Unity (Trans): Vector up 70% YoY in Jan.

Below are Dolphin Research's notes from the $Unity Software(U.US) Q4 FY2025 earnings call. For our post-earnings take, see: 一夜暴跌 30%，Unity 被谁 “杀” 穿了.

I. Key takeaways

1. Q4 FY2025 results

• Revenue: $503 mn, +2% YoY
• Adj. EPS: $0.24 (vs. Street $0.21)
• Adj. EBITDA: $125 mn, margin 25%
• FCF: $119 mn, 24% of revenue

2. Segment performance

• Grow (Ads) revenue: $338 mn, +6% QoQ, +11% YoY
• Vector (AI ads platform) revenue: 56% of Grow, third straight quarter of mid-teens QoQ growth
• Vector up 53% over its first three quarters post-launch; Jan. revenue a record high, +70% YoY+
• Create (Dev tools) revenue: $165 mn, +8% YoY (+16% ex-non-strategic)
• IronSource ad network: 11% of Grow; expected to fall to below 6% of total revenue in Q1

3. FY2025

• Revenue: $1.85 bn, approx. +1% YoY
• Adj. EBITDA: $445 mn, margin 22%
• FCF: $400 mn, +41% YoY
• FCF margin expanded 600 bps
• SBC as % of revenue reduced from 33% to 21%
• Cash & equivalents: $2 bn+

4. Q1 FY2026 guide

• Revenue: $480–$490 mn
• Adj. EBITDA: $105–$110 mn
• Grow expected flat QoQ (seasonality)
• Vector expected +10% QoQ
• Create to deliver double-digit YoY growth (ex-non-strategic)
• Adj. EBITDA margin to expand 300 bps YoY

II. Call details

2.1 Management highlights

1) Vector’s strong growth

Vector delivered another quarter of mid-teens QoQ growth, marking three straight quarters. Revenue has risen 53% over its first three quarters since launch, and management believes it is still early in the growth curve. Jan. 2026 was Vector’s best revenue month ever, even above the Dec. holiday record, up 72% YoY. By end-2026, Vector’s quarterly run-rate is expected to exceed $1 bn.

2) IronSource contraction

The sharp decline in the IronSource ad network has at times masked Vector’s exceptional growth. That dynamic is fading quickly and should lift overall ads growth and profitability over the next few years. IronSource will be under 6% of total revenue in Q1 and will shrink to a de minimis piece of the model over time. This is not just a revenue mix shift but a quality upgrade — replacing commoditized, low-margin network revenue with a deeply differentiated AI platform.

3) Create back to growth

Create posted its fastest YoY growth in over two years in Q4 FY2025. The growth was truly global, with China — the largest video game market — up nearly 50% for the year, helped by unique interoperability with local OS like Open Harmony and compatibility with consumer channels like WeChat. Unity enables build-once, deploy-anywhere. Unity 6 adoption is the fastest of any release in company history, with approx. 90% of active creators able to use it for free.

4) Platform positioning and ecosystem

Unity is the nexus for interactive content creation. When creations are ready to meet audiences, the Unity runtime bridges imagination and execution, keeping experiences seamless and high-performance across hardware. The runtime does more than render pixels; it underpins complex cross-device physics, input, and networking. That makes Unity not only a build tool but the global standard for deploying interactive content.

5) AI and world-model opportunity

Emerging creative tools such as world models make it possible to turn simple no-code prompts into high-quality interactive assets, creating a major opportunity to expand the interactive creation market for Unity. The Unity engine is not an asset generator; most assets are created outside the software. Unity will transform these assets for direct ingression into the platform, layering in physics, game logic, infrastructure, and distribution, turning them into full games that can support multi-billion-dollar live-service operations.

6) 2026 Vector product roadmap

FY2025 was foundational, modernizing the stack and improving installs and ROAS across geos, genres, and platforms. In 2026, the next step is to scale testing of runtime engine data in Q1, with a planned Vector launch in Q2. This milestone caps two years of heavy lifting. Runtime data will not create an overnight step-change, but highly differentiated behavioral signals should compound model performance over time. Vector’s edge lies not only in model quality but in signal quality — moving from clicks to a full understanding of how users interact with game worlds, what engages them, how they progress, and where they find value.

7) 2026 Create transformation

Create will undergo a fundamental shift in 2026. While continuing to enhance daily staples for customers, Unity will make step-change progress in two areas — collaboration and AI products — both poised to expand TAM materially. (1) Collaboration: By 2026, Unity’s creation workflow will be primarily browser-based, no downloads required, with one-click URL sharing for projects and game views. For the first time, software developers can collaborate seamlessly with artists, designers, PMs, backend engineers, and executives across the full creative team.

