Unity Software's (U.US) FY25Q3 conference call: The company is poised for growth and expects to achieve sustainable long-term growth in the coming years.

Recently, Unity Software (U.US) held the FY25Q3 earnings conference call. In the third quarter, the company's Grow business revenue reached $3.18 billion, an 11% increase compared to the previous quarter and a 6% increase year-over-year. Create business revenue reached $1.52 billion, a 3% increase year-over-year; excluding the impact of non-strategic revenue, the year-over-year growth was 13%. Adjusted EBITDA was $1.09 billion, with a profit margin of 23%, up 200 basis points from the same period last year and the previous quarter. Free cash flow reached a record high of $1.51 billion, an increase of $36 million year-over-year. Cash reserves are $19 billion, convertible debt is $22 billion. The company expects total revenue for the fourth quarter to be between $4.8 billion to $4.9 billion. Adjusted EBITDA is expected to be $1.1 billion to $1.15 billion. The Grow business is expected to achieve mid-single-digit sequential revenue growth. The Create business is expected to grow steadily; excluding the impact of non-strategic revenue, high-single-digit year-over-year growth is expected. The adjusted EBITDA profit margin is expected to remain stable. The company's leadership stated that the second quarter of 2025 was confirmed as a turning point in the company's development trajectory, and the third-quarter performance proved that the company is ready to unleash its potential and achieve sustainable long-term growth in the coming years. Unity does not need to choose between execution and vision, aiming to achieve both; the scale of the electronic game industry has surpassed the sum of Hollywood movies, music, and linear video, and social media and short videos are seen as the next target areas. The company is committed to democratizing technology and providing platform tools for software developers to become game developers. The advancement of artificial intelligence will deepen this mission, and in the future, Unity software will empower all creators to create interactive experiences. The wave of new democratization is expected to trigger explosive content creation and game length growth, and Unity occupies a unique position at the intersection of game creation, discovery, and monetization with its Vector AI technology. Q&A Session Q: What are the driving factors behind the accelerated revenue growth in the Grow business in the third quarter? Is it related to Vector AI improvements, expansion to more customers, or new customers? A: Vector AI does have good scalability and excellent operational performance. Compared to our previous products, the true advantage of Vector AI is its ability to handle Beijing Vastdata Technology, process data with more complex structures and features; at the same time, it can more effectively cope with various changes in the real-time market and learn new experiences from these changes. Vector AI has proven scalability and high performance, being able to handle larger, more complex data, respond to real-time market changes, and learn from them. The self-learning AI continuously invests in development and data sets for improvement. The company's roadmap combines positively trending mobile game ad spending to support long-term sustainable growth. It performs widely across regions, platforms, and game types, without structural barriers, showing confidence in infrastructure and systems. Q: How significant will Runtime data and Developer Data Framework be in shaping 2026's potential impact? What steps beyond data retrieval are needed for data to be effectively used? A: Runtime data should be seen as a multi-year growth opportunity and long-term advantage rather than something that will suddenly manifest at a specific point in time. Even without the contribution of Runtime data, we remain confident in Vector's growth trajectory. The adoption rate and positive developer feedback of the Developer Data Framework indicate that these tools will have an increasingly significant impact as more games are built on Unity 6. This is a marathon, not a sprint, but the company is fully committed to these efforts, and we are very satisfied with the progress made. Q: In terms of the mid-single-digit sequential revenue growth guidance in the Grow business, compared to the 11% sequential growth in the current quarter, why did the growth slow down? A: We did see very rapid growth while using Vector. Based on the current situation, there are no factors that would make us doubt the growth momentum in the future; we are fully confident in continuing to utilize data to drive model optimization and are excited about our product roadmap. The guidance is based on a comprehensive assessment of various factors, including operational rates at the beginning of the quarter, seasonal factors in the fourth quarter, and expected data flowing into the model. We are excited about the current momentum, the ability to improve models through data, and the product roadmap. Performance is likely to continue to improve throughout the fourth quarter and achieve outstanding results. We are confident in this guidance. It is worth noting that we do not operate the business to meet quarterly goals; new product launches and enhanced features are organically rolled out and not done to cater to financial reporting timing. We believe that our performance will only improve in the fourth quarter and the results will be as outstanding as in the third quarter. Q: In the non-Vector Grow business, what specific points of improvement are there? Can you give an example of how Vector's experience and technology are applied to other business areas? A: We are excited about our entire Grow business and have plans to incorporate Vector's technology and experience into other advertising businesses. With the initial release of Vector, we have allocated more resources to work in this area and have started preliminary applications. We are optimistic about the early results we have seen and the long-term potential of this opportunity. The ultimate goal is to drive healthy and sustainable growth for the entire business. Q: How should the Unity in-app payment plan be understood? Is it seen as an incremental profit opportunity or more as a value-added service for customers? A: We are very excited about this opportunity. Global app stores are opening up due to regulatory influences, and in-app mobile purchase expenditures are growing, providing a huge opportunity for Unity to offer value to developers allowing them to natively manage entire product catalogs and payment providers across platforms and stores within their engine, providing value to users in a way nobody else can. The product is entirely free for users, with only moderate fees charged to merchants