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Date

Thursday, May 7, 2026 at 8:30 a.m. ET

Call participants

  • Chief Executive Officer — Matthew Bromberg
  • Chief Financial Officer — Jarrod Yahes
  • Vice President, Investor Relations — Alex Giaimo

Takeaways

  • Strategic revenue growth -- 35% year over year, reflecting Unity Software's accelerated top-line expansion.
  • Adjusted EBITDA margin -- 27%, marking the highest level in over two years and an 800 basis point improvement year over year.
  • Adjusted EBITDA -- $138 million, up 65% year over year, demonstrating significant operating leverage and profitability gains.
  • Strategic Grow revenue -- $279 million, representing 49% year-over-year growth, with 80% driven by Unity Vector.
  • Strategic Create revenue -- $154 million, up 15% year over year, maintaining a four-quarter mid-teens growth trajectory.
  • Vector revenue -- 80% higher than a year ago, with four consecutive quarters of 15% sequential growth.
  • New Unity game sign-ups -- 20% quarter-over-quarter growth, the fastest since 2020, indicating increased adoption of the platform.
  • Made with Unity game releases -- 12% sequential increase, supporting the strength of the content pipeline.
  • Mobile app releases -- Up 60% year over year across iOS and Android, emphasizing industry-wide expansion.
  • Market share in mobile game creation -- Unity Software maintained a 70% share, aided by product and pricing strategy execution.
  • Customer data adoption -- Developer opt-in rates exceeded 90% for the data framework that powers Vector.
  • Adjusted R&D spend -- Increased by 9% year over year overall; AI-focused R&D spend rose 17%, reflecting prioritization of innovation.
  • Stock-based compensation -- Totaled $76 million, a 20% decrease year over year and now 15% of revenue, half the prior year’s percentage.
  • Cash balance -- $2.15 billion, with the intention to repay a $558 million convertible note due in November using existing cash resources.
  • Fiscal Q2 strategic revenue guidance (period ending June 30, 2026) -- $455 million-$465 million, implying 29%-32% year-over-year growth for the next quarter.
  • Fiscal Q2 Grow segment guidance -- 50%-52% year-over-year revenue growth anticipated, led by continued Vector momentum.
  • Fiscal Q2 Create segment guidance -- 11%-14% year-over-year revenue increase expected, excluding prior-year impact of a large customer win.
  • Fiscal Q2 adjusted EBITDA guidance -- $130 million-$135 million, corresponding to forecasted margin expansion of 44%-49% year over year.
  • GAAP profitability timeline -- Management forecasts GAAP net income profitability by the fourth quarter of 2026, earlier than previously indicated.
  • ironSource Ad Network & Supersonic exit -- Strategic action to sunset these businesses; $50 million in nonstrategic Grow revenue expected in fiscal Q2 and $45 million in fiscal Q3 until full exit completes.
  • M&A amortization -- Fell from $117 million-$80 million in fiscal Q2 and Q3, dropping to $55 million in fiscal Q4 and projected below $25 million for full-year 2027.
  • Unity commerce platform -- On track for launch in the current quarter, with SciPlay and Voodoo as committed partners, positioned to streamline global monetization for developers.
  • Unity AI public beta -- Launched during the quarter; initial user attachment rate at 70% after five days, demonstrating early engagement among creators.
  • Runtime data integration -- Transition from testing to live production in fiscal Q2, aimed at enhancing future Vector product performance through sequential behavioral data.

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Risks

  • Strategic decision to sunset ironSource Ad Network and divest Supersonic results in near-term nonstrategic revenue reduction and temporary operating deleverage, with the related costs exiting later in the year.
  • Management noted that cloud costs, as a component of cost of goods sold, can be temporarily elevated during periods of intensive testing and investment, affecting gross margin variability.
  • Contribution margin may be pressured in the near term due to staggered timing of cost removal associated with the ironSource and Supersonic exits.

Summary

Unity Software (U 2.20%) is accelerating its transition to profitability, targeting GAAP net income in the fourth quarter of 2026 as lower M&A amortization and reduced stock-based compensation combine with strong margin expansion. Management’s strategic focus on artificial intelligence, evidenced by a 17% year-over-year increase in AI-focused R&D investment and the public beta launch of Unity AI, is enabling substantial top-line growth in both Create and Grow, with Vector revenue up 80% year over year and driving the majority of growth in advertising solutions. The company’s Unity commerce platform, which is on track to launch this quarter, and early engagement from key partners such as SciPlay and Voodoo, further expand monetization opportunities beyond core gaming. Unity’s high customer data adoption rates are establishing a differentiated data advantage for further model improvement and competitive positioning.

