Unity Software Inc. Q3 FY2025 earnings call

Matt noted that Q3 was an inflection point with strength across Grow and Create segments. Vector AI drove 11% quarter-over-quarter lift in Grow. The Create subscription software business improved after excluding nonstrategic revenue. They rolled out the Developer Data Framework with over 90% of new projects using it. Expanded into cross-platform commerce with Unity IAP. The Unity engine's quality, stability, and performance improved with Unity 6 having over 9.4 million downloads. Made advancements in AR/VR with day 1 support for Android XR. Jarrod highlighted adjusted EBITDA of $109 million (23% margins), record free cash flow of $151 million, and strong financial performance with growth in both segments.

In the third quarter, Grow segment revenue was $318 million, up 11% sequentially and 6% year-over-year. It added $30 million of high-margin incremental Grow revenue sequentially, resulting in $19 million of additional adjusted EBITDA. Create segment revenue was $152 million, up 3% year-over-year. Excluding nonstrategic revenue, the Create subscription software business grew 13% year-over-year, powered by strength in the subscription business and momentum in China.

Fourth quarter total revenues are expected to be $480 million to $490 million and adjusted EBITDA $110 million to $115 million. Grow segment is forecasted to have mid-single-digit sequential revenue growth. Create segment is expected to have steady revenue growth, with high single-digit year-over-year growth excluding nonstrategic revenue driven by the subscription business. Adjusted EBITDA margins are expected to remain stable in the fourth quarter, with known expense items like Unite but confidence in continued strong performance.

The discussion mentions that today's discussion contains forward-looking statements which are subject to risks, uncertainties and assumptions as per SEC filings, with actual results possibly differing from expectations.

Q: In terms of the faster revenue growth for Grow in the third quarter, what are the drivers?

A: Vector AI's ability to ingest large quantums of data, complex types of data with more features and respond to real-time marketplace changes effectively, coupled with broad-based strength across geographies, platforms and game genres.

Q: On the Developer Data Framework and runtime data impact, how to think about 2026?

A: Runtime data is a multiyear growth opportunity, but Vector's growth trajectory is strong even without it, with positive adoption trends of the Developer Data Framework.

Q: On the guide for Grow at mid-single digit after 11% sequential growth, why the slowdown?

A: Guide is a function of run rate, seasonality, and data flow, with no pause in momentum and confidence in continued improvement.

Q: On the non-Vector Grow business, specific points of improvement?

A: Plan to incorporate Vector technology and learnings into other ad businesses, with optimism about early results.

Q: On Unity in-app payments initiative, incremental monetization vs value add?

A: Provides value to developers by enabling cross-platform commerce, with opportunity to build more commerce products and enhance offering over time.

Q: On Vector bidding in non-level play mediation solutions?

A: Vector is competitive across all platforms, with continuing strong performance.

Q: On Grow segment growth in Q3, details excluding Vector?

A: Not reporting breakdowns, but positive trends across entire ad business.

Q: On empowering any creator with AI, strategy and product road map?

A: AI enables more accessible game development for professional developers and broader creators, freeing time for innovation.

Q: On cost side in 2026, impact?

A: Operating leverage with high gross margins, expecting margin expansion and investment in product initiatives.

Q: On in-app purchase monetization economics and indirect opportunity?

A: Developers recapture margin but have costs, with leftover margin fueling growth and helping navigate complex commerce.

Q: On Vector and larger e-commerce opportunity?

A: Primarily focused on gaming, but bullish on programmatic advertising opportunity, with Audience Hub launch and positive campaign results.

Q: On compute capacity impact on business?

A: Cloud costs manageable with efficiency improvements, confident in continued growth with advanced compute use.

Q: On China performance, momentum?

A: China is a bright spot, with revenue growth from Create and Grow, including automotive and manufacturing uses, and 20% revenue share growth.

Q: On China publisher experience with Unity ads?

A: Ad experience is straightforward and similar to other regions.

Q: On China growth balance across Create and Grow, and capital allocation?

A: Growth balanced, with focus on product opportunities and potential acquisition opportunities with high threshold.

Q: On mobile market and Vector impact?

A: Bullish on market growth, Vector driving broad-based improvement across customer sets.

Q: On Vector returns dispersion, has it narrowed?

A: Seeing broad-based improvement across all customer sets, with narrower dispersion.