on negotiated terms. However, this is not our main focus; we are interested in building new commercial products for developers over the long term, offering more value, and enhancing this product so it becomes a meaningful commercial opportunity. Most importantly, we want customers to understand that this is a product that only Unity can natively provide and deeply integrate into existing tools, representing a significant step in expanding our platform role throughout the entire video game space (mobile, PC, and ultimately consoles) to assist developers in navigating increasingly complex and open environments. Q: How does Vector's bid competitiveness in various mediation solutions? Is there evidence of it increasingly bidding towards non-Level Play mediation solutions? A: At a high level, we see that Vector is highly competitive across all platforms, and we see this trend continuing. Q: Can you provide detailed information on the growth sectors in the third quarter, excluding revenues from Unity Vector solutions? What do the fourth-quarter guidance imply for this revenue? How should it be modeled in the long term? A: We do not report specific breakdowns of advertising revenue, so we cannot provide that detail. Overall, we are very excited about the progress made by all advertising businesses, showing positive trends, and we anticipate this revenue will grow over time. Other than that, we do not plan to further comment. Q: About the larger vision, strategic roadmap, and product roadmap for empowering all creators (not just software developers), in addition to the impact of generative AI. What cost considerations or potential opportunities should be kept in mind for 2026? A: Regarding the vision and AI strategy: Unity's core idea has always been the democratization of game development. In the past, we have enabled software developers to enter the gaming industry by providing tools and technology, dreaming that even individual developers can create games played by millions, which has now become a reality. AI technology is now making the game development process more accessible. For professional developers, AI tools will help them quickly accomplish basic functions and achieve standards, saving more time for genuine innovation. This democratization will further evolve to allow us to provide unique tools that enable ordinary content creators who are not developers to create interactive experiences and delve deeper into the Unity ecosystem. Interactivity is key to increasing user engagement and usage time, so the combination of "tool democratization" and "greater interactivity across content types" is a direction we are very excited about. Regarding costs and profit rate outlook for 2026: We are excited about the progress we have made this year in terms of profitability. In the third quarter, the adjusted EBITDA profit margin improved by 200 basis points year-over-year and quarter-over-quarter, an increase of 400 basis points since the beginning of the year. Our business has a very high gross margin (about 82%-83%), and the contributing profit margin is even higher, with a large portion of sales costs being fixed. Looking ahead to 2026, we expect to benefit from the anticipated revenue growth, leading to significant operational leverage. This contrasts with the past few years where business streamlining led to operational deleverage. Combined with cost discipline and the ability to improve operations using AI and automation, we believe there is potential to expand profit margins while investing in important product plans. We have strong assets (such as IP, collaboration capabilities, unique data access) that allow us to expand business profit margins while investing in product opportunities, laying a good foundation for profit prospects in 2026. Q: Let's discuss the profit potential of in-app purchases again. This opportunity does hold significant potential, but I also want to understand: how would switching to third-party payment platforms affect customers, publishers, and game developers themselves? Will this change be fully reflected in their profits, or will they potentially reduce the barrier to entry for content production, speeding up the pace of content updates? I believe there are also other indirect ways that can bring value to business growth. I'm just curious how you see these indirect opportunities. A: From the developers' perspective, they will recover a portion of the profits when taking on more business responsibility, but not all, as they need to pay for the costs of handling payments and promoting to encourage customers to use their business solutions, which can eat into profits. However, there will still be a significant amount of remaining funds. We believe that most of these remaining profits will continue to be reinvested for growth, and companies typically drive growth through positive advertising. This will be a primary consideration as profitability increases. We expect this to be a truly positive factor in the long term. Additionally, from a business perspective, we are excited about being an open partner to developers and helping them navigate the increasingly complex hybrid business and transaction world in the future. Q: How is the overall background of the current mobile gaming market? How do products like Vector and its competitors affect market dynamics and developer spending? Will the momentum for market improvement continue into 2026? A: We are very optimistic about the growth of the entire gaming business beyond just the mobile sector. The game industry is undergoing an interesting phase of "creative disruption," where the industry is reshaping itself and redefining its development models while continuing to see growth. However, this growth will happen against the backdrop of continued expansion. We have already seen a surge of outstanding new games emerging, and we expect this to significantly accelerate in the coming months and years, leading to an increased importance of AI-driven discovery. We can help developers and publishers navigate in a market that is increasingly competitive due to the abundance of content. We play a role in assisting customers obtain new users and better manage existing users by providing more efficient and effective tools. Our services revolve closely around AI and understanding consumer behaviors, which will have a significant impact over time. Therefore, we are very excited about the market's growth and the role we play within it. Q: Has the return on investment (ROI) differenciation of customers using Vector narrowed? Currently, do you see all customers having more concentrated and higher average ROAS yet or is growth mainly driven by a few more actively engaged large customers? A: We have seen a broad, foundational improvement across all customer segments, regardless of size, region, or game type.