Q2 2025 Unity Software Inc Earnings Call
To ask a question. Please raise your hand, if you have dialed into todays call. Please press star nine to raise your hand and star sixth on mute I will now hand, the conference over to Alex Jumbo head of Investor Relations. Alex. Please go ahead.
Thanks, Nicole good morning, everyone. Welcome to <unk> second quarter 2025 earnings call I'm joined this morning by Matt Bromberg, our CEO and Gerry as 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.
<unk> 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 in addition to and not 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.
With that I'll pass it over to Matt.
Thank you Alex and good morning, everybody.
On behalf of everyone at unique from across the globe I'd like to thank each of you for joining US today, it's a distinct pleasure and privilege for me to showcase our team's progress each quarter.
Ladies and gentlemen, thank you for joining us and welcome to the unity techn.
After a full year, leading this company.
Biology is Q2 earnings call.
The enthusiasm about the opportunity we have in front of us has never been more profound.
We believe the second quarter of 2025 will be remembered as an inflection point.
Were accelerated product innovation and enhance delivery of customer value came together to spark demonstrable sustainable growth.
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 star 9, to raise your hand and star, 6 to unmute
Led by the full emergence of Uni vector, which has far exceeded our expectations at this early stage of its development.
I will now hand the conference over to Alex jamo head of investor relations. Alex, please go ahead.
Strength in the second quarter reported 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 the growth segment.
To fully understand our enthusiasm it helps to narrow the focus a little bit.
Victor led performance inside the Uni AD network sparked 15% sequential revenue growth in the second quarter.
Thanks Nicole, good morning everyone. Welcome to Unity second quarter 2025 earnings call. Join this morning by Matt Romberg, our CEO and Jared Yas or 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.
Growth, which we are seeing continue into the third quarter as well.
Youll recall, we anticipated some softness across our other AD products during Q2 <unk>.
Driven in part by redeployment of technical and go to market resources towards the launch of vector.
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 risk described in our most recent form, 10K. Particularly in the section, entitled risk factors as updated by additional filings. We make with the SEC from time to time.
And that dynamic did indeed temper the impact of the annuity AD networks growth on the overall AD segment revenue in Q2. However.
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 <unk> network as product enhancements and greater operating discipline bring results back into line.
Today's call will include both gaap and non-gaap financial measures. Non-gaap Financial measures are in addition to and not substitute for or Superior to Gap 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 fcc.gov website with that, I'll pass it over to Matt.
Thank you, Alex and good morning everybody.
And we began to spread our AI driven capabilities across our broader ad portfolio.
Second.
Do you maybe the unity AD network now comprises approximately half of total grow revenue.
On behalf of everyone at unique 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.
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.
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.
Finally, we're seeing continued increases in the value that vectors bring to our customers as we continue to invest in the development of the quality of our AI.
We're accelerated product Innovation and enhance delivery of customer value came together to spark the monster bowl sustainable growth.
Last quarter.
We talked about the 15% to 20% lift we're seeing in both the volume and quality of new users delivered through unique vector.
Led by the full emergence of unity Vector Which is far exceeded our expectations at this early stage of its development.
In the second quarter those results continued to climb.
Strengthen the second quarter or for a cross, both grow and create.
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.
Help Drive results that once again exceeded expectations, substantially beating the high end of our guidance for both revenue and adjusted Eva d.
Let's begin in the growth segment.
It's worth taking a moment to understand precisely how delivering strong results to our partners translates directly into a willingness to scale spend with unity.
To fully understand our enthusiasm, it helps to narrow the focus a little bit.
Remember the performance advertisers are not allocating budget in the traditional sense, nor they necessarily pulling share from competitors.
Vector lead performance inside the unity. Add Network sparked. 15% sequential Revenue growth in the second quarter.
Growth, which we are seeing continued into the third quarter as well.
Performance advertisers consistently increased spend up to the limit of the return requirements all the way across the efficient frontier.
You 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.
We are already working with 85 of the top 100 mobile games in the world.
And as we strive to deliver better returns, we expect our partners will continue to invest in growth in our business will grow alongside.
And that Dynamic did indeed temper, the impact of the unity ad networks growth on the overall ad segment Revenue in Q2.
However,
We also anticipate that sector will move from strength to strength in the years ahead.
Trajectory for 3 primary reasons.
As the quality and efficiency of the AI that powers our performance engine continues to improve.
And we continue to extend vectors capabilities to enhance some of the other AD products in our portfolio.
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, add 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.
Second.
The any, the unity, add Network now, comprises approximately half of total grow Revenue.
The deep consumer understanding we possess by virtue of unique position as the operating system for games globally.
And we expect that percentage to continue to increase.
Usually as the leading provider of the software used to build distribute and run gaming applications used by billions of consumers worldwide.
As a consequence, our fastest growing product should have a greater impact on overall results in the quarters ahead.
70% of the top mobile games in the World are built on Muni.
And finally, we're seeing continued increases in the value, that vectors bring to our customers as we continue to invest in the development of the quality of our AI.
Last quarter.
In our advertising business. This unique vantage point, we'll provide our vector AI engine access to new and highly differentiated behavioral data will provide a significant potential future catalyst for enhanced performance and growth.
We talked about the 15 to 20% lists. 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 anticipate seeing the impact of our work in this area beginning in 2026 and extending well into the future.
We now believe that the combined impact of these 3 factors should drive mid single digits, sequential growth across the total combined growth segment in the third quarter of this year.
As excited as we are today about unity, we're equally sure that this is just the beginning.
The foundation for this next generation Uni is being launched this summer with the release of Uni $6, two which includes the introduction of the developer data framework.
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.
The developer data framework as 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 unit.
Remember the 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.
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.
and as we strive to deliver better returns, we expect our partners will continue to invest in growth in our business will grow alongside
Since we are discussing unit $6 two let's take the opportunity now to transition to discussion of our create segment, where a transformation in the way, we build and support our software is now well underway.
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 vectors capabilities to enhance some of the other AD products in our portfolio.
Our re dedication to quality stability and improving the developer experience is catalyzing strong financial results and create including another quarter of double digit subscription growth in Q2.
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.
We're also seeing momentum around the continued adoption of <unk> six the most stable and performance version of Uni, we've ever shipped which is now registered more than $6 6 million downloads up 50% from last quarter.
The Deep consumer understanding we possess by virtue of unity's position as the operating system for games globally.
Uni is the leading provider of the software used to build distribute and run gaming applications used by billions of consumers worldwide.
The transition, we're making from Uni six from prior versions is taking place quickly and far more smoothly than in any previous point in our history.
The beta feedback we received for the Uni AI and $6, two which is still in very early stages of development has been both positive and extraordinarily helpful.
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 that provide a significant potential future Catalyst for enhanced performance and growth.
With vector now successfully underway youll see us substantially ramping our ambitions for the role AI will play in the core unique content creation experience.
We anticipate seeing the impact of our work in this area beginning in 2026 and extending well into the future.
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.
As excited as we are today about Unity, we're equally sure that this is just the beginning.
The foundation for this next.
Justice data from applications that are distributed on the unit run time has the potential to provide a long term competitive advantage in our AD business.
