Unity Software stock is feeling bearish pressure. Why is U stock dropping?
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Operator
Ladies and gentlemen, thank you for joining us and welcome to the Unity Technologies Q4 earnings call. 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 nine to raise your hand and Star six to unmute. I will now hand the conference over to Alex Giamo, Head of Investor Relationship. Alex, please go ahead.
Alex Giaimo (Head of Investor Relations)
Thank you. Good morning everyone. Welcome to Unity’s fourth quarter 2025 earnings call. Today I’m joined by our CEO Matt Bromberg and our CFO Jared Yates. Before we begin, I want to note that today’s discussion contains forward looking statements, including statements about goals, business outlook, industry trends and expectations for future financial performance, all of which are subject to risks, uncertainties and assumptions. You can find more information about these risks and uncertainties in the risk factors section of our filings at sec.gov actual results may differ and we take no obligation to revise or update any forward looking statements. Finally, during today’s meeting we will discuss non GAAP financial measures. These non GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with gaap. A full reconciliation of GAAP to non GAAP is available in our press release and on the sec.gov website. And with that I’ll turn it over to Matt. Thank you, Alex. Good morning everyone. On behalf of all of us at Unity from across the globe, I’d like to thank each of you for joining us today. When the environment gets noisy, it’s always clarifying to tune back into performance and the underlying product and market dynamics that produce it. It’s in that spirit that I’ll begin this morning by offering some broader context for why we’ve never been more excited about Unity’s future. Our fourth quarter results once again comfortably exceeded the high end of our guidance, led by exceptional performance from Vector, which experienced its third consecutive quarter of mid teen sequential revenue growth. Vector revenue has grown 53% in the first three quarters since its launch, and we believe we are still very much at the beginning of its trajectory. This January was Vector’s best revenue month ever, larger even than the holiday record set in December and 72% larger than January of last year. By the end of 2026, we expect the quarterly revenue run rate for Vector to be comfortably more than $1 billion a year. We could not be more optimistic about how this business is scaling and the value it is delivering to our customers throughout 2025 and into 1Q26. The sharp decline in the Iron Source Ad Network has at times masked this incredible growth in Vector. That dynamic, however, is swiftly drawing to a close, which will materially enhance growth rates and profitability in our advertising business as a whole in the years ahead. The Iron Source Ad Network will represent less than 6% of total Unity revenue in the first quarter and will become an even smaller component of our financial profile over time. And this isn’t just a shift in revenue, it’s a shift in quality. We are displacing commoditized lower margin ad network revenue for deeply differentiated AI platform revenue. The success we’re seeing in our advertising business has been mirrored by the return to growth of our software business, where the fourth quarter of 2025 showcased the fastest year over year growth in Create in more than two years. And this growth is truly global in nature. Over the course of the year our Create business is up nearly 50% in China, the world’s largest video game market, driven by our unique interoperability with local operating platforms like Open Harmony and compatibility with popular consumer channels like WeChat. Unity is the global abstraction layer that allows a developer to write once and deploy everywhere so that no one has to choose, for example, between building a WeChat minigame and a high end iPhone release. They can have both at the push of a button. Uni6 is being adopted more quickly than any version in our history, and as a reminder, it’s for around 90% of our active creators completely free to use. Our customers typically only pay us once they’ve built successful games, which by definition includes wiring a full suite of infrastructure monetization and content optimization tools to the Unity platform. Tools which might be developed by us, but because we are an open and extensible platform, might just as likely be offered by third parties or even self built. This is what we mean when we say we’re the assembly point for interactive content creation and when that creation is ready to meet its audience. The Unity runtime is the universal bridge that connects imagination to execution, ensuring that regardless of the hardware or platform, the experience remains seamless and performant. Our runtime doesn’t just display pixels, it serves as the persistent foundation that manages the complex interplay of physics input and networking across devices, making UE not just a tool for building, but the standard for deploying interactive content globally. New creative tools like emerging world models that make it possible to generate high quality interactive assets from simple no code prompts are a massive opportunity for Unity and should greatly increase the market for interactive creation. The Unity engine is not an asset generator and it never has been. Assets have always been created largely outside of our software. We’ll transform these new assets, enabling them to be brought directly into Unity’s platform and adding the physics, game logic infrastructure and distribution systems to turn them into full fledged games, making it possible for our customers to run multibillion dollar live service businesses. As we increasingly integrate native AI into the creation process, Uni will become easier to use, which will draw more customers into the world of interactive content creation than ever before. This explosion of new assets, types, new creators and new games will also drive our advertising business. As the amount of content multiplies. The primary challenge then becomes discovery. How will consumers find the next thing they really want to play? That’s where Vector comes in. As it grows and becomes ever more efficient at understanding consumer preferences, it will become more effective at making high quality recommendations. We expect this dynamic will be a tailwind for Unity for many years to come. With all that as a context, now let’s look ahead to what we’re building and delivering to the market. In 2026, we’ll begin our advertising business with Vector. Last year was about laying the foundation, modernizing our tech stack, improving our capabilities to customers by delivering both improved install volumes and ROAS across GEOS genres and platforms. 