(2) AI-native creation: A beta of the upgraded Unity AI will be unveiled at March’s Game Developers Conference, enabling creators to build complete casual games natively on-platform using natural-language prompts, moving from prototype to production with ease.

8) Commercialization solutions

To better enable new creators to build businesses, Unity’s toolkit will add enhanced in-app commerce products. These enter early access next week and reach GA in Q2. By baking monetization and commerce directly into AI-native workflows, Unity aims to make not only making games easier, but also making them succeed easier.

9) Financials and capital allocation

In 2025, Unity delivered its fastest growth and highest margins in two years, with organic YoY acceleration each quarter. A focus on cost discipline and prudent capital allocation clearly benefited profitability and cash flow. Adj. EBITDA margin rose to 22% in 2025, with 99% of adj. EBITDA converting to FCF. The company refinanced $690 mn of 2026 converts, extending maturity to 2030. With $2 bn+ in cash and strong cash generation, management is confident future debt can be repaid with on-balance-sheet cash and internally generated cash.

III. Q&A

Q1: Grow just posted its first double-digit organic growth in four years, and Vector has delivered mid-teens QoQ growth for several quarters. How much of the 'low-hanging fruit' has Vector harvested, what big breakthroughs remain in ads, and how much drag will IronSource be in 2026?

A: We are very excited about Vector’s continued strength, which keeps meeting and exceeding our expectations. In Jan., the business grew over 70% YoY. All of this came before bringing runtime data into the model, which we believe will have a major long-term impact. We do not see a natural cap on this business. I mention the IronSource trajectory only because investors seem overly focused on it; it is legacy and will diminish over time, and it is not a material piece of our overall picture.

Q2: On commercialization solutions (store-bypass payments, monetization management), ahead of the Q2 GA, what demand and adoption are you seeing, which customer groups are testing, and how broad could uptake be?

A: Customer response has been very positive. We enter early access next week, with GA in Q2. We have engaged a very broad set of customers, and interest is strong. Customers see three main benefits: first, the ability to capitalize much faster on store-related regulatory changes and control their own payment layer; second, purchase behavior should enhance Vector models over time; third, native integration simplifies usage for current and future customers.

Q3: Has Meta become more competitive on iOS inventory in Q1, and what does that mean for Vector? Thoughts on CloudX entering mediation, and LevelPlay share risk vs. partnering with CloudX?

A: On CloudX, we are working with the team as one of their demand partners. We support any platform that opens up mediation and makes it more transparent and effective for customers, which benefits the industry and mobile ecosystem. Mediation is not core to our forward strategy because our direct connection to customers via the engine and runtime is sufficient. As a bidding ad network, we are mediation-agnostic on where we bid, as long as it is fair and transparent. Mediation has no material impact on Unity’s overall results. As for Meta, Unity has long competed with the largest and most sophisticated players. Meta competing on iOS traffic is not new and has no meaningful impact on us. We are focused on gaming, not e-commerce, and given Vector and engine strength, we feel very good about competing with anyone.

Q4: How do you view Google Genie and its implications?

A: At a macro level, we believe AI will be a major tailwind for video games. First, leisure time will increase materially, driving a surge in gaming time. Second, AI will make game creation more efficient and lower cost. We think the impact is more about time-to-innovation than time-to-market, as most build time goes into complex systems that power live services and functionality — much of which is common at a foundational layer. AI helps build these underlying systems faster and removes drudgery, freeing human creators to focus on differentiation and innovation. World models will inspire and supply assets but will not replace game engines; they are complementary. Their video-based generation is exactly the type of input our AI workflows are designed to leverage. Our role is to operationalize these advances and route outputs into our real-time engine, where they become structured, deterministic, fully controllable physical simulations. We have a long relationship with Google and are expanding in this area, and we are source-agnostic for 3D assets as the nexus for building interactive experiences.

Q5: How do the economics of cross-platform commerce management work, how is the Stripe partnership progressing, and what tangible/intangible benefits accrue to other lines?

A: We participate in commerce transactions at very high margins, but at small scale. The goal is not to monetize the transactions heavily but to add customer value, ensuring the commerce experience is built natively and tightly integrated with the rest of Unity. Over time, helping customers process, optimize, and improve commerce — alongside optimizing engagement — should strengthen Unity’s operating model and value to customers. It should also enhance Vector’s value, as optimizing engagement and the experiences that lead to transactions and revenue is central to building games and forming a complete picture of the gaming consumer. Our core strategy is to hold the deepest, clearest, most accurate understanding of each of the billions of global gamers who touch our products annually. Over 3.5 bn people played Unity games last month.