Generation of uni is being launched this summer with the release of uni 6.2 which includes the introduction of the developer data framework.
Data from applications developed immunity 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.
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.
As Uli reconnects with its customers and community and fully embraces the role it plays as the operating system for games.
The opportunities available for partnerships and create also move into new territory. This.
So if we're discussing Unity 6.2, let's take the opportunity. Now to transition to discussion of our create segments where a transformation in the way we build and support our software is now well underway.
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 scope Lee creator of one of the world's top grossing mobile games monopoly go.
Our rededication to Quality stability and improving the developer experience is catalyzing strong financial results and create including another quarter of double digit subscription growth in Q2.
With Tencent, our expanded multi year partnership will keep <unk> at the core of some of the most popular multi platform titles in the world for many years to come.
We're also seeing momentum around the continued. Adoption of beauty 6, the most stable and performant version of uni we've ever shipped.
It also highlights the continued strength of our business in China, the largest market for games in the world.
Which is now registered more than 6.6 million downloads up 50% from last quarter.
We're 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.
The transition we're making from uni 6 from prior versions is taking place quickly and far more smoothly than at any previous point in our history.
With Sculpsure, 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 scope of these games as well to improve is to improve the uni engine for all of our customers.
Extraordinarily helpful.
On the platform side, we announced an exciting multifaceted partnership with Nintendo whose experience experiencing tremendous success with the launch of the switch to.
With Vector now successfully underway. You'll see a substantially ramping, our Ambitions for the role AI will play in the core unique content creation experience.
Our collaboration ensured that unit six will be fully optimized on day, one for the release of the switch to.
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.
So that <unk> could play a foundational role in the growth in support of Nintendo's ambitions for third party game development Commerce and live service operation on their platform.
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.
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.
And finally on industry.
Data from applications developed in unity will enable our AI to transform the content. Creation experience, leveraging. Our awareness of each product in each project to predict the needs of each developer transforming, the way content is built and empowering the future of our create business.
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.
As uni reconnects with its customers and community and fully Embraces, the role that plays as the operating system for games.
In automotive this quarter, we announced the deepening of our relationship with BMW. The users usually asset manager to power its groundbreaking <unk> asset management platform globally.
The opportunities available for Partnerships and create also move into new territory.
Unique <unk> technology has also been integrated into the Mercedes Benz operating system to enhance the in car experience of the numerous sadie's been CLA.
This quarter. We were proud to announce major multi-year Partnerships with 10 cents 1 of the largest developers and Publishers of games in the world and scopely creator of 1 of the world's top, grossing mobile games monopoly, go.
And healthcare Spector medical is redefining pre surgical planning and patient communication through immersive three D visualization tools built on unity.
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.
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.
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.
And express our continued gratitude for the support of our partners and our community worldwide.
We believe Uni is just one of a few companies in the world poised to benefit from the incredible opportunities that are bound at the intersection of AI digital content creation digital advertising interactive entertainment and all of US here are dedicated to making that future a reality.
The scope, we were embarking on a new multi-year agreement. That includes a long-term technical partnership across both create and grow design. Both the support the growth and operation of scope of these games, as well as to improve as to improve the uni engine for all of our customers.
On the platform side, we announced an exciting multifaceted partnership with Nintendo. Whose experience experiencing tremendous success, with the launch of the switch, too.
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 Jarrett.
Our collaboration ensured that uni 6 would be fully optimized on day 1 for the release of the switch 2.
Thank you so much Matt and good morning, everyone. I am pleased to report that unity exceeded the top end of our guidance on all measures in the second quarter.
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 operations on their platform.
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.
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.
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 vector.
And finally, on industry.
We made 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.
As expected the growth of the Unity AD network was partially offset by declines in other ad products.
In automotive this quarter, we announced a deepening of our relationship with the MW who uses Unity asset manager to power. Its groundbreaking 3D Asset Management platform globally.
And 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.
Unis, 3D technology has also been integrated into the Mercedes Benz operating system to enhance the in-car experience of the new Mercedes-Benz CLA.
I'd also like to remind investors that we lapped $21 million in nonstrategic create revenues as compared to the second quarter of 2024.
In healthcare specto. Medical is redefining pre-surgical planning and patient communication through immersive. 3D visualization. Tools built on Unity.
Adjusting for the non strategic revenue create grew at 16% year over year in the second quarter.
The use cases continues to expand and we're more confident than ever in the long term growth opportunity, or cross a broad range of categories and applications.
Non strategic create revenue in Q2, 2025 was minimal and we expect it to remain so moving forward.
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.
Turning from revenue to non-GAAP profitability adjusted EBITDA for the quarter was $90 million, representing 21% margins.
And express our continued gratitude for the support of our partners and our community worldwide.
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 head count costs and cloud spend.
We Believe uni is just 1 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 inactive entertainment. And all of us here are dedicated to making that future a reality.
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.
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 Jared.
Thank you 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.
We continue to see opportunities for further margin expansion and operating leverage over time, particularly as we scale and grow our ads business.
Revenue, exceeded the top end of our guidance by 16 million with adjusted ibaa coming in. 1500 of the top end of our guidance.
<unk> 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.
Better results than expected at this early stage from vector.
In terms of our balance sheet cash at the end of the quarter was $1 7 billion and convertible debt was $2 2 billion.
As expected, the growth of the unity, add network was partially upset by declines. In other AD products.
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.
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.
With that I'd now like to turn to guidance for the third 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.
We're expecting total third quarter revenues of 440 million to $450 million and adjusted EBITDA of 90 million to $95 million in.
Adjusting for the non-strategic, revenue, create grew at 16% year-over-year in the second quarter.
And grow we expect mid single digit sequential revenue growth driven by continued performance and the unity AD network, where the strong momentum has continued into Q3.
Non-strategic. Create revenue in Q2 2025 was minimal, and we expected it to remain so moving forward.
Outside of the Unity AD network, we're seeing stabilization and expect sequentially steady revenues from Q2 to Q3.
Turning from revenue to non-gaap profitability, adjusted ibida, for the quarter was 90. Million representing 21%, margins.
As Matt mentioned, the Unity AD network now represents about half of total grow revenue and we expect that percentage to grow over time.
Adjusted, EBA 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.
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 are 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 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
Our adjusted EBITDA guidance factors in the deliberate controls, we're implementing around G&A and R&D spend including efficiencies were driving around cloud spend.
Unity is also just starting to benefit from improved operating leverage supported by adjusted gross margins of 83%.
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 return to revenue growth with higher 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.
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.
And other high potential R&D investments.
With that I'd like to thank you for joining us on <unk> second quarter 2025 Conference call. Let me turn the call over to Alex So that we can take your questions.
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,
Nicole I think we're ready for questions.
With that, I'd now like to turn to guidance for the third quarter.
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 todays call. Please press star nine to raise your hand and star six on mute.
We're expecting total third-quarter revenues of $440 million to $450 million and adjusted EBITDA of $90 million to $95 million.
Please standby, while we compile the Q&A roster.
In Q2, we expect mid-single digits sequential revenue growth driven by continued performance in the Unity Add Network, where the strong momentum has continued into Q3.
