Unity (U.S.) FY25Q2 conference call: Unity Ads has seen over a 10% increase in consecutive quarters, with the non-Vector part remaining stable.

Recently, Unity (NYSE: U) held its FY25Q2 earnings conference call. Unity stated that Unity Ads has seen consecutive quarter-over-quarter growth of over 10% for the past two quarters, with a cumulative growth of over 25% after the previous quarter's 15%. Additionally, the growth of Unity's advertising network has had almost no substantial impact on other advertising expenditures such as ironSource. The company mentioned that the promotion of Vector is still at a very early stage. Significant results are expected to be seen starting in 2026, and this improvement will continue for several years. Regarding guidance for the Grow business, the company expects quarter-over-quarter revenue growth from Q2 to Q3 to be in the mid-single digits, around 5%. The non-Vector part of the revenue in the advertising business (accounting for approximately 50%) will remain stable. If overall growth is 5%, it implies that the Unity advertising network part will achieve double-digit quarter-over-quarter growth. Therefore, with the recovery of the business, there is room for further improvement in profit margins. Even with significant investment in future growth, profit margins continue to improve. Overall, the company is very confident in the upward potential of the profit margins in the Grow segment. Q&A Session Q: Can the recent strong performance of the Unity advertising network be extended to other products within the growth segment? Are there any obstacles preventing the extension of the core technology behind Unity Ads to the rest of the growth product portfolio? A: Unity Vector is a highly modular system, and there are currently no obstacles preventing us from using it to optimize parts or even significant portions of our advertising products. Q: Vector has seen rapid improvement since full deployment. How is the pace of future performance improvement for Vector? How much more "low-hanging fruit" can be expected to sustain iterative improvements? Additionally, will the empowerment of Vector with runtime data truly only see significant results by 2026? A: The launch of Vector was a significant milestone for our business, representing a "generational upgrade" of our core capabilities, migrating to a new neural network platform. This platform is more powerful, flexible, and scalable, capable of handling more complex data types and responding in real-time to data changes. As the model continues to learn, these capabilities will strengthen, enabling us to delve deeper into key signals within the data. This investment is still in its early stages and will continue to drive growth in the coming years. In fact, the current increase in installations and user value has already exceeded 15% to 20% from the previous quarter. While there may be fluctuations each quarter, this is truly a long-term direction that will profoundly transform our business. Q: What are the key steps and priorities for future evolution of the Grow products? Which aspects have seen satisfactory progress? Where do you hope to make further improvements, and what do you foresee for the next stage of the Grow solutions in the coming months? A: The promotion of Vector is still at a very early stage. Our excellent team is continuously investing in improving AI models and learning capabilities, and this is just the beginning. In the coming period, we will continue to invest and enhance existing capabilities. Furthermore, as I mentioned in the previous remarks, we are approaching another significant turning point. By integrating Unity as an AI-driven insights layer for the global gaming "operating system" into AI based on behavioral data from billions of consumers, model performance will further improve. We expect to see significant results starting from 2026, and this improvement will continue for several years. We are only at the beginning of a huge transformation. We have already seen improvements in performance and revenue, with many unique advantages not yet fully realized. This is why we are very confident and optimistic about our business. Q: What caused the $12 million permanent order in this quarter? Why is it not recurring income? Are there any special circumstances or one-time factors? Could you briefly elaborate on the background of this order? A: Definitely. We are very excited about some of the large partnerships we have signed this quarter. Matt mentioned a few, such as Tencent, Scopely, and other partnerships that were not specifically mentioned. These contracts involve multiple parts of our business, with some terms determining that part of the revenue will be recognized as income upfront, while the majority of revenue is still based on traditional SaaS subscription models, providing ongoing contributions to the business. We specifically mentioned this one-time revenue because it is only a small part of the entire contract, having a positive impact on the second quarter, but it will not carry over to the third quarter. It is important to emphasize that the Create business itself is performing strongly, with subscription revenue growing in double digits year-over-year and strategic revenue growing by 16%. Whether or not this one-time revenue is present, the overall performance of the Create business is very healthy. Q: The guidance for the non-Vector part of the Unity advertising business indicates stable growth at around the mid-single-digit level, implying around 5% growth. Does this mean that the growth momentum of Vector or Unity Ads will slow down in the third quarter compared to the second quarter? Could you break down the performance of each part specifically? A: Regarding the guidance for the Grow business, we expect quarter-over-quarter revenue growth from Q2 to Q3 to be in the mid-single digits, around 5%. The non-Vector part of the advertising business (accounting for approximately 50%) will remain stable. If overall growth is 5%, it implies that the Unity advertising network part will achieve double-digit quarter-over-quarter growth. Unity Ads has seen consecutive quarter-over-quarter growth of over 10% for the past two quarters, with a cumulative growth of over 25% after the previous quarter's 15%. Q: With the introduction of the 6.2 data framework bringing