2026, however, will be about taking the next leap forward. Over the course of Q1, we’ll scale our testing of runtime engine data with the expectation that it will be live in vector during Q2. This milestone has been made possible through a great deal of hard work over the last two years, and we’re really proud of the team for getting us to the launch threshold. As we’ve mentioned previously, we don’t anticipate that the inclusion of runtime data will produce a lightning strike moment, but rather it’s our conviction that the addition of highly differentiated behavioral data will result in significant compounding model improvements over time. What makes Vector different isn’t just the quality of our AI model, it will also be the quality of the signal. We’re moving beyond capturing clicks towards fully understanding how users interact with the game world, what engages them, how they progress, and where they find value. Our runtime will enable us to interpret this unique deep behavioral signal and provide more value to our advertising customers for years to come. As the signal improves, modeling becomes even more valuable. So we’re optimistic about marrying these runtime data advances with the long list of planned product improvements to be delivered in Vector over the course of 2026. One of those product improvements already in beta and having a positive impact is our Day 28 ROAS feature which enables customers to manage their campaigns based on longer time horizons. There will be many such improvements over the course of the year and we expect runtime data will boost the impact of everything we do in our Create business. We expect 2026 will also be a year of fundamental transformation while continuing to deliver a roadmap to customer that provides enhancements to the product they depend on. Every day we’ll make fundamental advances in two areas, collaboration and AI offering, both of which we expect will meaningfully grow our addressable market. Let’s take collaboration first. In 2026, uni authoring workflows will become largely accessible by web browser, no download required, with project and gameplay views shareable with a one click URL. This shift will for the first time enable software developers who are currently our only customers, to collaborate seamlessly with the artists, designers, product managers, back end developers and executives that comprise the full creative team, massively expanding Unity’s utility and the size of our addressable market. Our first steps in enabling this vision of the future can be glimpsed today in Unity Studio, our recently announced no code 3D editor that’s already in beta for industry customers. Today, by moving the Uni environment to the browser, we are moving 3D creation out of a siloed local install and into a live collaborative workspace, bringing the business and creative stakeholders directly into the heart of the project. For every current Unity developer, there are a multitude of others working collaboratively on each project will benefit from access. We’re excited to drive this expansion of the unity platform in 2026. AI driven authoring that’s our second major area of focus for 2026. At the game Developer Conference in March, we’ll be unveiling a beta of the new upgraded Unity AI, which will enable developers to prompt full casual games into existence with natural language only native to our platform, so it’s simple to move from prototype to finished product. This assistant will be powered by a unique understanding of the project context and our runtime, while leveraging the best frontier models that exist. We believe together this combination will provide more efficient, more effective results to game developers than general purpose models alone. AI inside Unity will lower the barrier to entry, raise productivity for existing users, and democratize game development for non coders. When combined with our new web accessible authoring environment, our goal is to remove as much friction from the creative process as possible, becoming the universal bridge between that first spark of creativity and a successful scalable and enduring digital experience and to better enable these new creators to build their businesses. Unique’s toolset will include our newly enhanced in app purchase commerce offerings. These also move into early access next week with general availability in Q2. By integrating monetization and commerce directly into the AI authoring flow, we won’t just make it easier to make games, will make it easier to succeed at them. When you look at all these pieces together, the compounding intelligence and performance of Vector, the accessibility of Unity in the browser, and the massive potential tailwind presented by AI authoring, the picture becomes clear. We’re moving from a world where game development was the province of the few to one where it will be accessible to the many. This is what we’ve always called the democratization of game development and it is in our DNA. Unity is the common denominator in this transition. We’ll provide the platform to create interactive content, the engine that renders it, the runtime that connects it to players, and the advertising stack that helps consumers discover it. With that, I’ll pass over to Jared an overview of our financial performance.