  • Management expects runtime data integration to provide continuous model quality enhancements for Vector, with meaningful impact anticipated to build gradually rather than spike immediately.
  • Unity’s pricing model for AI-powered solutions is evolving to scale with usage and supports both human and agentic interactions, aligning future revenue with productivity delivered to enterprise customers.
  • Efforts to automate sales, marketing, and general operations are expected to further amplify operating leverage and profitability in the back half of the year as legacy costs exit.
  • Matthew Bromberg stated, “Unity has a pipeline of new products scheduled for release before the end of 2026 that we believe have the potential to accelerate this future massively and redefine our industry.”

Industry glossary

  • Vector: Unity’s proprietary AI-powered personalization and prediction engine, underpinning both advertising and content creation solutions through analysis of behavioral and performance data.
  • Runtime data: Real-time, sequential behavioral data generated during user interaction with games or applications, utilized by Unity to enhance AI model training and targeting accuracy.
  • Adjusted EBITDA: Earnings before interest, taxes, depreciation, amortization, and certain non-cash or non-recurring items, providing a normalized measure of operating profitability.
  • ROAS: Return on Ad Spend, a performance metric quantifying revenue generated for every dollar spent on advertising.
  • ironSource: Acquired business unit focused on mobile advertising solutions, now being discontinued by Unity for strategic focus on core and high-margin segments.
  • Supersonic: Mobile publishing business unit being exited as part of Unity’s ongoing portfolio optimization.

Full Conference Call Transcript

Matthew Bromberg: Thanks, Alex, and good morning. On behalf of everyone at Unity from across the globe, I'd like to thank each of you for joining us today. It is a privilege to be with you this morning. Unity is on an incredible trajectory, growing rapidly on both the top line and the bottom line while also shipping the most ambitious product road map in our history, a product road map that we believe will transform both Unity and the future of interactive content creation. Our first quarter results reflect this momentum with Unity posting strategic revenue growth of 35% year-over-year and our best adjusted EBITDA margin in over 2 years at 27%, up 65% year-over-year.

As Jarrod will share in more detail later, we expect the second quarter to bring more of the same with guidance for strategic ad revenue to grow 50% year-over-year, including robust Vector revenue growth as well as year-over-year margin expansion. This organic growth trend, combined with operating discipline means that we now expect our business to become GAAP profitable by the fourth quarter of 2026, an important financial milestone and a reflection of the kind of company we want to run over the long term. This is another topic that Jarrod will address in more detail in just a bit.

Unity's tremendous financial performance, a passion for execution and a deep commitment to our customers have also positioned us well to take advantage of the massively positive forces we're seeing in the marketplace, driven by the adoption of AI across our industry. Our research is telling us that 90% of game developers are already using AI in their workflows, and these tools are accelerating the production of new games. We're also seeing this up close every day in our work with studio partners, both large and small. Newly released mobile apps are up 60% year-over-year across both iOS and Android with a particularly noticeable uptick in more recent months.

And remember, mobile games continue to account for the majority of all new app releases worldwide. These are the trends propelling our business forward. Newly published Made with Unity games were up 12% over the prior quarter in Q1, with new Unity sign-ups showing 20% quarter-over-quarter growth, the fastest growth we've seen since 2020. So more games are being made. That's great for Unity. And because AI is making game creation more approachable, there are also more creators. That's great for Unity. And with more creators and more games, the need for game discovery becomes ever more acute as many more titles compete for consumer attention.

So helping match consumers with the next game they want to play becomes even more critical than it is today, and that's great for Unity as well. Crucially, while these developments are driving significant change for many developers and publishers, we expect they will also be strong drivers of growth for the entire industry for many years to come. But AI is not just accelerating adoption of Unity's platform in the marketplace. It's also propelling the pace of our own product development. Unity is truly meeting the moment by building new products that we believe will form the foundation of the next generation of interactive content creation and marketing.

Let's start with Vector, the AI system that sits at the heart of Unity. Improved performance and enhanced returns for our advertising customers drove another quarter of 15% sequential growth, the fourth in a row, exceeding our own already ambitious expectations. Our Vector revenue in the first quarter of 2026 is 80% larger than 1 year ago, an astonishing result. But what we're really excited about is just how young Vector still is. We believe we've just begun to see the impact it will have for our customers and our business. Most notably, later this quarter, we'll see Unity's runtime data graduate to our live production models for the first time.

