change: I don't know that that's the that's really the way this marketplace plays out.
Speaker Change: We want all our networks to perform the best they possibly can and then customers will move spend.
Speaker Change: Accordingly.
Speaker Change: Across the whole marketplace. So.
Speaker Change: We're going to continue to to operate in that way as I said, we have four or five different AD products. They have they provide different value to different sets of customers and we're going to keep we're going to keep selling.
Speaker Change: These products really aggressively and happily.
Speaker Change: Got it and maybe just one follow up on gross margin if I heard you correctly.
Speaker Change: E Sun setting the legacy.
Speaker Change: Unity model here, so you're going to be running on one model for the entirety.
Speaker Change: Are there any puts and takes with some of the.
Speaker Change: Non strategic revenue, that's going to be coming off in Q2 that would cause gross margin to be down sequentially from <unk>.
Speaker Change: No I don't think there's anything that we would expect in that regard Chris I think we should expect a relatively stable gross margins into the second quarter and I think.
Speaker Change: There is there is no reason why that.
Speaker Change: Trajectory of our EBITDA shouldnt be a stable to two.
Speaker Change: So our current EBITDA performance in the first quarter.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Chris We'll go next to David Mac at Arete Research.
David Mac: Alright, Thanks for taking my question just one more on vector for me.
David Mac: Just wanted to drill into the detail on the timeline of these new vector powered DSP product is there a reason why there's no discernible financial impact quite yet maybe due to advertisers still testing dipping their toes meeting sales support for example, or is it more the case that these models still need to improve.
David Mac: Further to be truly competitive on se rowhouse basis versus the other offerings out there and so on for childhood as well after that.
Speaker Change: Hi, David Thanks recall, no listen I think it's just two things one it's still very early for us. So we literally just launched these new models and we're just rolling them out to customers, but and so there's a timing element here, but but to be really clear we are already seeing better Ross as I.
Speaker Change: Said, we are seeing more installs proceed at servicing where scale and our advertisers are seeing better returns, but we're just at the beginning of bringing this to market. So there is a timing element as well and then the second element is really just and we've talked about it a couple of times over the last few minutes is there is so there are some internal.
Hudson: Hudson takes.
Speaker Change: On the new Unity AD network versus the iron source of AD network as we've identified.
Hudson: And we're investing really aggressively.
Hudson: And so we're going to see some movements there and so it's really timing and some of the internal revenue mix that.
Hudson: That is masking some of that upside at this stage.
Speaker Change: Alright, Thanks, and just the ones that Jarrod is just are you able to just quantify the nonstrategic revenue in the first quarter across create and grow and then what is embedded to each of those in the <unk> guidance, you mentioned $30 million for 2025.
Speaker Change: Mostly in Q1, and then trailing off after that.
Speaker Change: Would be helpful. Thanks very much.
David Mac: Yes, David there was about $17 million of non strategic revenue in the first quarter and our expectation of $30 million for the full year is consistent.
David Mac: And so yes, it will be a trail off in Q2 and beyond and we will see a bit of a step down in that regard and I think the good news is that this is now becoming a small part of our revenues, it's under 2% of the company's total revenues. So it gives us the opportunity to be a little bit more clear and transparent and straightforward in our disclosures and really just talk about <unk>.
David Mac: <unk> revenue and growth and create and grow.
Speaker Change: Great. Thanks, very much thanks, Alex welcome as well.
David Mac: Thanks, David We will go next to Martin Yang at Oppenheimer.
Martin Yang: Hi, Thank you for taking my question.
Martin Yang: Question is about subscription.
Martin Yang: Can you maybe talk about how subscription.
Martin Yang: Was trending on a sequential basis and how do you see the key drivers for subscription revenue overall in 2025.
Martin Yang: Both on the user and.
Martin Yang: User per revenue perspective, thank you.
Martin Yang: Sure Martin. Thank you so much for your question so subscription revenue growth in the first quarter was 13% year over year. So another ah.
Martin Yang: Double digit growth quarter for us, we feel really great about the trajectory.
Martin Yang: There are several <unk> that are driving that subscription growth I think number one you've heard about some of our success in the industry segment, Matt spoke about some of the new customer wins in areas outside of gaming. So we're seeing a lot of new seat growth and expansion in that area.