Your first question comes from the line of Matthew cost with Morgan Stanley. Your line is open. Please go ahead.
Outside of the unity, add Network. We are seeing stabilization and expect sequentially steady revenues from Q2 to Q3
Good 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 I guess is there anything preventing you from taking the technology, that's driving the stronger performance that at unity ads.
As Matt mentioned, the unity, add Network now, represents about half of total grow revenue and we expect that percentage 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.
Deploying it across the rest of the portfolio and then I have one follow up thank you.
Hey, Matt Thanks for the question.
Uni vector is a highly modular system and there is nothing that prevents us from taking that.
I would note that excluding the impact of this deal are 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.
Taking that modular system and using it to improve.
Select parts.
And in fact, maybe sometimes significant parts of our other Ed.
Our adjusted, EBA dog. Guidance factors in the deliberate. Controls were implementing around GNA and R&D. Spend including efficiencies, we're driving around Cloud spend.
Other end products.
Great. Thank you and then in terms of just the rate of improvement with vector I mean, 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 add vector was fully rolled out there but vector itself.
Unity is also just starting to benefit from improved operating leverage supported by adjusted gross. Margins of 83%.
What is the pace of improvement that we can expect from vector overtime.
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.
We're not even necessarily going to see the benefits of runtime data until 2026, I mean, how much low hanging fruit is there left to drive.
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.
Functional improvements just in the performance of the model.
Nicole, I think we're ready for questions.
Thanks, Matt.
Yes listen vector was a was a really important inflection point for our business and we implemented what was effectively a generational upgrade of our capabilities.
And we move them to a brand new neural network based platform.
We will now begin the question and answer session. Please limit yourself to 1 question and 1 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 star 9, to raise your hand and star, 6 to unmute
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 so.
Please stand by while we compile the Q&A roster.
Please go ahead.
Yes.
These are capabilities that will continue to grow as the model continues to learn because we can process more features both tencent sparse.
And we can find important signals in what would otherwise be a vast sea of noise for us. So.
Good morning everyone. Uh, thanks for taking the questions. Is there a potential to expand the strength that you have on the unity? Add side to the other products that grow I guess? Is there anything preventing you from taking the technology? That's driving the stronger performance that that Unity ads and just you know deploying it across the rest of the grow portfolio and then I have 1 follow-up. Thank you.
We expect that this investment which to your point is really just very much at the beginning we'll continue to provide.
Hey, Matt, thanks for the question. Um,
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.
But again these are the and these are quarter to quarter moves but to your point. This is a long term shift that we think is going to transform our business for many years to come.
Unique Vector is a highly modular system and there is nothing that prevents us from taking that uh uh taking that modular system and using it to improve uh select Parts. Uh and in fact, maybe sometimes significant Parts uh of our other add uh of our other AD products.
Great. Thank you.
Your next question comes from the line of Brent Thill with Jefferies. Your line is open. Please go ahead.
Good morning, Matthew on grow maybe if you could just characterize the next steps youre going to take in the evolution of the plug what areas are you pleased with what areas would you like to see.
Great, thank you. And then in terms of just the rate of improvement with Vector, I mean, it’s been just sort of a fast deployment over the course of the year. You know, I think it was in May that you rolled it out, you know, across Unity Ads. You know, Vector was fully rolled out there. Um, but Vector itself...
More improvement.
Do you characterize the next the next chapter if you will over the next few months for the rollout of the solution.
What is the pace of improvement that we can expect from, you know, Vector over time, uh, it seems like we're not even necessarily going to see the benefits of runtime data until 2026. So I mean, how much low hanging fruit is there left to drive these
Financial improvements just in the performance of the model.
Yes, we've been as we've indicated and Matt pointed out we are still very very early in the process of rolling vector out and.
Uh thanks Matt. Um yeah listen Vector was a was a really important inflection point for our business and we implemented what was effectively a generational upgrade of our capabilities.
We have what we think is an extraordinary team.
Investing in improvements.
And aiding the learning process for for AI and.
Again, very very early for us so what the future looks like is we continue to invest and we're going to continue to see improvements over time in the existing.
And we moved them to a, a brand new neural network based platform. Uh, it's more powerful, it's more versatile. It's more scalable than our old systems, which means that it it can handle more data can handle more complex types of data and it can respond in real time, to changes in in data. So,
In our existing capabilities and then to your point as I noted in.
And my preparatory remarks.
We really believe there is 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.
These are capabilities that will continue to grow as the model continues to learn because we can process more features, both dense and sparse. We can find important signals in what would otherwise be a vast sea of noise for us.
so, um, we expect that this investment which to your point is really just very much at the beginning will continue to provide, uh,
With our position as the operating system for games globally as those as <unk>.
As those insights into consumer behavior on the billions of billions of consumers that are using made with Uni applications as we begin to bring that insight into the into our AI, we're going to see enhanced performance and as we indicated we expect to see that beginning in 'twenty six and then.
Lifts for us for years. Um, and indeed, even in the immediate term, we are already seeing lifts above the 15 to 20% improvements that we saw and installs in user value last quarter. Um, but again, these are the and these are quarter to quarter moves. But to your point, this is a long-term shift that we think is going to transform our business for many years to come.
Continuing out for many many years to come but in a way. This is what's so exciting for us very very early on to a major transition immediately seeing.
Great. Thank you.
Your next question comes from the line of Brent, Phil with Jeffrey's your line is open. Please go ahead.
Our enhanced performance enhanced spend and still at the very beginning of a tactical development roadmap.
And not yet having taken advantage of some of the unique position that we have in the marketplace. So that's sort of what accounts for our for our great enthusiasm this business.
Okay, and just a quick follow up maybe for Gary just on the $12 million perpetual deal in cream can you just describe what happened there why that's not recurring what what you saw there that maybe just doesn't.
Good morning, Matthew on, uh, grow. Maybe if you could just characterize the, the next, uh, steps you're going to take in the evolution of of the product. What, what areas are you pleased with? What areas would you like to see, uh, more Improvement? How do you characterize the next? The next chapter, if you will, uh, oh, over the next few months for for the the the role of the solution.
Is an anomaly give us a sense of the color that the background. Thank you.
Yeah, as we've been as we've indicated and and and Matt pointed out, we are still very, very early in the process of of rolling, Victor out. And um, we have uh, what we think is an extraordinary team.
Sure. So we're excited about some of the larger partnerships that we signed during the quarter of Matt mentioned several of them, namely <unk> scope. Lee there are several others that we didnt mention by name those those contracts are fairly far reaching or they touch multiple parts of our business and.
Investing and improvements, um, and aiding the learning process for, uh, for our Ai. And
There are some elements of those contracts whereby 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 necessary to call out is one component of one of the.
Again, very, very early for us. So what the future looks like, is we continue to invest and we're going to continue to see improvements over time in the existing, uh, in our existing capabilities. And then to your point is is I I noted in, um, in my Preparatory remarks,
The contracts.
It is less than the totality of the contract by far its 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 create business continues to see strength on strength double digit subscription revenue growth <unk>.
16% growth year over year.
Of the strategic revenue and create so we're feeling really good about the growth and create with and without this particular element to one of the contracts.
I'm really seeing.