Our conviction remains high that real-time sequential behavioral data will provide a significant future catalyst for growth. We're now ingesting this data inside Vector, and we are very encouraged with the results we're seeing in testing. And with opt-in rates to our developer data framework remaining at over 90%, adoption rates continue to scale each day, enhancing our unique competitive position. But Vector is about much more than just advertising. At its heart, Vector is personalization AI, designed to understand how and why games appeal to players. It's trained on 20 years of game making on the one side and interaction with billions of consumers on the other.

Our vision is for these 2 domains to interoperate so that we can better understand both what appeals to players as well as how those appealing experiences are designed, constructed and delivered. Vector is where these 2 domains come together, and it's now at the center of our product development across both Create and Grow. Our first Vector-driven enhancement for the Unity engine, Unity AI, went into public beta earlier this week, and the response from creators has been really gratifying. Unity AI is an integrated agent tuned specifically for Unity. It has full context for your project and is custom-made for Unity workflows.

So it knows both your game and our software better than anyone else, and it writes code directly in a Unity project. From scene hierarchies, packages, code, assets, all the way down to performance controls we've never made available before. It knows not just how to make a game, but how to make a game that runs well across every platform, fully in service of the individual creator's vision. The Unity AI interface also offers extreme flexibility so that our customers can work not just faster and more efficiently, but more creatively.

For example, we've remarked on many occasions that generic world models would be a great source of prototyping material and that game engines like Unity could ingest those pixels, transform them into Unity scene and enable developers to build deep interactive content and systems around them. Well, that's just what Unity AI now does. It ingests image pixels, outputs primitives and does mesh up scaling and textures, constructing the entire content pipeline almost instantly. Image data is thus transformed into production-ready format, massively accelerating the process of game development. You can check it all out, including a cool video introduction at unity.com/features/ai.

The conversation about world models and game engines has been framed as a contest, but I think that framing misses what's actually happening. Today, the most ambitious interactive experiences will combine what generative systems do best, speed, personalization and the ability to produce variation at a scale humans can't with what engines do best, which is determinism, persistence and the consistency players and developers depend on. As neural capabilities continue to advance, new forms of interactive entertainment will emerge, and they will look quite different from the games we play today, different modalities, different form factors, things we haven't yet imagined. We don't think the future is a threat to what Unity does. We think it's the reason Unity exists.

In fact, Unity has a pipeline of new products scheduled for release before the end of 2026 that we believe have the potential to accelerate this future massively and redefine our industry. These new launches are AI native, yet integrated with authoring tools robust enough to produce professional results, not just for today's professionals, but for the motivated and talented millions of new creators who will be inspired by all these new capabilities.

These creators, both professional and otherwise, need tools and technologies that will enable their inspiration to become more than just an experience to enable them to become a real system, a real game, distributed everywhere, rendered at high fidelity even on mobile devices, tied to our advertising and monetization capabilities, driven by data and AI, but not defined by them. Empowering this new creative class and realizing the next era of the democratization of gaming is very much in Unity's DNA. Here's what's crucial to understand about the future of interactive entertainment. Great experiences will still come from human creative vision. AI models are powerful precisely because they're trained on what human creators have made.

The bottleneck in the future isn't generation that will become a commodity if it hasn't already. The bottleneck is effective direction and realization. It's how a creator takes a spark of an idea and transforms it into a deep, engaging commercial system that is distinctive rather than generic. That can be distributed and enjoyed at high fidelity on any device that has a business model to sustain its creator. That's a tools problem. And it's a creator meets technology problem, and those are exactly the problems Unity has spent 20 years solving and will continue to solve.

Our role in this future is to build the tools that human creativity shape what AI can do so that the results reflect the creator, not the average of the training data. So you can see what an incredible opportunity we have. All of us around the world feel so privileged to be delivering the kind of extraordinary business results we are today and are also on the precipice of so many incredible advancements in the near future. There is no company in the world better positioned to win in this marketplace than we are.

With that, I will thank you once again for your time, and I'll pass it over to Jarrod for a deeper dive on our business results. Jarrod?

Jarrod Yahes: Thanks, Matt, and good morning, everyone. Unity had an exceptional first quarter of 2026 with strategic revenue growth accelerating and adjusted EBITDA margins expanding rapidly. We are in our best financial position in years with a portfolio that's driving faster revenue growth alongside robust margin expansion. We're in the enviable position of posting these impressive results while simultaneously investing heavily in AI to drive further growth and create new revenue streams for Unity in the future. First quarter results were driven by strong performance above our expectations across both Create and Grow. Strategic Grow revenue in the first quarter was $279 million, representing 49% year-over-year growth.