in more data, how have customers responded to integrating more data into advertising products when communicating with Unity? A: The core significance of the developer data framework lies in giving customers full control over data sharing and usage decisions, which is integrated into the product in a highly automated and deeply embedded manner. Therefore, customers do not need to communicate frequently with us; they can autonomously decide in the interface through switches and options which data to share with us and how it should be used. Each customer can choose as needed, and the entire process requires no additional communication. Our goal is to make this data control method the norm, give the power to customers, and allow them to work with us in the way they desire. Q: Can you provide specific reasons for the strong growth in installation volume brought about by Unity Vector technology? Has it led to more ad impressions or have lower-cost display placements been discovered, or has the number of installations increased per thousand impressions? Could you further explain the influencing factors? A: In short, the answer is "all the above." All key driving factors have seen improvements: we are creating more value for advertising customers, which is reflected in the continuous increase in expenses. As we continue to optimize models and introduce more unique data signals, performance will continue to improve. We are very confident in the entire process. Q: Have there been any changes in the revenue share percentage of Unity Ads compared to before? A: No, there have been no significant changes in the revenue share percentage or pricing method per installation. While the overall number of installations and value per customer has increased, there has not been a significant change in the business's profit margins. Q: Can you explain the significant increase in revenue quarter-over-quarter in the Chinese market? Is it mainly driven by Vector, or are there other reasons? A: We are very optimistic about the opportunities in the Chinese market. The majority of revenue growth comes from the core Create business, particularly deepening partnerships with major clients and the advantages of Unity Engine's multi-platform adaptation starting to show. Additionally, revenue in the Chinese market has increased by approximately $20 million quarter-over-quarter, with a portion coming from the Create business and another portion from the Grow business. Overall, both the platform and advertising aspects have seen comprehensive growth in China. Q: Does the 49% of Unity Ads data only refer to the DSP part? A: I'm not quite sure what you mean. The 49% refers to a part of the entire Unity Ad Network in the Grow business, not just the DSP. The Grow business also includes other non-Unity Ad Network parts, which will gradually integrate Vector and involve various advertising products. The Unity Ad Network may primarily correspond to what you call DSP. Q: Can you confirm whether the growth of the Unity advertising network in the second quarter is primarily due to incremental contributions or if it has partially eroded ironSource's advertising spending? How confident are you that the growth trend of the Unity advertising network will not slow down in the third quarter when the non-Vector part (such as ironSource) stabilizes? A: The growth of the Unity advertising network has had almost no substantial impact on ironSource and other advertising expenditures. Our advertising products operate in a highly competitive market environment where customers allocate budgets to platforms with higher returns. According to our calculations, the internal erosion rate between advertising networks is less than 10%, indicating that the main factor is the incremental growth resulting from creating more value for customers. We are confident in the continued growth, with key factors being the ongoing enhancement of AI capabilities and data quality. Based on the data, we anticipate that the Unity advertising network will continue to grow in the third quarter, while the non-Vector business also stabilizes. Therefore, we are optimistic about future trends. Additionally, we believe that using terms like "erosion" or "market share transfer" to understand this business is not entirely accurate, as the core is still driving growth through enhancing product value. Q: How do you view the strategic importance of improving content quality, relevance, and optimizing user and developer experiences within the Create platform as content continues to grow? A: We see AI playing a critical role in our future business, whether in the Grow or Create segment. In the Create sector, the opportunities brought about by AI are also enormous. Unity's greatest advantage lies in its scalability and openness, serving as an integrated platform for interactive content creators, without restrictions on tools or 3D asset sources. In the future, Unity will become the orchestration layer for AI-driven content creation. With a deep understanding of project environments and platform capabilities, we can help customers develop games more efficiently and quickly, unleash more innovation space, reduce repetitive and complex work. Additionally, distributing games within our operating environment allows us to support users in acquiring and growing more efficiently through AI. Hence, we are confident in the changes AI will bring in the future and in the core capabilities the company has invested in. Q: Regarding the performance improvement and reinvestment opportunities within the Grow business segment, how should we interpret the incremental improvement space of the profit margin in this segment? A: Our business contributes to a very high profit margin, with an adjusted gross margin of around 83%, and even higher for incremental profit margins. The company has optimized its cost structure, so there is room for further improvement in profit margins once the business resumes growth. Even with significant investment in future growth, profit margins continue to improve. Overall, we are very confident in the upward potential of profit margins in the Grow segment. Q: When do you think it is the right time to expand the Vector technology to other parts of the Unity advertising network, and what signals or conditions would you like to see before making this decision? A: Integrating Vector technology into other parts of the Unity Ad Network will be an ongoing, gradual process rather than a single moment-triggered plan. We are already seeing some effectiveness in some products and will continue to invest, optimizing continuously. This will actually become a long-term theme for us - continually improving business performance with AI and data. The launch of Vector means we have more resources, and going forward, it will not only drive advertising products but also expand into content creation and other areas, driving overall innovation and growth. Furthermore, each product has its own independent growth potential. Besides AI applications, growth will also be propelled through operational optimizations, marketing strategies, and R&D innovation, collectively driving growth. Q: Does the current Unity Ads guidance already assume there will be no further model improvements? If there are further model optimizations, will they all be considered as outperforming expectations? Could you briefly explain the methodology behind the current guidance? A: Our current guidance is based on data from the past six weeks (July-August), and we are satisfied with the current performance and see ongoing daily improvements. However, we are still in the early stages, so while the guidance considers future opportunities, it also balances related risks. Overall, the guidance reflects the current known circumstances, but we will not be overly aggressive in our expectations for future growth. Q: Is there room for improvement in scaling up Vector technology for advertising delivery? Does the company have plans for further product investments to improve the convenience and scalability of advertising delivery? There have been some doubts recently regarding the scalability of Vector. A: The Vector system has only been launched a few weeks ago, and while the overall performance is satisfactory and has seen improvements in various categories and regions, some clients have not yet reached ideal scales or effectiveness. Advertisers are looking to achieve greater scale with an ideal return on investment, and we are continuing to focus on system quality and customer customization optimizations. This is an ongoing effort, with each client, category, and region having unique needs, and we are actively working to optimize them. Additionally, the external environment is constantly changing, so there is still plenty of room for improvement and opportunity. Q: Was the 15% quarter-over-quarter growth in the second quarter consistently achieved throughout the entire quarter, or did the pace of advertising delivery accelerate as the quarter progressed? What is the growth trend for the current third quarter? A: Overall, we are still at a very early stage, and while we have seen good initial returns with steady growth, we do not break down data by internal quarterly pace further. The most important thing is that the current trend is positive, and there is significant room for future growth. For specific details, we recommend sticking to our overall guidance. Q: How has the Dollar retention rate (DV&E) for engine business performed with the introduction of Create business and the new Vector model? Do you expect it to remain consistent with the data by the end of 2022, or do you see higher upward potential during the stabilization period? A: We are satisfied with the improvement in the current Dollar retention rate (back to 100%). Both the Create and Grow businesses have contributed, mainly reflected in increased revenue from existing clients and advertising investment. Further improvement in the Dollar retention rate will mainly come from the increased advertising of Grow business clients, while the Create business will remain relatively stable and predictable. Therefore, the further increase in the Dollar retention rate depends mainly on the continued expansion of the Grow business. Q: How important do you consider ad mediation and pricing signal collection for the Unity Grow strategy? Would further integration of mediation with other Grow functions (such as DSP) help unlock more inventory and sales potential? A: We believe that mediation plays a crucial role, but Unity's unique advantage lies in having a large base of game developers and players, enabling growth without relying on winning the Mediation market. We are more focused on continuously creating value for user acquisition (UA) and enhancing the overall platform capability. The future development of mediation requires observation, but our current strategic focus is to drive the overall ecosystem value through enhancing UA capabilities. Q: When can we expect substantial progress or implementation of the deep integration or complete embedding of SDK with top partners such as Tencent? How do you view the development pace of these collaborations in the future? A: While I cannot comment on specific clients and timetables, I can say that we are currently engaging in higher-level strategic discussions with major global partners, aiming to package our full platform capabilities to empower them, facilitating user expansion and development efficiency. What we want to emphasize is that this could be the first time in our history that we can start packaging all the value of our platform for customers. This deep integration is an ongoing optimization process that requires continuous strengthening of data and information connections to achieve sustained value improvement. Therefore, even without clear landing points, the overall collaboration will continue to progress, with effects gradually becoming evident. Q: Has the revenue increase driven by Unity Ads and the Unity advertising network under the influence of Vectors maintained a continuous growth trend in the second quarter? Has this trend continued in July and August? A: We are very pleased with the 15% quarter-over-quarter growth in the second quarter, even though the relevant features of Unity Vector were not fully deployed at that time. Performance has been increasing each month, and this momentum has continued in July and August, so we are confident in the mid-single-digit quarter-over-quarter growth of the Grow business in the third quarter. We are optimistic about the current progress and future upgrades in products and data assets, expecting more positive impacts by 2026.