Great. Thanks.
Your next question comes from the line of Andrew Boone with citizens. Your line is open. Please go ahead.
Thanks, So much for taking my questions I wanted to go to ROE guidance, you guys talked about an improvement in the non <unk> portion of the business in terms of kind of stabilization. There if I think about kind of mid single digit growth.
Uh, enhanced performance enhanced spend, and still at the very beginning of uh, of a technical development roadmap. Um, and and not yet having taken advantage of some of the unique position that we have in the marketplace. So, that's sort of what accounts for our for our great enthusiasm, this business.
Does that imply that vectra gains are generally add gains are slowing as I think about <unk> compared to Q can you guys just break that apart.
Okay, just a quick follow up maybe for Jared just on the 12 million dollar Perpetual deal and create what can you just describe? What what happened there? Why that's not recurring? What what what you saw there that maybe just doesn't
And then Matt as I think about the data potential of you guys are incorporating more data and the data framework, that's coming out with six point channel can you just help us understand how customer conversations are going in terms of including more data within your AD products. Thanks, So much yeah.
Uh, is an anomaly give give us a sense of of the color that that the background. Thank you.
Let me take the second one first and then Charles will take your first question.
The.
The importance of the developer data framework Andrew is that.
Is it.
The interaction around what data is shared and how we use it.
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 so the.
The sort of mental model you.
I 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 that customers interact with in the world.
Sure. So, you know, we're we're excited about some of the larger Partnerships that we signed. During the quarter of Matt mentioned, several of them, namely 10 cents scopely. Uh, there are several others that we didn't mention by name. Um, those, those, uh, contracts are fairly, uh, far-reaching, uh, they touch multiple parts of our business and there are some elements of those contracts whereby virtue of the way that they are structured. There is an upfront, recognition of the revenue, component of them, uh, with the majority of that Revenue, being a traditional SAS based subscription Revenue, that continues the benefit the business, uh, over time. Uh, we felt necessary to call out as 1 component of 1 of the contracts. Uh, it is less than the uh totality of the contract by far. It's a small component of it. Um,
Just because it did positively benefit the second quarter and wouldn't continue on into the third quarter.
There are.
There are toggles and menus, where you can control what data you share with us in <unk> and.
And how we use it and and folks will have different we'll have different predilections about that but conversation is not really required.
As I mentioned, the create business continues to see strength on strength, double digit, subscription Revenue growth, uh, 16% growth year-over-year, um uh of the Strategic revenue and create. So we're feeling really good about the growth in create uh with and without uh this particular element of 1 of the contracts. Great. Thanks.
That's really that's really the goal here, it's just a completely normalized us to put control into the hands of our customers and allow them to.
Your next question comes from the line of Andrew bun with citizens, your line is open, please go ahead.
To work with us in whatever way they like.
And.
Just to the second part of your question on the grow guidance, we've guided for mid single digit sequential revenue growth and grow comparing Q2 to the third quarter.
And we do expect stabilization in the non vector part of our AD business, which as we talked about is about 50% of the business. So it's 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 is double digit growth.
Thanks much for taking the questions. Um, I wanted to go to grow guidance. Um, you guys talked about an improvement in the non-unity ads, portion of the business, in terms of kind of stabilization there. If I think about commit single digit growth, does that imply? That Vector gains or Unity, add gains or slowing? Because I think about 3 compared to 2q. Can you guys just break that apart?
We are set up for sequentially and the unity AD network whats 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 of quarters, that's really exciting for us and something that we.
And then Matt, as I think about the data potential of you guys, incorporating more data in the data framework, that's coming out with 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. Yeah. Let me take the second 1 first. Uh and then uh Jared I'll we'll take your first question. Um,
you know, the
The importance of the developer data framework. Andrew, is that um,
We are.
Truly pleased about in this early stage of vectors development.
is that the the interaction around what data is shared and and and how we use it and um,
To add it.
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.
Your next question comes from the line of Vasily <unk> with Cannonball. Your line is open. Please go ahead.
Is we're, 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. So, you know, the the the the sort of mental model you 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 that customers interact with in the world,
Youre very much wanted to follow up on what you said earlier on the call here I think you mentioned that you'll see a strong growth in installs. So can you help us understand.
What it is that Youre seeing unit divest that during different differently is it finding more impressions is it finding impressions that are underpriced or youre seeing more installs per thousand impressions board. So would appreciate if you could help us dimensionalize. This.
Um, there are uh, uh, there are toggles and menus where you could control, what data you share with us and um and how we use it. And and folks will have different uh will have different pedal elections about that, but conversation is not really required. Uh and that's that's really that's really the goal here. It's just to completely normalize. This is to put control into the hands of our customers and allow them to to to to to work with us and whatever way they'd like
Yes so.
The short answer is yes, which is to say we are seeing broad based improvement against all of the drivers.
And, um, just the second part of your question on the grow guidance. We've guided for Mid single digit, sequential Revenue, growth and grow comparing Q2 to the third quarter.
That.
That indicate.
We're delivering more value to add customers and again the.
The best way to gauge that is just to gauge continued and increased enthusiasm.
Spent.
And it's it's really that simple. These are 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 the that's kind.
A process that we feel really comfortable with.
Thank you quick follow up is the take rate changing compared to unity ads.
No actually we're not seeing sort of material shifts in the way, we're thinking about take rate.
Process. Something that we are, um, truly pleased about in this early stage of vectors development. And I, and I just to add it, you know, we're 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, uh, just so you could understand the drivers of what we're seeing and and understand our enthusiasm about the direction of the business.
And installs were seeing broad based growth in installs in value per customer with no significant changes in the margin profile of the business to generate net revenue.
Thank you.
Your next question comes from the line of Vaseline, courtesy of with Cannonball, your line is open. Please go ahead.
Thank you very much.
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 I'm curious on the China piece it looks like the revenue by Geo there was sort of a big sequential step up in China spend is this vector related or.
Or something else.
Let me take the first part of that Jared you can you can jump in on the second part we are really excited about the opportunities we havent, China as I mentioned.
You're very much, uh, wanted to follow up on what you said earlier on the call here. I think you you mentioned that you see a strong growth in installs so can you help us understand? Um, what it is that you're seeing um, Unity Vector doing different differently? Is it finding more Impressions? Is it finding Impressions that are underpriced? Are you seeing more installs per thousand Impressions bought? So would appreciate you. If you could help us dimensional this
And the vast majority of that activity is really related to improvements in our core.
Uh, yeah, so um, you know the the short answer is yes.
Business.
Where we have 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.
which is to say we are seeing broad-based Improvement against all of the drivers that um that indicate uh we're delivering more value to add customers and again the
Really kind of starting to take root to help us grow that business.
And Jim I would just add to that that our business in China was up about $20 million sequentially, which is truly very exciting.
The best way to gauge that is just to gauge continued in increase enthusiasm uh on spent um and it's it's really that simple. These are models will continue to improve
Some component of that growth was due to growth in the create element in other parts of the growth was due to growth and grow and so 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 and just a point of clarification on the 49% for unity adds is this solely the DSP.
As we continue to invest in the quality and efficiency of the models and as we continue to uh provide more and unique data signals over time, that's a, that's a a kind of process that we feel really comfortable with.