Revenue upside compared to our guidance and our expectations was once again driven by the exceptional performance of Vector. While our growth was impressive, it does not yet reflect any impact from our runtime data, which we believe will provide us with a sustainable competitive advantage for many years to come. In Create, strategic revenue was $154 million, up 15% year-over-year. The consistency of this business over the last year has been phenomenal with 4 straight quarters of mid-teens year-over-year growth. Performance is driven by the continued impact of our annual price increases, meaningful strength in China as well as strength in our nongames industry business.

All of this is as a result of dramatically improved products, delivering performance and stability to customers, enhancing Unity's core value proposition over time. Over the past 2 years, we've made a firm commitment to performance and stability, resulting in a 22% decrease in user-reported issues since the launch of Unity 6 and improved satisfaction from our customers. This has allowed us to maintain a robust 70% market share in mobile game creation while passing along moderate price increases and allowing us to invest aggressively in our products. We expect our business model in Create to evolve as we roll out new AI products.

The new pricing models we've introduced with Unity AI, which account for the number of first- and third-party agent connections in addition to seats, ensures our pricing scales fairly with usage rather than penalizing creators who use AI to be more productive. Over time, we expect this will allow us to scale revenues from both agentic and human consumption. Ultimately, customers value outputs, not inputs, and we expect that business models will completely adapt to that preference. We welcome that and the minimum commit model we maintain with our enterprise customers and the new consumption elements of our pricing model are very well suited to that evolution.

The Unity commerce platform is also on track to launch this quarter, and we already have a set of committed partners like Voodoo games and SciPlay working with us to ensure we do it right. Developers shouldn't have to be fintech experts to run a global business. That's why we think our Unity e-commerce platform is so vital. By providing a single native dashboard to manage catalogs and pricing across mobile, web and PC, we're removing the massive overhead of juggling multiple SDKs and payout systems, providing a turnkey solution for global payments. Now turning to our profitability in the first quarter. Adjusted EBITDA was the best in over 2 years at $138 million, growing 65% year-over-year.

Adjusted EBITDA margin was 27% and improved 800 basis points year-over-year. Our margin expansion is primarily driven by operating leverage, resulting from accelerating revenue growth with high flow-through margins, which enables us to simultaneously reinvest aggressively in our strategic AI initiatives while also expanding margins. Adjusted sales and marketing and G&A have both declined year-over-year and as a percentage of revenues. And we have deliberately redeployed much of that capital into R&D, where our adjusted R&D spend is up 9% year-over-year and AI-focused R&D, where spend is up 17% year-over-year, inclusive of AI-focused hiring and cloud inference training costs.

We expect AI-focused R&D spend to continue to climb with any margin impact more than offset by operating leverage and further cost efficiencies. In terms of cash and our balance sheet, our cash balance of $2.15 billion continues to increase each quarter as a result of our robust free cash flow. We also have a $558 million convert coming due in November of this year, and our current intention is to reduce leverage and pay it off using cash on the balance sheet. Before diving into our second quarter guidance, I want to spend a moment outlining Unity's path to GAAP profitability, the time line of which has been substantially pulled forward. There are 3 factors contributing to this.

Firstly, adjusted EBITDA margins are up 800 basis points, as we have discussed. Secondly, stock comp expense is down 20% in dollar terms and is down markedly as a percentage of revenue to 15% this quarter. And lastly, we expect materially lower M&A amortization that runs off almost entirely at the end of Q4 2026. As a result, we now forecast Unity to be GAAP net income profitable by the fourth quarter of 2026. With that, let's turn to guidance for the second quarter. For the second quarter, we're guiding to total strategic revenue of $455 million to $465 million, implying year-over-year growth of 29% to 32%.

In strategic Grow, we're forecasting year-over-year revenue growth of 50% to 52%, driven by continued robust growth in Unity Vector. And in strategic Create, we're forecasting 11% to 14% year-over-year revenue growth, excluding the impact of a large customer win we're comping from 2025. As a result of our recent strategic decision to sunset the ironSource Ad Network and sell our Supersonic publishing business, our guidance moving forward will be focused on our strategic revenues. Beginning in the second quarter, there will no longer be any nonstrategic revenues in Create. In Grow, we expect $50 million in nonstrategic revenues in the second quarter.

As a reminder, the second quarter incorporates 1 month of the ironSource Ad Network revenue given the closure on April 30. As we move to the third quarter, we expect about $45 million in nonstrategic revenue until we complete the exit of our Supersonic business. For the second quarter, we're guiding to adjusted EBITDA of $130 million to $135 million, implying adjusted EBITDA growth of 44% to 49% year-over-year. We forecast that with continued strong revenue growth, high flow-through contribution margins, combined with cost reductions associated with our strategic actions, that adjusted EBITDA margins will further improve in the back half of 2026.

