Unity Q2 F2026 Earnings Call Transcript

I also want to let you know that we are really currently just seeing a fraction of the functionality that we have planned in Unity AI. And so we're just really excited about the future of that product. And ultimately our ambition is to use Unity AI and our runtime data to offer our complete tool set for game developers. And what I mean is recall that EDI is useful for developers not just in coding a system, but ultimately it's going to enable real-time personalization of content creation at scale so that customers can change the way they build games to optimize experiences for players at an individual level. There's so much more interesting going on here than just coding and UI assistance. Where the product is currently, as happy as we are about it, it's really still very much at the beginning. On the commerce product, we're really pleased to announce that the product went into general availability in June 30th. This is an amazing opportunity for us, the opening of commerce opportunities, and things are moving really fast. A lot of estimates are showing that direct-to-consumer monetization within mobile gaming is already around 15% of the overall market. Just to remind everybody, our product is completely free to developers. We're really pleased with the early feedback. We're actively onboarding new partners. We recently published an example of a new partner, a terrific game publisher in Hutch, who's using the Uni IAP product to add direct-to-consumer purchasing for one of their top games, top drives. Like many customers, they're able to achieve this without any added complexity or the need to manage multiple or separate SDKs or stores. It's sort of the perfect example of how our platform can provide more value to the games ecosystem over the long term. There are three main benefits of the commerce product. It expedites and simplifies the process for publishers to circumvent high fees. It gives us visibility into the rich purchase behavior data, which further optimizes our ad models. And there is some small economic benefit to us as well, which scales over time. So the product's been really well received. This is a long-term growth opportunity, and we're really pleased to be able to have successfully integrated into our offering.

Your next question comes from the line of Clark Lampin with BTIG. Your line is open. Please go ahead.

Hey, guys. Good morning. Did I get all three unmuted here? Can you guys hear me? Okay, all right, perfect. Thank you guys very much. Vector growth, 23 in the quarter, you're guiding 20 in the forward quarter. Maybe I've missed this in the past, but I've heard you guys call out step function model improvements on a quarter-by-quarter basis. Has that been a driver historically or something that we should think about as a potential future opportunity? I'm just thinking about the range of product releases and evolution that you've talked about on this call and on recent ones and wondering if that's something that could drive accelerating or improving momentum from a development standpoint.

Thank you for the question, Clark. The short answer is yes. So in my prepared remarks when I noted that AI is a real driver of product velocity and quality, this is one of the areas that I was thinking of. As I noted, we delivered more than 20 product enhancements to Vector during the second quarter. It's just an incredible rate of progress. And the way I would think about this business is that progress comes across all three of the important elements of a performance model. So you need continuous products. enhancement, which we are accelerating, the velocity of which is accelerating, in which we feel we have lots more to do. Now, every quarter won't be as busy as this quarter in terms of product enhancements. We're not going to do 20 product enhancements every quarter, but we are going to continually enhance the product as quickly as we possibly can. But product enhancements are just one leg of that Higher quality data, better signal. That's what I'm referencing when we talk about the long-term benefits of runtime as an example, but there's also lots of other routes for us to improve the quality of our signal and the depth of our signal. And then when you have product enhancements and you have higher quality data, you also give your model the opportunity to learn and improve. And two, itself, as a self-learning model does. And each time you make product improvements and improve data, your model has an opportunity to get more efficient. It's all three of those drivers that are driving significant gains for our customers. And we just were very confident that we're going to be able to continue that process over time as we continue to benefit

That makes sense and is really helpful. Maybe as a follow-up here, I wanted to ask a question related to the Netflix partnership. The very basic question is, to the extent you're comfortable sharing more detail around the scope and potentially even the economics of this, You know, how is, I guess, the initial sort of working relationship taking shape or how is it going to affect your customers?