Thank you. Um quick follow up is the take rate changing compared to Unity ads.
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 growth business that is not related to <unk>.
The unity AD network.
Is the piece, where we are later to introduce vector and that comprises a number of different AD products. So I think the year.
Um, no, actually. We're not seeing sort of material shifts in the way we're thinking about take rate. Uh, and, and installs, um, we're seeing broad-based growth in in installs and value per customer, uh, with no significant changes in in the margin profile of the business to generate net revenue.
Thank you very much.
<unk> AD network is really the DSP side that you're that you're referring to.
Okay got it thank you.
Your next question comes from the line of Tom Champion with Piper Sandler. Your line is open. Please go ahead.
Your next question comes from the line of Alex <unk> 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 with cannibalizing irons for spend as opposed to incremental to kind of like unity corporate or the business overall and so maybe any thoughts on that concept instrumentality.
Hi. This is Jim on for Tom, thanks for taking the question. Um, curious on the the China piece, it looks like the revenue by go. There was sort of a big sequential Step Up in China spend is this Vector related or
Um, or something else.
Relative to cannibalization would be helpful and perhaps a sense check on your level of confidence that as iron source, where 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 <unk> network that would be super helpful. Thank you.
Yeah, I'll take a piece of that and Jared if you have anything else to add let me know.
Uh, let me take the first part of that Jared, you can, you can jump in on the second part. Um, we're really, um, excited about the opportunities we have in China, as I mentioned. Um, and the, the vast majority of that activity is, is really, really related to improvements in our work. Uh, create business, um, where we have expanded our relationships with some major, uh, customers in that space and where the utility of the unity engine and its ability to work across all the Platforms in China. Um, is are really kind of starting to take root to help us grow that business.
So we're quite clear that the cannibalization that theres 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 against unity. So spend flows to where the return is.
Yeah, and Jim, I would just add to that that our, our business in China was up about 20 million dollars sequentially, which is truly very exciting. Um, some component of that growth was due to growth in the create uh, element and other parts of the growth was due to uh growth in in, in grow. And so we are seeing broad-based growth in China, across both the platforms out of our business, as well as the advertising side of our business.
And we estimate that the cannibalization of.
Great, that is helpful. Um and just a point of clarification on the 49% for Unity ads, is this solely the DSP?
Of our other AD networks to unity is less than 10%. So thats 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.
Don't think they're any natural structural.
Barriers to that continuing.
All we need to do is continue to improve the quality of the AI we use.
Uh, not exactly sure. What you mean, Jim. But this is the entire Unity. Add Network component of, uh, the grow business. The other portion of the grow business that is not related, uh, to to, to, to the unity add Network. Um, is the piece where we are later, uh, to introduce vector and that comprises a number of different ad products. So I think, uh, the unity add network is really the DSP side that you're that you're referring to.
Okay, got it. Thank you.
To deliver that value, which will do and we will continue to grow the quality and base of the of the data that's provided.
Your next question comes from the line of Alec brondo with Wells. Fargo, your line is open, please go ahead.
Alex I think we've done some detailed analysis around this and it really supports the number that <unk> 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 and so it's really starting to come through for Us and we're really excited about what we're seeing yes, I was just just to add again.
The reason in my in my prepared remarks, where I spent a little bit of time trying to explain the dynamic with customers because I do think there's often this mental model that where folks thinking thinking about share shifts and cannibalization and other things.
For spend as opposed to incremental to kind of like Unity corporate or the business overall. And so maybe any thoughts on that concept kind of incrementality relative to cannibalization would be helpful and and perhaps a sense check on your level of confidence that as iron Source or the non
Yeah. Um I'll take a piece of that in Jared, if you have anything else to add, let me know. Um,
I just don't think that's the best way to understand the dynamics of our business.
Perfect, 10% data point is really helpful. Thank you guys.
So we're quite clear that the cannibalization that there is really no meaningful cannibalization impact at all. Uh, it's important to understand that.
Your next question comes from the line of Dylan Becker with William Blair. Your line is open. Please go ahead Hey, Jim.
I 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 creator platform evolves around kind of the proliferation of content, particularly and kind of managing.
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. So spend flows to where the return is.
Quality and relevance and kind of reducing friction around that kind of.
User and publish our experience if that makes sense.
So are you interested in mostly in sort of the role that AI is going to play and create in terms of helping folks make games or are you more interested in but just maybe maybe just clarify for me yes, yes.
Um, and we estimate that, the cannibalization of, uh, you know, of our other AD Network to Unity is less than 10%. So that's just the monster really not, what's happening? Um, what's happening is that as we uh, continue to increase the value, we provide to customers. They will continue to spend and that will drive growth. Uh, I don't think there are any natural structural
And this kind of proliferation of content rights of strategic importance that unity can play in that ecosystem.
<unk> publishers navigates and sift through that to maintain kind of optimal user experience if that makes sense, yes, I mean look.
Barriers to that continuing. Um all we need to do is continue to improve the quality of the AI. We use um, to deliver that value, which we'll do. And we'll uh continue to grow the quality and base of the uh, of the data that's provided
One of the things that we're really excited about is how much.
AI and how quickly ice move the center of our future we've talked a lot about vector.
And we've talked a lot about how the our investments today are driving our agro business on the creative side.
VA opportunity is also really and is really enormous.
Because remember as I've said before Unis greatest strength is its extensibility and openness, where the assembly point for folks who create interactive content, we're agnostic as to which tools they use and where <unk> come from we're going to be the platform the orchestration layer.
For AI led interactive content creation going forward.
Okay, I think we've done some detailed analysis around this and it really supports the number, uh, 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, uh, in the unity, add Network and stabilization, and some of the non-veterans. And so, uh, it's really starting to come through for us and we're really excited about what we're seeing. Yeah. And just, just to add again, I part of the reason in the, in my, in my prepared remarks, where I, what I spend a little bit of time trying to explain the dynamic with customers is because I I do think there's often this mental model that where folks thinking or thinking about share shifts and cannibalization and other things. And I I just don't think that's the best way to understand the Dynamics in our business.
And the fact that we.
Perfect at. 10% data point is really helpful. Thank you guys. Yep.
We are context aware of the project the fact that the.
But we are the platform where the project is being built.
Your next question comes from the line of Dylan Becker with William. Blair your line is open, please go ahead.
It's going to give us unique insights that will allow our customers both too.
Make games more quickly and efficiently and to be able to apply much more innovation and have much more time to to create because we're going to take away over time, some of the drudgery and complexity of content creation and 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 run time is going to give us unique capability to power, our AI to enable folks to acquire new users more efficiently and more effectively.
Hey gentlemen, uh, appreciate it here. Maybe Matt. Uh, 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, um, Quality and relevance and kind of reducing friction around that kind of, uh, user in public or experience, if that makes sense.
So we just we're extraordinarily excited about sort of how the world is developing around us.
And 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.