As a result, Unity is poised to expand margins in 2026 to record levels while simultaneously bringing to market an incredibly exciting pipeline of products that will transform the process of game creation. With that, I'd like to thank you for joining us on Unity's First Quarter 2026 Conference Call. Let me turn the call over to Alex so that we can take your questions.

Alex Giaimo: Thanks, Jarrod. Operator, we are now ready for questions.

Operator: [Operator Instructions] Your first question comes from the line of Matthew Cost with Morgan Stanley.

Matthew Cost: I have one for Matt and one for Jarrod. Matt, just following up on the Unity AI public beta, obviously, a major step forward in terms of putting those tools in the hands of creators. There have been some demos from some of the companies behind the frontier models where they sort of showcase making games as a use case for some of these cutting-edge models from these big AI companies.

I guess when you think about how that compares to what you can do with Unity AI and your ability to get in front of the next generation of game creators with Unity AI, given that there's going to be this proliferation of other tools that can make some sort of games. I guess, where do you feel you sit in the future of these new AI game creation tools? And then for Jarrod, just on commerce, there was a really great update to hear about how you have some pretty high-profile partners at launch. I guess, how did those conversations evolve? How enthusiastic are the customers that you're talking about potentially working with on commerce?

And this seems like a product that could be very needle-moving financially if it starts to get some real traction. So is there any way you can help us dimension how impactful that could be financially?

Matthew Bromberg: Matt, thanks for your question. Good morning, and good morning to everybody. Unity AI is an integrated agent that's tuned specifically for game development and for use of Unity. General -- as I kind of talked about in the opening, general purpose coding agents are really powerful, but what they lack is Unity engine-specific context as well as the context of the project you're building itself. And that gap matters a lot when shipping a real game across multiple platforms. So if you think about the kind of differentiation, you've got full project context, so it's easier scene and the packages and the assets and the code and a unified system.

And then Unity-specific tuning for workflows that are platform aware and aware of your asset pipelines and how they're going to get integrated. What we're seeing in -- it's only been about a week, but we're seeing really strong attachment rates in that product. So 70% of the users who adopt it are continuing to work with the product 5 days in. So that tells us that we are on the right track. And of course, we'll be tracking that as we go forward.

This kind of attachment appears to be a function of better performance of our AI product than just generic models alone because those models aren't exposed to the context engineering that we bring to the table on our own products. It makes the AI more efficient. It makes it less expensive. It means less prompting is required and it's faster. Now we've just launched again this earlier this week, but we're really, really excited about it.

And as I also mentioned a couple of minutes ago, what's really exciting for us also is that Vector, which I think historically, most folks have thought of as having -- being built really just for our advertising business is -- has really come to the center of everything we're doing. So Unity AI is the first Vector-driven advancement for the Unity engine itself, meaning the same personalization AI thesis that sits underneath our grow business is also powering our Create business.

So we're just -- we're very excited about the future of this space, and we're really confident in our ability to combine the best tools and technologies, the robust systems and authoring tools monetization capabilities, distribution capabilities that we do, and we combine the best of what's happening in AI. And what we're seeing is that is driving our business forward. That is why we have more sign-ups to Unity than ever before. It's why there are more games being created by Unity than ever before. It is why our advertising business is in better shape than it ever has been before.

Jarrod Yahes: And Matt, with respect to the update that we provided on our commerce product, we too are also extremely excited to be working with landmark customers like SciPlay and Voodoo on the launch of our commerce product. As we've mentioned in the past, value to Unity is going to come in a number of ways. Including data, economic revenue share and really helping our customers with merchandising and web shop optimizations and analytics. We're excited about the potential here. This is a classic example where providing customer value and product value and create can really help the entirety of the Unity platform, including Vector.

And Unity is extraordinarily well positioned to offer this product where it can help our game developers solve a real-world problem that they're encountering, which is really ensuring that they can accept IP in an economically viable way, minimize their engineering overhead and also maximize the value of the data that they ingest as part of their IP processes. So we're really excited about the progress here, and we're really excited about taking this forward with the 2 customers that we spoke about.

Operator: And your next question comes from the line of Alec Brondolo with Wells Fargo.

Alec Brondolo: Maybe a couple for me. I think first, is there a specific expectation for Vector sequential growth in the second quarter? I think you said robust in the prepared remarks, but I think investors are looking for a little bit more granularity there. Second, I think people are trying to unpack like why the runtime data is powerful. And as I've heard you guys talk publicly over the last several weeks, as I speak to people in the industry, I think this idea of sequencing keeps coming up, right?