Thank you. As I mentioned up front, what we love about the Netflix relationship is that it's emblematic of the kinds of significant platform relationships we have with virtually all of the major gaming platforms in the world. So it's a very rewarding and we're really pleased that Netflix chose us. It's an important multi-year deal that calls for us to invest in support of their gaming initiatives on their platform and ensure that those games work well, that our developers can easily build games that function on the Netflix platform, which helps us expand the opportunities for our developers, which is what we're all about. and expand access to games for a new set of consumers that might not have played before or that haven't had the opportunity to play on that platform. What's interesting and exciting about Netflix is that it's important to remind folks that there are always new platforms developing and that interactive entertainment is a fundamental human desire. Consumers love and will always love playing games and Platforms rise and fall, they grow and shrink. There's all sorts of cycles, but new platforms and innovation always come to the fore, and players will always love playing games. And we are really excited to be in a position to help platforms, any and all platforms, be optimized for Unity, because Unity is by far the leading platform for game making in the world. And that's what we're so excited about.

Thank you again, Matt.

Your next question comes from the line of Vasily Karisiov with Cannonball. Your line is open. Please go ahead.

Thank you. Good morning. Matt, I wanted to ask you to go into more detail, please, if you can, on Unity 7. I know you said in your prepared remarks that it's a sort of a new frontier product for you. But can you explain to us in simple terms, please, how it's different from the previous generation and how you see it supporting growth in both of your segments? Thank you.

Thank you, Vasily. I'm happy to do it. Yeah, I could talk about Uni7 all day. Very, very excited about the product release. I think the most important thing to remember is that this isn't just another engine upgrade for us. It's a complete change in how developers are going to interact with our technology and how they're going to utilize coding agents in concert with Unity and how they're going to collaborate with their teams. So what we did effectively was re-architect Unity so that a team of both creators and coding agents could work together side by side across every stage of game mode together using Unity. Previously, that was not possible. It was very difficult to connect your coding agents to Unity, and it was impossible to really collaborate with multiple parties. It's very much a single-use experience. So being able to partner with other people and with coding agents in unlimited numbers to make interactive entertainment is a fundamental shift in the way Unity works. At the same time, a big part of Unity 7 was that we accelerated every part of the development process because one of the things we discovered is that when we exposed Unity to coding agents, which were working extremely quickly and relentlessly, we saw that sometimes our software was the bottleneck in the speed of development. So we also had to go back into the laboratory to accelerate lots of parts of the development process so we were never the thing that was making developers wait. Maybe even most importantly, we've done all of this in a way that will not require our customers to do a traditional upgrade. Nothing will break. Everything that works in Unity 6 will work in Unity 7. There is no languages to learn. There is no barrier whatsoever. That is a major change to the way we have built Unity in the past. I would also note that I believe the weight between Unity 5 and Unity 6 was something like seven years. We were closer to 18 months, and that's gonna continue to accelerate. So it is a very different product than it was before. You asked for me to be clear and simple, the really important technical features that we upgraded. But suffice it to say that we sped the quality and the fundamental nature of the way games are rendered. And as I mentioned, enhanced the collaboration, enhanced the ability for folks to make live changes so that you're building a game, you make a change in code, and you can literally see it running. in the game you're building in real time. Make a change, see it, see the change in the game, right? If you think about how fast that is, especially if you're using coding agents or multiple coding agents and multiple people together, all these advancements are really a fundamental change. And it kind of opens Unity to folks beyond engineers. Those agentic workflows are to enable faster generation, which ultimately, and this is the most important part, is going to enable people to make deeper and more beautiful games and more of them. Because none of this technology is designed to replace people, great interactive entertainment will always have the spark of human creativity Great Interactive Entertainment is not going to be built by sort of the average of all the games that have been built before, which is effectively what language models are giving you. But what this does is open up all those tools to accelerate innovation. And folks are going to create amazing, differentiated new things that we have never seen before with this. And that's going to drive growth in the industry. And we're really excited to be a part of it.

Thank you.

Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open. Please go ahead.

Thanks so much for taking the question. When you guys couple the operating momentum you have now with the completion of all the corporate actions you've been putting in place to align the business for the long term, How would you think about long-term incremental margins in the business from both a business mix perspective but also the balance you would likely have to strike between maintaining that momentum with growth investments and letting some elements of just the pure incremental margins of this mix flow through to the bottom line? Just if there's a framework you're thinking through. Thanks so much.