Um, so are you interested in mostly, in sort of the role that AI is going to play in create in terms of helping, folks, make games, or are you more interested in the? But just, maybe maybe just clarify for me. Yeah, yeah, yeah, no. In this kind of proliferation of content, right? The Strategic importance, that Unity can play in that ecosystem, uh, of kind of, helping Publishers navigate, uh, in sift through that, to maintain, kind of optimal user experience if that makes sense. Yeah, I mean, look,
Perfect. That's helpful. Thank you Matt.
1 of the things that we're really excited about is.
How much?
Jared I think youre the vector point has kind of been hammered home here as well too, but as we think about kind of 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, but how should we be kind of thinking about the incremental flow through from a margin perspective within the gross.
Ai and how quickly is moved to the center of our future? You know, we've talked a lot about vector and and we talked a lot about how our investments in our are driving. Our grow business on the create side.
Thank you.
Yes, so we spoke about this a little bit in our prepared remarks, but the company is blessed with a very high contribution margins. Our adjusted gross margin in the business is 83% with.
With the incremental contribution margin is probably higher than that.
The a opportunity is also really. An is really enormous, um, because remember, as I've as I've said before, Unis greatest strength is its extensibility and openness, we're an assembly point for folks who create interactive content where agnostic as to which tools they use and where 3D assets come from
We expect fully and are beginning to see.
Meaning full operating leverage in our business and 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 returned to growth.
We're excited about that we think there is 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 and grow I think it's a great point and I would just add and amplify that.
Part of what's what's really exciting about the ways the opportunities laying out for US is that you know.
Despite making really aggressive investments in everything that we feel like we need to invest and to create future growth.
Seeing substantial and sharp improvement in margins as we go.
And that's not always the case.
But to <unk> point, a combination of making really tough choices and prioritizing what is important to us as a business.
And some quality execution of our of our teams around the world.
Enabling us to have a little bit of have are taking needed to.
To to create, because we're going to take away over time, some of the drudgery and complexity of content creation, and 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 that, um, the game is being distributed on our runtime is going to give us unique capability to power. Our AI to um, enable folks to acquire new users more efficiently and more effectively. So we just we're extraordinarily excited about sort of how the world is developing around us and we're really excited to see how having made some investments in core capability. That the company we're able to bring those capabilities to bear for our customers over time.
And that's really exciting.
Okay. Thank you Bob.
Your next question comes from the line of Bernard Mcternan with Needham. Your line is open. Please go ahead.
Great. Thanks for taking the questions just a couple of follow ups on grow.
Wanted to ask on bringing vector to the other parts of the U N D AD network and to simply like when will you know its the right time to do so and what do you need to see or what are you looking to see too.
Okay, that's all. Thank you, Matt. Um, and maybe Jared, I think you have the vector Point has kind of been hammered home here as well too. But as we think about kind of the performance improvements on the growth, side of the business uh understanding the opportunity to reinvest and really kind of double down on some of those initiatives. But as we be kind of thinking about the incremental flow through uh from a margin perspective, uh, within the growth side, thank you.
And then eventually make that change to bring it over.
That's gonna be 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 so we're going to see opportunities to use it to improve our other businesses.
Yeah, so we spoke about this a little bit in our prepared remarks but the company is blessed with uh very high contribution margins. Our adjusted gross margin in the business is 83% uh, with the incremental contribution margins, probably higher than that. Um, we expect fully and are beginning to see, uh, meaning
We see some now we're already investing in starting to see some of the impact and that will be a process that's ongoing for for many years.
The idea of bringing AI inflicted performance enhancements to data driven products. The stack concept, that's going to be a theme for us forever.
So the mental model is not one where it's like hey, we're going to 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's going to be a process of constant improvement.
Operating leverage in our business and 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. Uh, so we're we're excited about that. We think there's a lot of potential for upside in the margin structure of the business and 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 and grow. I think it's a great point and I and I, I would just add and amplify that
But but what is exciting for us is that as we get past the vector launch it as providing some additional bandwidth for us to start to look at.
Part of what's, what's really exciting about the way? The opportunities laying out for us? Is that, you know, despite making really aggressive Investments and everything that we feel like we need to invest in to create future growth.
Other opportunities across our business.
Invest more and.
Using AI to to to drive the creation experience on the creative side to continue to invest in other ad products.
And sort of pick our heads up and start to spread some of that goodness throughout the whole company.
We're seeing substantial and sharp Improvement in margins as we go. Um, and that's not always the case, um, but to Jared's point of combination of making really tough choices and prioritizing, uh, what is important to us as a business and some quality execution of our of our teams around the world are enabling us to have a little bit of have our cake and needed to um and and that's really exciting.
Great, thank you both.
So the the the launch of a vector has provided some additional bandwidth there, but that's going to be.
Your next question comes from the line of Bernard mcternan with needam. Your line is open, please go ahead.
Constant constantly.
One thing I would add is it's not just using what we've learned in vector in 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 and there are a series of operational improvements go to market changes.
Great. Um, thanks taking the questions. Just a couple of follow-ups on grow. Um, wanted to ask on bringing Vector to the other parts of the UND, um, ad network and to Simply like when will, you know, it's the the right time to do so and and what do you need to see, or what are you looking to see to and then, um, eventually make that change for bring it over?
Yeah. That's that's
<unk> innovations, where we think that those products each have great potential opportunity. So 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.
Be a um, Bernard. Thanks for your question.
Understood. Thank you and just one more if I could.
It's gonna be a, a, a gradual and constant process. As I said, the Vector Technology is highly modularized and so we're, we're going to see opportunities to use it to improve, uh, our other businesses. Um, we see some. Now, we're already investing in starting to see some of the impact and that will be a process that's ongoing for, you know, for many years, the
Understood the guidance and the sequential increase on <unk> just wanted to level set just given this is new like are we assuming no additional improvement in the.
And back to your firm here. So basically any continued model improvements would be would be upside to the guide potentially or just kind of wanted to understand that the guidance methodology. Given this is still relatively new.
So Bernie I think we have the benefit of having been through the month of August as we provide this guide and were.
The idea of bringing Ai and selected performance enhancements to data driven products, just that concept that's going to be a theme for us forever. Um so you know the mental model is not 1 where it's like hey we're going to 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's going to be a a process of constant Improvement. Um but but 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.
Partly partly there and we're seeing the benefit that we received also in the month of July So, we're probably six weeks in and how that experience.
At.
We really like what we're seeing we're looking at the run rates, we are continuing to make improvements each and every day and right now we're guiding based on what we see with six weeks into the quarter.
But we are consistently being surprised and we're really thrilled with what we're seeing but I would also note that we are early we are early in this journey.
And so we are we are appropriately weighting 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 and the entity AD network.
Uh, other opportunities across our business, to invest more in uh, using AI to, to to drive the creation experience on the create side to continue investing. Other AD products, um, and sort of pick our heads up and start to kind of spread some of that goodness throughout the whole company. Um, so the the the the launch of, of vector has provided some additional bandwidth there, but that's going to be a, a constant, a constant thing
Understood. Thanks, Dara Thanks, Matt.
Your next question comes from the line of Chris <unk> 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 vector we've heard in our checks out the strong performance improvement, but we've also heard a bit of pushback on factor on the scalability side of things. So is there an opportunity to invest in product improved ease of spend.