The idea that if we can understand what the user is doing in the app in order in a sequence, that's kind of a powerful predictor as to their likelihood to convert. And so could you maybe just like help us understand that in a little bit more detail? Like why do you think sequencing is going to be such a powerful avenue of conversion prediction in the mobile game and app space? And lastly, just maybe one on the Unity AI beta. How do you think about first-party agents relative to third-party agents?

Is there still a commitment to allowing third-party agents to interact with the Unity engine via an MCP connector as you roll out the Unity AI beta, are you agnostic to whether it's a first-party or third-party agent that the customer uses? Or would you prefer them in the 1P product?

Matthew Bromberg: Alec, that's quite a question. We're going to -- hope to provide some time for others as well. But let me take a -- one at a time. Let's start with Vector. Vector is an AI prediction engine. And the reason Vector is continuing to grow as we're doing a better job predicting which customers are going to like which games and matching those customers with the publisher of the corresponding game. It's a process of continuous improvement, and it's pretty straightforward at a high level. We improved product, which makes it easier and more effective for our customers to use, so they buy more.

So an example, we rolled out last quarter a day 28 ROAS product, which enables our customers to plan and predict their return on a 28-day basis instead of just a 7-day basis. And it's driven an incremental lift of 80% for campaigns and showing a 37% ROAS improvement versus the old day 7 benchmarks. So that's an example of a product improvement. It helps customers, it helps return. They buy more, we deliver value, they spend more. So that's product improvements. The second piece is signal improvements. We try to improve the signal, the quality of our data. And then when we -- every time we do that, it enables us to retrain our models, which are self-learning.

We retrain them around that better signal and around the increased demand that we're creating. And that constant process of optimization is what makes the product work. And all of that results in better return for customers, which drives more demand. And then you start the process again, better signal, better models, better ROAS, better product, more ad spend and you begin again. That's the flywheel of our business. And as I've said many times, what is really exciting for us is we're still at the very, very early part of Vector product that didn't even exist a year ago, a little more than a year ago.

And we just -- we feel really, really good about our continued ability to run that flywheel that I just described. So the growth is a function of the success of that process. And we've had about 4 straight quarters of 15% quarter-over-quarter growth. That growth has been broad-based. It's been balanced across different geos, different campaign types, different platforms and different genres. And as you point out, our Q2 guide doesn't yet reflect any of the runtime data contribution, which is we think going to be an incredibly important catalyst for us, and I think was the part two of your question. So moving to runtime data.

We're really excited and encouraged by what we're seeing in offline testing, and we are expecting to graduate our testing to live production models during the course of Q2. The runtime data is a kind of signal of the value which is going to build over time and compound. As we've said many times, it's not something we expect immediate spikes around, but we think it will be steady, meaningful improvements of quality in the model and the data over time. And as you point out, what we believe is really quite valuable about runtime data is that it's real time, so it's not delayed.

It is sequential, which means it helps us to understand not just what consumers are doing, but what they're doing in, which if you think about your behavior in your own life, the order in which you do things is critical to understanding what it is that you're doing. So if you combine that behavioral data from inside games, which is informed also by the context of the games themselves, which are running on our run time. It's not click data, it's not conversion data, it's not post-back data. It's a different category of signal. And we're excited about the impact we think it will have.

As I mentioned in the prior remarks, we're seeing really positive 90-plus percent opt-in rates into our developer data framework. So the volume of the live published games is increasing and scaling, and we're excited about the impact it is going to have on our business in the back half of '26 and going forward.

Operator: And your next question comes from the line of James Heaney with Jefferies.

James Heaney: Yes. I mean I know it can be difficult to predict. But based on the guide for strategic grow revenue, I mean, you've been pretty consistent, I think, in sort of this mid-teens sequential growth trajectory. Is there a way that you can help sort of frame up the composition of growth between model enhancements and self-learning? Any way to frame that up? And then I had another follow-up for Jarrod.

Matthew Bromberg: Yes. So James, just as we think about strategic grow, we're extremely excited about the trajectory of growth. It's over 50% year-over-year. 80% of that strategic grow revenue line is now the Unity Ad Network powered by Unity Vector. And so that's really the driver of that substantial growth. As Matt mentioned, there are numerous constituents to that growth, which include model improvements, product enhancements as well as data and signal. We don't break out or delineate the individual contributions in a quarter of any one of those. But suffice it to say, we are powering along all 3 of those axes, with one of the most interesting and proprietary elements of it, our runtime data on the come.

So we're enthusiastic about it, and we're confident in the future.

James Heaney: Great. And Jarrod, while I have you another one on just additional margin levers that you have at your disposal. I mean, I know there's definitely a ton of natural leverage that you get from the growth of Vector, but are there any other places where you see room to continue slimming down the cost structure and getting to these milestones that you called out?