Yeah, maybe just a minute of history, then I'll let Jarrod take the rest of that question, Eric, and thank you for the question. It is exciting for us to take a step back for a moment and think that two years ago, Vector wasn't even a thing. Six quarters ago, it wasn't a thing. It's now by far our biggest and fastest growing business, significantly more than a billion dollars on a run rate. Two years ago, our creative business was in decline. A couple years ago, our adjusted EBITDA margins were in the low 20s. We're now approaching 30. And as Jarrod noted, we expect to be gap profitable for the first time ever. Our free cash flow on a quarterly basis has doubled, as Jarrod mentioned in his remarks. And we're really excited about the mix of businesses we're operating. And very excited, to your point, about having shed Slore growing, less profitable businesses. So as I noted, we've been able to grow, significantly grow revenues while also growing profitability. And we expect to continue to be able to do that. That is our strategy. We expect to have our cake and eat it too. There are continued efficiencies we can find in our business. We will have continued rapid revenue growth. And we continue to look invest in high growth activities by making choices and prioritizing the things that we do, which is the most critical piece of a well-operated business. That's as true in lean times as it is in good times. In fact, it's even more true when things are going well. That's when folks have the inclination to want to start doing everything. We are not going to fall into that trap. We're going to continue to apply capital to our fastest growing businesses and prioritize those and not get distracted by things that are not creating growth and profitability for us.

That's our strategy. Yeah, I think that's well said. I think the only thing I'd add to what Matt reviewed was, you know, Unity is blessed with structurally high contribution margins. Look at our adjusted gross margin. They've been about 82 up to 83 percent in the second quarter. as we invest in our business, there are short periods of investment followed by periods of revenue realization that allow for very high levels of ROI on those investments. And we're seeing that repeatedly in our business. Investment followed by revenue realization, followed by ROI and operating leverage of the business. And so we're very pleased with that. We've experienced 200 basis points of margin expansion Each quarter since the first quarter of 2025. And based on the strategic actions we've recently executed, we're looking at 400 basis points of operating margin expansion of EBITDA margin expansion in the third quarter alone. Thank you so much for joining us. These high ROI opportunities for accelerating our business, for accelerating the value that we provide to our customers, our Fed, through our cash flows and through our P&L. And despite investing in those opportunities, we're still seeing the operating leverage and we're still seeing the margin expansion. So I think we're in rare air right now. And that virtuous cycle has really taken off for us in terms of investment, margin expansion and operating leverage.

Your line is open. Please go ahead.

Thanks so much for taking the question. Jarrod, I wanted to go back to, or Matt, excuse me, I wanted to go back to Unity 7 and think about how we should be thinking about the cross-sale in terms of the advertising business and then corporate. You mentioned it earlier, but it's always been this massive opportunity for Unity. Can you really unpack that as we start to think about 27 and the next generation of Unity of bringing those two sides closer together?

Yes, absolutely. The most important thing I could deliver as an idea for you all to think about our company is to go back to the framing offered up front about the flywheel and how we see our platform and the use of that authoring platform including Vector as the primary driver of our business going forward. As more games get created with our authoring platform, those games, think of it this way. When you create a game, you've created a thing and it exists in your world, but there are no consumers playing that game. There is no monetization in that game. It is not, it can't be updated. All the deep underlying systems and infrastructure that go into operating a massive live service is done on the Unity platform. The ability to acquire new users, which especially in mobile is literally the lifeblood of the revenue of every mobile game, is done using our Vector platform. The ability to build a storefront and take IAPs, we talked about earlier, something as that functionality is fully integrated into the Unity platform. When I was asked the question about Unity AI, I talked about the opportunities that we have to deliver added value to our game creators in the form of giving them tools to help build more customized, personalized, More exciting experiences. All those tools that sit on the platform are what we're really excited about. Folks tend to focus just on the application layer, which is the least interesting part of this. We open up the funnel to as many creators as possible. They build games. Those games drive use of our platforms. Vector is the very, very big part of that platform. And what I mentioned earlier, remember what I said was that when folks use coding agents, rather than going into the Unity application directly and working with our UI, we're also able to configure all these platform elements automatically for them. And it's just built in. So it The process, the AI that is driving this not only drives more content creation, and we think it's not only driving more innovations, but it's driving easier and more use of our platform. As that happens, we will earn money downstream from services, from live operating services, from Vector, from other things. That is the flywheel we are trying to explain and why we're so excited about this. Last thing I'll say about it, we are only just beginning to scratch the surface of the number of people who are building interactive entertainment. AI is going to make it much easier for consumers to do. I am fond of saying creation is the new consumption. What I mean by that is we believe that tens of millions of new folks will begin creating interactive entertainment just as they today create linear video. So you're making TikTok videos, making YouTube videos, you're posting on Instagram, whatever you're doing. Every one of those creators ultimately is going to become a creator of some kind of interactive entertainment. Because the technology and our tools are going to enable them to do that. And because interactivity is the only way to increase engagement over linear video, which is spectacular, but can only ever be so engaging. Whereas interactivity can create effectively infinite engagement loops. There are going to be tens of millions of people who are doing that. We are opening our software and opening our platform to welcome those folks who are now going to be able to use Unity, and we're going to be having further announcements about this over time, who are now going to be able to use Unity in a way that they were not able to before. That is distinct from professional users, who I was addressing slightly earlier in this answer, right? Who are building multi-billion dollar games, who are using our platform, using Vectra. That's going to grow. that other folks are going to build. So we're going to see both an expansion of our historical professional customer set, ultimately as well as the expansion of a more kind of a, call it a prosumer over time, a creator class. All that's going to be enabled by opening our software to coding agents and collaboration between people and coding agents. I hope that's helpful. Thanks, Matt.