Jarrod Yahes (Chief Financial Officer)
thanks Matt and good morning everyone. Unity had exceptional momentum in the fourth quarter which translated into the fastest growth and the highest margin we’ve experienced in the past two years. Our execution and ability to hit our targets is improving and becoming more consistent and as expected, that accelerating organic growth paired with high contribution margins is enabling operating leverage and driving free cash flows in the fourth quarter. We had strong performance across both grow and create. Grow revenue in the fourth quarter was 338 million, up 6% sequentially and up 11% year over year. Revenue upside compared to our guidance was driven by the exceptional performance of Vector. Vector experienced yet another quarter of mid teens sequential growth, its third in a row driven in part by a robust holiday season. As a point of context, Vector added more incremental dollars in the fourth quarter than in any prior quarter. January was Vector’s best month ever and we remain extremely confident that our ad business remains in the early innings of a multi year growth story. In the fourth quarter Vector represented 56% of grow revenue, up from 49% just two quarters ago. Grow results in the fourth quarter were impacted by a $7 million sequential revenue decline in the IronSource ad network which represented 11% of grow revenue for the quarter. Our internal analysis shows that Vectors ongoing strength is almost entirely coming from incremental advertiser demand and improved conversion performance RA rather than a shift over from customers who have been reducing spend with iron source in create. Revenue was 165 million up 8% year over year. As a reminder, we lapped 10 million in non strategic create revenue from the fourth quarter of 2024. Excluding the impact of non strategic revenue, our CREATE business grew an extremely healthy 16% year over year powered by strength in our subscription business. Revenue growth accelerated during 2025 as customer contract renewals and related price increases took effect. We also exhibited extremely strong growth momentum in our Create Business in China this year. Our commitment to product stability and performance coupled with a successful rollout of annual price increases and an improved go to market approach has now translated into consistent steadier growth for our CREATE business. Turning from revenue to Non GAAP profitability Adjusted EBITDA for the quarter was solidly above our expectations at 125 million, representing 25% margins, an improvement of 200 basis points both year over year and sequentially. We were able to achieve this despite significant sales and marketing spend in the quarter for our UNITE conference in Barcelona and additional accruals associated with sales commissions and annual performance bonuses. We also experienced elevated R and D spend due to significant increases in cloud spend and additional AI hiring. I would like to touch on some key financial highlights from 2025 that underscore how our strategy is beginning to result in faster organic revenue growth and and improved profitability and cash flow. Firstly, organic year over year revenue growth has been accelerating in each of CREATE and Grow as well as UNITY in the aggregate, year over year growth has accelerated every quarter throughout 2025. Secondly, our focus on cost discipline and prudent capital allocation has demonstrably benefited profitability and cash flow. In 2025, we increased adjusted EBITDA margins to 22% while converting an impressive 99% of ...