Q6: On Jan. growth vs. Q4 and the outlook for Grow in Q1, how did Jan. stack up and how does that shape your view?

A: Vector grew mid-teens QoQ in Q4, the third straight quarter at that pace. Jan. set a new all-time high, with Jan. revenue above Dec. — which itself was a record for Vector. We expect Vector revenue to add another 10% QoQ in Q1 FY2026, with Jan. up over 70% YoY. We are pleased to see our largest business compounding so quickly, and we know Unity’s transformation and growth trajectory are accelerating.

Q7: On Create, investors have raised concerns about long-term positioning. What are you seeing in the customer base vs. the broader narrative?

A: We see tremendous strength in Create. A few quarters ago, both Create and Grow were shrinking; a year later, our largest ads business is up 70% and Create is up 16%. The business strength is clear. Improvements in quality and stability, plus clarity on investment and the roadmap, have been well received by customers. Unity 6 is our latest release and is being downloaded and adopted faster than any prior version, with very positive results. We are excited about collaboration-centric enhancements. Moving Unity into the browser from a closed-download environment, where everyone can share builds, progress, and co-edit projects, will be a major unlock.

Q8: On pricing, if tens of millions more become creators, do you need more tiers to capture the low end of new communities, and could commerce make Unity more competitive on pricing?

A: AI-driven accessibility will let us monetize more effectively the ~90% of users who do not pay today, by offering value-added capabilities on a consumption or other basis. We also expect TAM to expand, enlarging the opportunity. We are flexible on business models and are not wed to a per-seat SaaS approach. We run a large freemium model and have commerce, AI enhancements, and Vector in ads — multiple high-value ways to serve customers. We do charge for the engine, but the reality, especially for commerce and ads, is that we primarily want more engine usage. The more people use the engine, the larger our ads and product businesses become.

Q9: On IronSource, as headwinds abate, what are the direct operating cost implications for the managed ad network or knock-on effects elsewhere?

A: As Matt noted, we are replacing commoditized, low-margin network revenue with a deeply differentiated AI platform revenue base. We are convinced this simplifies and streamlines the business over time, yielding a higher-margin, more scalable model with greater operating leverage. Today, resources are spread across multiple networks. As the mix evolves, we can consolidate resources, driving leverage and higher GPM. Our 2026 EBITDA margin commentary reflects this, with margins improving through the year and +300 bps YoY in Q1.

Q10: On the developer data framework and layering it into models in 2026, can you share timing/contribution details? And on expanding cross-platform collaboration tools, what is the opportunity and monetization path?

A: For runtime, we launched the developer data framework in Aug., starting to collect data from new games built on version 6.2. Opt-in rates are above 90%, and many apps are being created. We also rolled out simplified self-serve, enabling customers running older Unity versions to leverage the framework. Testing is reaching critical mass, which should yield meaningful results; hence we plan to integrate runtime data into models in Q2. For web collaboration and AI LLMs, we see an opportunity to sell collaborator licenses under a more traditional seat model to adjacent roles beyond core software developers. For AI, we expect enterprise customers to receive token/consumption allotments and be able to purchase additional tokens.

Q11: For Grow overall, with Vector exiting FY2026 at a $1 bn+ run-rate and IronSource moving from 11% to 6%, will this let Grow reflect Vector’s momentum? How are non-Vector components (ex-IronSource) progressing on AI?

A: Your read is accurate. Vector growth, alongside IronSource becoming a smaller slice of total revenue, is exactly right. This should raise growth rates and profitability, as Vector is structurally more profitable. We are also driving further efficiencies. Ex-IronSource, all other Grow businesses grew QoQ in Q4 and remain meaningful revenue and profit drivers. In fact, excluding IronSource, Grow delivered double-digit QoQ growth in Q4. As the business evolves, we are well positioned for continued growth.

Q12: On China mini-games, how does Unity benefit across Create and Grow?

A: We are very excited about our position in China, the world’s largest and likely fastest-growing gaming market. Unity is fully compatible with all local platforms in the region, and we have deep, long-standing ties with the developer community. On Create, we are seeing substantial revenue expansion across customers, and not only in gaming — our Industry Solutions are particularly strong in Asia. Games developed in China and published in the West continue to grow and, like any game built on Unity, represent additional customer opportunities for Vector.

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