Martin Yang: We have very good efforts across the company in order to ensure that we are executing on our strategy around price improvements and we're seeing that start to flow through the P&L that'll be a bit of a waterfall and so the impact of those price improvements will increase over the course of the year and we will continue to benefit from that but I think broadly speaking we feel.
Martin Yang: Good about with subscription being 80% of our creates segment at this point and getting larger.
Martin Yang: That over time, there is the ability to achieve consistent double digit growth in AR and create.
Martin Yang: Thank you that's it for me.
Speaker Change: Thanks, Martin will go next to Alex <unk> at Wells Fargo.
Alex: Hey, Thanks can you hear me okay.
Speaker Change: Yes, we can hear you yes.
Speaker Change: So maybe first I would love to ask.
What percent of grow revenue due to <unk> network represents I think what you guys are describing as theres a little bit of noise is a factor improves the performance <unk> network, but theres a little bit of noise is kind of baby iron source cede some share some of the other products fall off is there any kind of rough math or a rough mix you could give us help us understand what percentage of the base vector.
Speaker Change: Be impacting.
Speaker Change: Yeah, So Alex while we're not breaking down into more granularity sort of the individual reporting areas of create and grow what we can say is that unity vector is by far the largest AD product that we have in that growth segment and we have a number of other AD products that are meaningfully smaller than that so this is impacting a very.
Speaker Change: <unk> portion of the revenues.
Speaker Change: And that's why it's garnering the heavy investment that we're making what I would also add is this investment that we're making into the vector and this capability that we've developed and machine learning is going to benefit all of the unity add products and grow products over time, and there is a tremendous opportunity to leverage some of the.
Speaker Change: Property and the capabilities that we've developed and.
Speaker Change: And so we are focused on what is the largest area in our growth segment with the most growth potential, but we expect that to eventually trickle down and benefit the grow side.
Speaker Change: <unk> in its entirety.
Speaker Change: If I can maybe follow up on that point I guess, it's clear that the first priority here is improving the performance of unity ads on the demand side could you maybe help us think about where level playwear mediation kind of falls on your list of priorities for the business. Matt is that is that something that you know.
Speaker Change: Maybe you want to improve in 'twenty five is it more of a medium term store any any feedback there would be helpful.
Speaker Change: Absolutely.
Speaker Change: Thanks for the question to your point are our primary focuses on improving user acquisition. Both because we think that's the largest opportunity for us in the immediate and long term, but also because.
Speaker Change: Strength in mediation is often a function of strengths of user acquisition. So it's clearly the best place to start, but secondarily I would say that some.
Speaker Change: <unk>.
Speaker Change: We don't view mediation is as as strategic.
Speaker Change: As maybe some other folks in the market to those items and the reason is really simple.
Speaker Change: As I've said many times before.
Speaker Change: We're not an AD network, where we're a development platform and we have first party connections to customers and data.
Speaker Change: And so while mediation is helpful is not the only source of of that insight for us and so while we are a we're proud of our product in and we're excited about about how it's operating is perhaps.
Speaker Change: Less important to us.
Speaker Change: Than others.
Speaker Change: And as a consequence, where we're really focused on the on the OE side.
Speaker Change: Perfect. Thank you so much.
Speaker Change: We'll go next to Bernie Mcternan at meetings.
Bernie Mcternan: Great. Thanks for taking my question.
Bernie Mcternan: I just wanted to ask about is where the current performance of vector rates relative to prior peak performance levels for the unity and iron source AD networks and I know, it's a tough question, but how would you expect that 10 to 20.
Bernie Mcternan: <unk> to trend over time.
Bernie Mcternan: Yes, I would.
Bernie Mcternan: Thank you for the question I'd say this.
Bernie Mcternan: Last weekend.
Bernie Mcternan: We saw some of the peak days for AD spend that that we've seen in many years.
Bernie Mcternan: So.
Bernie Mcternan: At a high level.
Bernie Mcternan: The the.
Bernie Mcternan: The growth in the performances is encouraging not just respect with respect to where we were yesterday or the day before but but but overall in terms of the trajectory trajectory of our business.