Jarrod Yahes: Yes, James, absolutely. I mean, for us, we are very deliberate about the way that we think about margin expansion in the business. We've seen consistent operating leverage in G&A and sales and marketing. You should expect that operating leverage to continue as we automate the way that we operate internally and as we automate the way that we face our customers and interface with our customers and deliver our products and services. There's a couple of catalysts that I would call out separately.

Firstly, with respect to some of the strategic actions that we announced, while the second quarter does start to see an impact of some of the revenues of those actions, the costs haven't come out of the business as of yet. That will take place over the back half of the year. And so that is an opportunity for margin expansion with us as we look towards the back half of 2026. The other piece that we would call out is we are currently in the midst of the strategic process for Supersonic. The profitability of Supersonic is such that as we divest the business, that will naturally cause our margin profile to improve.

We expect at least 200 basis points of operating profit improvement upon the divestiture of that business. And so beyond the normal cost effectiveness and cost actions that we take to operate more prudently, we have sort of 2 known catalysts in the back half of the year that we expect, which should improve margins even from current run rate levels in the first half of the year.

Operator: And your next question comes from the line of Vasily Karasyov with Cannonball.

Vasily Karasyov: I wanted to ask you about Unity Vector performance domestically and internationally. Are you seeing any differences in adoption in revenue growth rates? Anything -- any findings in the past year that would be useful for us to know.

Matthew Bromberg: No, we're seeing very, very broad strength in Vector growth across all geographies, campaign types, genres, et cetera. And we're really pleased with that. So there's nothing I'd call out for you.

Vasily Karasyov: And the same for expectations for the runtime data integration?

Matthew Bromberg: Indeed.

Operator: And your next question comes from the line of Clark Lampen with BTIG.

William Lampen: Did I get all the unmute correct here? Can you guys hear me?

Matthew Bromberg: We can.

William Lampen: Okay. Perfect. So Matt, I appreciate some of the data points and I guess, comments that you made upfront around release volume sign-up trends. I can't recall a lot of quarters over the past couple of years where we've had those sort of positive callouts. At the risk of connecting dots, it feels like browser AI tools, a lot of the work on the product side that you're doing with Create is closing some of the gaps that might have been sort of temporarily created at the upper end of the market.

I'm curious how you guys see this sort of collectively changing the commercial opportunity for the Create business as it relates to sort of both professionals and hobbyists and maybe what that means for segment growth near to medium term? Quick follow-up, I guess, just for Jarrod. You talked about the rundown of M&A amortization. Is it possible to give us a feel for how big that is? When going back to some of the filings, we thought that, that was a number that maybe was around $200 million. Are we right to think about the change in D&A being something in that magnitude when we look at '27 and beyond?

Matthew Bromberg: Thank you. Good to hear from you this morning. Yes, listen, we've been on a journey, a product journey over the last couple of years, and it's been a really exciting one. And as you recall, the first stop on that journey was ensuring that our software for our core professional audience was stable and performant that the product road maps and were sound and reflected what customers wanted from us and that we delivered those advancements in a timely fashion and backed up our promises and delivered on those promises. We talked a lot at the beginning, as you recall, about rebuilding the relationship and the trust we have with our customers.

That part of the process has been really gratifying. It's one that continues. As Jarrod pointed out, we have never had a product that is as performing and stable as it is now. Issues with the product are down more than 20% over the last quarter and that will continue to keep going down. And that's just a critical part of any business. As we look forward, as I talked about in the upfront remarks, we're extraordinarily excited about 2 avenues of growth.

The first one is that we believe, and as I talked about and as you rightly pointed out, I think we are seeing the evidence in the marketplace that advancements in AI are creating the opportunity to be more effective and efficient in building. That is a very important advantage for our professional customers. And I have noted before that having spent many, many years developing games, I can tell you that the biggest and most frustrating part of the time line of building a game is building the systems that are largely common and very similar in a genre from game to game.

And so you know that a lot of what you're building has been built before, many times. And what you're itching to do is get to the part of the development process where you can create differentiation, where the part that you're really excited about when you begin. Tools that enable more efficiency, allow you to get to that creative head end much faster and will ultimately result in better games and will drive the creation of more games more efficiently, and I think will be great for our industry and great for our customers and will drive more usage of our tools.

And as we talked about, over time, now and over time, our tools will merge with the best of what is available in the market from a neural perspective and combine those neural capabilities with the systemization, the syndication, the commercialization that we do best. And that's all going to be great for our professional customers. But we're equally excited about the creation of a new class of creators that ultimately is going to be much, much larger than the professional class.