Your next question comes from the line of Dylan Becker with William Blair. Your line is open. Please go ahead.

Hey, Matt, Jarrod, Alex, appreciate it. And it might be a little late to the party here, Matt, but congrats on the Knicks championship recently. Thank you very much.

It's not as important as the quarter, but it's very important.

It certainly helps, yeah. I want to touch on the, I know we've talked about the flywheel pretty extensively here, Matt, but maybe if you could characterize kind of the components of the flywheel or how you're interpreting those between some of the platform advancements, right, we talked about The best way to figure out how much value and improvement

We're driving is to track revenue growth. Because as I talked about earlier, when our customers are seeing return, they're spending more with us and our revenue goes up. So revenue is in fact a direct output of the quality of that three-legged supply I talked about. The quality of the nature of our product releases, quality and increases to the quality of the data that drives vector as well as our ability to improve the efficiency and accuracy and tuning of our models. Those three legs of the stool are what drive this forward. As I mentioned, every quarter we are working as fast as we possibly can to implement as many positive changes to all three legs of the stool as we can. Our self-learning algorithms are always working. We're trying to put as many new product enhancements as we can into the marketplace, and we are always working on enhancing data. The long-term benefits of access to runtime data, which we're now six, eight weeks into, are going to be substantial. The long-term advantages of this flywheel I described, where more and more games are going to be created on our platform, which are going to be automatically integrated with that platform, which includes Vector, is going to drive a lot of growth in the future. We are very, very bullish about continuing to put our heads down and work across all three of those legs of the stool. And we're really very, very bullish about the ability of our platform and that flywheel to keep spinning and, in fact, to increase the velocity with which it is spinning. And that is the way we think about this business.

Very helpful. Thank you.

Your final question comes from the line of Omar Dossocki with Bank of America. Your line is open. Please go ahead.

Hi, thank you. Can you hear me? Yes. Great. Could you maybe just give us an update on where you think you are in terms of advertiser penetration as sort of like a percentage of all the advertisers in the market? You know, how that's trended over time and, you know, what you're doing to accelerate that adoption or if you need to do anything at all, you know, in that advertisers just come to you, you know, when they see returns.

Hi, thanks for the question. I would say that by and large in the game space, the vast majority of folks already know who we are. and are already spending with us to one degree or another. Now, there's a lot of diamonds in this market. It's tremendous amount of growth in Asia and in particular, so new entrants come into the market Thank you very much. And so it's not as if the issue for us is we've got to ramp up some big new sales force to ring doorbells to try to get folks to try vector. It is much more of what I describe as a optimization and account management function in which. We test and scale individual games and do the work around data and integration to ensure that we are able to deliver as much scale and as much value as we possibly can for each advertiser. And that is more of the dynamic and it's playing out in a really positive way for us.

This concludes the question and answer session. I will now turn the call back to Alex for closing remarks.

Thank you everyone for joining this morning. Have a great day.