Bernie Mcternan: And can you repeat again in the second part of your question I'm, Sorry, Oh, yes.
Bernie Mcternan: Just.
Bernie Mcternan: Just the other 15% to 20% improvement that you called out how should we expect that to trend over time.
Bernie Mcternan: Called out Mary more of the data between create and grow just how should we expect that improvement, yes, listen I've mentioned this a little bit earlier, but it bears repeating we are so much at the very beginning of this process I mean keep in mind I'm, what I'm literally saying to you is we just launched this product.
Bernie Mcternan: So the fact that we're in by the way.
Bernie Mcternan: We would have launched the product if all it did was provide the same performance. We still will have launched it because we would have wanted to begin learning as quickly as possible and because it's more efficient from a cost perspective. So that was one possible outcome here instead, what we're seeing is much greater unexpected performance even really early on.
Bernie Mcternan: This business the nature of this business is daily learning that goes on forever.
Bernie Mcternan: So.
Bernie Mcternan: I would I hope that this is.
Bernie Mcternan: As we pulled back the camera over time that this will be the low point of the of the performance of this business.
Bernie Mcternan: It's certainly our intention and as I've said.
Bernie Mcternan: Particularly with respect to some of the larger and more strategic opportunities. We have that we have not yet brought to bear.
Bernie Mcternan: Think theres a real we think there is a really exciting long term opportunity here.
Bernie Mcternan: Great and just one follow up if I could just we know performance marketing budgets can can shift quickly and publishers are constantly evaluating but that evaluation time like are we talking days or weeks, just trying to get a sense gave them. The platform is so new kind of what the evaluation period is on the other side.
Bernie Mcternan: It depends on the nature of the Advertiser I think it's important to remember for us at the vast majority of our advertisers our game.
Bernie Mcternan: Publishers and developers.
Bernie Mcternan: Who are who are.
Bernie Mcternan: Purchasing based on return on advertising spend in their games and different publishers have different time horizons that they are optimizing for but.
Bernie Mcternan: These are these are long term.
Bernie Mcternan: Turn based advertisers.
Bernie Mcternan: And.
Bernie Mcternan: I wouldn't expect it when you see shifts you're going to you're going to see them.
Bernie Mcternan: No.
Bernie Mcternan: <unk> are sharply.
Bernie Mcternan: Got it thanks, Matt.
Bernie Mcternan: Thanks, Bernie will take our final question from fake runner at William Blair.
Speaker Change: Hey, guys here.
Bernie Mcternan: Yes, yes, yes beautiful.
Speaker Change: Diving deeper on what you're just as I'm looking at your Advertiser base. So you mentioned that <unk>. The same way, we expect typical branch advisory sell any additional color you can add on the spending behavior and potential downtime and then maybe how that layers in additional durability internet spend given the ROI you're seeing.
Bernie Mcternan: Yeah, absolutely here's the here's the thing.
Bernie Mcternan: And believe me I understand as well as the next person some of the they are the disruptions in frictions in the macro marketplace.
Bernie Mcternan: For us.
Bernie Mcternan: Our performance is zooming, principally driven by the quality of execution, we're not generally speaking moving up and down with macroeconomic trends. That's just not where we are as a business right. Now. So I can tell you that when we provide meaningfully and markedly better performance, we see increased advertiser spend as.
Bernie Mcternan: We increased that performance, we will see more advertiser spend that's my expectation, we're seeing we're already seeing that across a broad base of.
Bernie Mcternan: Of our customers and it's something that we've been seeing over the prior weeks.
Bernie Mcternan: Right in the midst of all of them again.
Bernie Mcternan: All of this macroeconomic uncertainty and friction so that's the beauty of what we do is if we deliver.
Bernie Mcternan: Customers can see that they can see it very quickly.
Bernie Mcternan: And we expect over time for that to.
Bernie Mcternan: To trend up.
Bernie Mcternan: Alright, great. Thank you guys.
Bernie Mcternan: With that we'll wrap up today's call.
Speaker Change: Joining us this morning, and we look forward.
Bernie Mcternan: <unk> in the coming days and weeks have a great day.