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. And there are a series of operational improvements. Go to market changes R&D Innovations, where we think that those products each have great potential opportunity. So it's not just the application of machine learning and AI to those products. But there are road maps 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.
Thanks.
Listen.
Just to Echo the point that Joe just made it is important to remember that we are just a very few short weeks into having rolled out this system and the answer the short answer to your question is yes.
While we are and 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. So yes, many customers are seeing lifts.
I understood. Thank you and just 1 more, if I could um um understood the guidance, on the sequential increase on UD ads. Um just wanted to level set just you know given this is new like are we assuming no additional Improvement in the in Vector from here. So basically any continued model improvements would be would be upsides to the guys potentially or just kind of want to understand that the guidance methodology given. Um, this is still relatively new
And yes, those lifts are being seen across <unk>.
John Roos and across geographies, but there are also some customers that have not yet seen those lists or were those lifts have of 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 and we.
So, so Bernie, I think, uh, we have the benefit of having been through, uh, the month of, uh, August, as we provide this guide. And we're, you know, partly partly there and we're seeing the benefit that we received also in the month of July. So we're, you know, probably 6 weeks in and how that experience. Um, we really like what we're seeing. We're looking at the Run rates.
We wanted to deliver those but that's work that needs to be done.
And the quality of our systems and the fine tuning that we will we do with each customer in terms of how we manage those accounts and that's the day to day work of our of our lives and.
And so and that's part of what.
These channel checks that you guys are all doing don't really capture.
It's.
We are continuing to make uh, improvements each and every day and right now we're guiding based on what we see with, uh, 6 weeks into the quarter. Um, but we are consistently being surprised and we're really thrilled with what we're seeing. But I would also note that we are early uh we are early in this journey. Uh and so you know we are we are appropriately waiting 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 uh, Vector in the unity, add Network.
Each customer.
Understood. Thanks Sarah. Thanks Matt.
<unk> has a we have a team on each customer we're working with each customer and each customer has its own story.
Deliver.
Your next question comes from the line of Chris Kenard with UBS. Your line is open. Please go ahead.
<unk> capabilities across our systems, and then we work with each customer any genre and each geography to try to optimize those returns, but that is a and by the way the macro environment is changing every day as well right. So this is just what it is to be in this business and we're feeling really good about it but.
Great, thanks for taking the question. Can you talk a bit about the scalability of AD spent on Vector? We've heard in our checks about the strong performance improvements, but we've also heard a bit of push back on Factor on the scalability side of things. So is there an opportunity to invest in product to improve ease of spend? Thanks?
Yes, there's nothing but opportunity.
Got it very helpful and maybe just one follow up can you just talk a bit about the pacing throughout two two I just want to make sure I understand the 15% sequential growth in <unk> and now youre trending to double digit growth.
<unk> and.
<unk> were you through the months of April May and June.
Listen, just to Echo the point that jar just made, it's important to remember that we are just a very few short weeks into having rolled out the system and the answer, the short answer to your question is yes. Um, while we're and and and let's be clear while we're really pleased with the results we're seeing,
Trending to that 15% sequential growth or was there accelerating spend dynamics as you move throughout the quarter.
Let me just say at a high level and leave it.
We also see nothing but work ahead of us. I mean, we are just scratching the surface here. So yes, many customers are seeing lifts. Um, and yes those lifts are being seen across
Our goal and sort of getting a little bit granular this quarter and talking about this is what.
What we want to provide as much transparency as we could about what we're seeing so you guys would understand the.
The overall trajectory of the business.
What I don't think it would be helpful would be like to break this down any further and as I said, we're not going to be delivering this level of detail going forward.
genres and across geographies. But there are also some customers that have not yet seen those lists or where those lifts have of uh, have hit a point of the mission returns where they can't get the scale. They want every Advertiser wants infinite scale at their return requirements and
We want to deliver those.
I don't think its particularly helpful.
Most important thing to understand is that.
Yes, we're very early in this.
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.
But that's work that needs to be done. Um, both in the quality of our systems and the fine-tuning that we'll we do with each customer in terms of how we manage those accounts. And that's the day-to-day work of our of our lives. And, you know what, the and so and that's part of what these Channel checks that you guys are all doing, don't really capture. Um, it's um, you know, each customer
And beyond that I think just our general guidance is what we would lean back on.
That's helpful. Thank you.
Your next question comes from the line of Parker Lane with Stifel. Your line is open. Please go ahead.
Yeah, Hi, good morning, guys. Thanks for taking the question here.
Nice to see dollar based net expansion and get back to a 100 and the changes in the composition of that create revenue base Anthony Victor models I was wondering if you could characterize.
Uh, has a, we have a team on each customer, we're working with each customer and each customer has its own story. We deliver, um, better capabilities across our systems and then we work with each customer and each genre and each geography to try to optimize those returns. But that is a CO. And, and by the way, the macro environment is changing every day as well, right? So this is
DVA across the two businesses and when we look at the upside potential.
Just what it is to be in this business and we're feeling really good about it. But there's yeah, there's nothing but opportunity.
Something in line with what we saw for example, with <unk> two in the data sheet or is it potentially higher upside.
I would say.
Yes. So we are pleased with what we're seeing in terms of net revenue retention, which is 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.
<unk>.
<unk> 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 growth businesses such that improvements in that metric is really going to come from customer spend increases and grow.
The pace of price improvements and create is going to be modest and stable, we expect to be able to give our customers predictability and stability and so 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.
Of April, May and June, uh, trending to that 15% sequential growth or was there accelerating spend Dynamics as As you move throughout the quarter. Thanks, you know, let me just say it at a high level. Again we it was our goal and sort of getting a little bit granular this quarter and talking about this is what we want to provide as much transparency as we could about, you know what we're seeing. So you guys would understand the um the overall trajectory of the business. What what what I don't think would be helpful would be to like to break this down any further. Um, and as I said, we're not going to be delivering this level of detail going forward because I
I don't think it's particularly helpful. I think the most important thing to understand is that, um,
Yes, we're very early in this.
Understood. Thank you.
Your next question comes from the line of Richard Kramer with Iraq. Your line is open. Please go ahead.
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 and beyond that, I think just our, our general guidance is, is what we would. We lean back on.
That's helpful. Thank you.
Thank you very much Matt one of the big questions are debates with investors seems to be over the strategic importance of mediation and 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 of mediation with other grow features like the DSP is.
Your next question comes from the line of Parker Lane, with default. Your line is open, please go ahead.
Unlocking more potential in inventory and sales.
Yes, Hi, Richard Thank you for the question.
We believe that we are uniquely positioned in this marketplace as I've as I've described by virtue of being providing the operating system for games globally. So it's not our contention that.
Yeah. Hi, good morning guys. Thanks for taking the question here. Uh, Jared nice to see. Do 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, um, dvne across the 2 businesses. And when we look at the upside potential, uh, are you thinking something in line with what we saw towards the end of 22, when the data sheet or is there potentially a higher, um, upside? Um, as steady state?
Mediation is unhelpful.
It's just that it's our contention that that we don't need to win in mediation in order to.
In order to prosper and grow the business.
We have first party relationships with billions of customers already.
And sorry billions of players of end users already and as well as with the creators of those games.
And by the way I'm not at all sure that the that the future of that.
Of mediation ought to be.
System, which locks customers in to mediation by virtue of their use of user acquisition.
We will have to see how that plays out over time, but.
What we're focused on now mostly is continuing to deliver value and user acquisition, providing more value in user acquisition is sort of the path through which all goodness takes place.
Yeah. So um, we are pleased with what we're seeing in terms of uh net revenue retention, which is 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, um, uh, uh, uh, ARP, who for our existing, create customers, as well as improvements in spend, uh, for our grow Revenue, uh, business as you think about the future potential for upside, the scale of our growth business as such that improvements in that metric is really going to come from customer, spend increases and grow. Um, the pace of price improvements in create is going to be modest, and stable, uh, we expect to be able to give our customers predictability and stability. And so you would expect that the improvements in that metric, will largely be driven by meaningful improvements in our grow business and meaningful improvements.
Using customer spend through our platform.
Understood, thank you.
And we're going to continue to build out the value and usefulness of our platform and we will take it from there.
Okay, and then maybe just a very quick follow up mentioning partnerships with the likes of Tencent and scope leader, obviously huge names and in mobile gaming and gaming generally for Tencent can you give us a sense of the timeline when these sort of partnerships or likely to yield actual deeper integrations or or games, which which builds.
Your next question comes from the line of Richard Kramer with eret. Your line is open, please go ahead.
In all of your SDK elements in and how you see those progressing because they're obviously both of them are really leading lights in the industry.
Thank you very much. Uh, Matt 1 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 of mediation with other growth features like the DSP is unlocking more potential and inventory and sales.
Yes, I wont.
Yeah. Hi Richard, thank you for the question. Um,
I won't comment specifically about those customers and the <unk> related to those customers, but let me back in just speak slight little bit more general.
What the what the announcements there and as well as the conversation we're having around Nintendo is really meant to.
To point out is that for the first time I think maybe in our 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.
We believe that we are uniquely positioned in this Marketplace as I've as I've described by virtue of being providing the operating systems for games globally. So it's not our contention that, you know, mediation isn't helpful. Um, it's just that our, it's our contention that that we don't need to win a mediation in order to um, in order to prosper and grow the business.
There their user base as well as build games more effectively more efficiently and there are deep connections between those two things as we've talked about this morning, and we've talked about many times before so our ability to bring those to bear with customers and these broad.
<unk> marks a change in our strategy and our ability to execute.
Which will enable us to take advantage increasingly of our of our position as a platform as a meaningful platform in this ecosystem and that's the piece I think that over the years.
We have for party relationships with billions of customers already, uh, and I'm sorry billions of of players of end users already and as well, as with the creators of those games. Um, and, and by the way, I'm I'm not at all. Sure that the that the future of that, uh, of mediation ought to be, uh, a system which locks customers in to mediation by virtue of their use of user acquisition. Not, you know, we'll have to see how that plays out over time. But um,
As promised the he's always had but we haven't been able to access.
what we're focused on now, mostly is continuing to deliver value and user acquisition, uh, providing more value in user. Acquisition is sort of the path through which all goodness takes place. Um, and we're going to continue to build out the value and usefulness of our platform and, and, and we'll take it from there.
Because each customer is different again I won't go so much into the details there but.
Generally these are.
<unk>.
The process is not an incredibly lengthy one.
Processor optimization, so as I as I referred to in the question. We had a couple of questions to go when you work with customers on an individual level everyday to enhance returns and the more connected you are at the.
And then maybe just a very quick follow-up. You know, mentioning Partnerships with the likes of 10 cent in scope either, huge names in in Mobile gaming and gaming. Generally for 10 cent. Can you give us a sense of the timeline when these sort of Partnerships are likely to yield actual uh, deeper Integrations, or, or games, which which build in all of your SDK elements and and how you see those progressing? Because they're obviously both of them are are really leading lights in the industry.
Yeah, I won't. I
Um, I will comment specific.
At the level of information and data exchange the more opportunity there is to optimize but that is something that takes place over time and you work on it every day.
Customers and the Thailand's relation.
Customers. But
All it needs to do is get better and better every day and.
Youre going to be in really good shape.
And just speak slightly a little bit more general. What the what the announcements there. Uh and as well as the conversation we're having around Nintendo is is really meant to
Okay. Thanks.
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 vectors benefits for unity at network do you see pretty consistent sequential run rate increase for humidity ads in the second quarter.
And has that trend continued in July and August to date.
Sure Martin This is Jared let me take that we are extremely pleased with the 15% sequential growth we experienced in the second quarter.
To uh, to point out is that for the first time I think, maybe in our 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, uh, their, uh, their user base, as well, as build games, more effectively, and more efficiently. And there are deep connections between those 2 things as we've talked about this morning and we've talked about many times, uh, before so, our ability to bring those to bear with customers and, uh, these broader relationships, the market
Would remind investors that we did not have all components of the vector fully rolled out over the course of the second quarter. So that's really exciting we saw strength on strength. So 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 into August, which really what gives us that.
A change in our strategy and our ability to execute, um, which will enable us to take advantage increasingly of our of our position as a platform as a meaningful platform in this ecosystem. And that's the piece I think that over the years is, you know, has has promised that, you know, he's always had but we haven't been able to access, um,
Conference to talk about mid single digit sequential growth in our overall grow business.
Because each customer is different again. I won't go so much into the details there but um,
In the third quarter.
We're really pleased with what we're seeing we're pleased with the ongoing momentum and 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.
generally, these are, you know, it
Followed by the introduction of some of the unique data that we have and data assets that we expect to have all of that should positively impact our business. In 2026. So 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.
The process is is not an incredibly lengthy 1. It's it's a process of optimization. So as I as I refer to in a question we we had a couple of questions to go when you work with customers at an individual level every day to enhance returns and the the more connected you are at the, um, uh,
Got it. Thank you that's it for me.
Uh, at the level of information and data exchange, the more opportunity there is to optimize. But that is something that takes place over time, and you work on it every day. Uh, all it needs to do is get better and better every day.
This concludes the question and answer session I will now turn the call back to Alex for closing remarks.
you're going to be in really good shape.
Okay, thanks.
Yes, we want to thank everyone for joining this morning, we look forward to.
Catching up with everyone throughout the quarter have a great day.
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. Um, first on grow, can you talk about maybe inter quarter to Jack tree of vectors benefits for Unity at and network? Do you see pretty consistent sequential run rate, increase for Unity ads in the second quarter and has that Trend continued in July and August to date?
Sure. Martin, this is Jared. Let me take that. You know, 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, so that's really exciting. We saw strength on strength, so 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 what gives us the confidence to talk about mid single digits. Sequential growth in our overall growth business uh in the third quarter. Um uh we're really pleased with what we're seeing. We're pleased with the ongoing momentum and 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, uh,
Followed by the introduction of some of the, uh, unique data that we have in data assets that we expect to Avail of that should positively impact our business in 2026. So, 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.
This concludes the question and answer session. I will now turn the call back to Alex for closing remarks.
Yeah, we want to thank everyone for joining this morning. We look forward to uh to catching up with everyone throughout the quarter. Have a great day.