There will be distinctions as there always have been and there always will be between those that are capable of creating professional hit interactive entertainment and a class of, call it, prosumers who will, however, be newly enabled and capable of creating very high-level interactive entertainment. And if you think about the hundreds of millions of folks around the world, for example, who are creators on social -- various social networks who are mostly doing -- creating linear video. We believe in the future, all those creators will be adding interactive elements and interactive entertainment to the kinds of things that they're creating because that is, by far, the most direct way to increase engagement.

And engagement, as always, is the coin of the realm here. So the tools that we -- and the history we have, the unique ability to build products that are informed and leverage the best of neural technologies, but also take advantage of 20 years of understanding of game consumers and how games are built so that we can use context engineering to make our products work better than generic AI-driven products will benefit both professionals and this prosumer class, which is going to be a whole new set of Unity customers. And we're going to build products for both of them, and we're really excited about that future.

Jarrod Yahes: And Clark, to your question on amortization, we are extremely pleased to be able to talk about the pull forward of Unity's time line towards becoming a GAAP profitable company. This is something that for us is a result of a lot of hard work on the part of the team in terms of driving margin expansion and exerting discipline around the way we run and operate our business. You should expect M&A amortization to fall off quite precipitously this year. From the first quarter where we experienced $117 million of amortization, we would expect $80 million of amortization in each of Q2 and Q3, dropping down to $55 million of amortization in the fourth quarter.

And in calendar year 2027, that amortization for the full year should be sub-$25 million, so dramatically lower levels of M&A amortization, that combined with lower levels of stock comp, vastly improved profitability is really creating the glide path for GAAP profitability in the fourth quarter of 2026 for Unity.

William Lampen: Jarrod, any chance you might be willing to give us a little detail around the SBC trends? Like where could those go, I guess, maybe not quarter-by-quarter, but just sort of directionally, is that sort of compressing in the same way that we're seeing with amort?

Jarrod Yahes: So we experienced $76 million of SBC this quarter. That's down 20% year-over-year. It's down to 15% as a percentage of revenue. It's literally been cut in half as a percentage of revenue year-over-year. You should expect it to remain relatively stable at current run rates, which as we grow our business, will also take it down as a percentage of revenues.

Operator: And your next question comes from the line of Andrew Boone with Citizens.

Andrew Boone: I wanted to ask about AI and the increased use of tokens across the platform. Matt, as I think about what the potential is in terms of moving towards more of a usage model, can you help us unpack how the business model has to evolve as AI just becomes more of the centralized piece of Unity? And then for Create, you guys mentioned strength in terms of the nongame portion of Create. Can you guys unpack that? We haven't had an update there in a while. What's going on with that portion of the business?

Matthew Bromberg: Yes. So let me talk a little bit about the future and the future of our business model. As we've said this morning, AI-driven products are effectively a productivity enhancement for our customers. And the principle is that pricing should scale with usage and value created. And we don't want to penalize our creators for being more productive. Because ultimately, as Jarrod noted at the outset, customers value the outputs, not the inputs. And our models are adapting to that preference. So our current relationship with our large enterprise customers is already one that leverages an idea of minimum pricing that's only partially driven by the number of seats and it's really very amenable to modifications that reflect consumption.

And so the business model is evolving very organically is in the right place. And ultimately, it's driven by the quality of the products you have in the market and how much value created. As we talked about, we believe we can create and drive distinct value and our products are going to be better. And if we can deliver a differentiated value with these products because the context matters to the performance of the AI, and we can deliver product experience that's going to be fundamentally better and more performant, then we feel really good about our ability to inflect new areas of growth like consumption into our models.

The pricing of UDI currently reflects that, and it reflects not just a consumption model, but also a recognition that concurrency is important. So you will be -- in the future, we will have, of course, both human beings as well as agents interacting with our software working together and our pricing comprehends that.

Jarrod Yahes: And Andrew, in respect of Create, we're really pleased to see the step-up in growth that we've experienced over the course of the last several quarters. There's a number of things that are working well for us that we've called out. Our industry business outside of gaming continues to grow very strongly. We're really a leader in auto HMI. There's a range of use cases where people are looking to have indirective content for extremely sophisticated models available across a range of platforms and operating systems, which really plays to Unity's strength. So we believe in that business. We're seeing good strength and pull-through in that business.

We're not going to discretely call out the revenue growth or the contribution of that business.

Operator: And your next question comes from the line of Jason Bazinet with Citi.

Jason Bazinet: I'm guessing the single biggest driver of the Vector growth is just improved conversion rates. And I guess if you could confirm that. And then is there any way you can sort of frame maybe in terms of multiples, like where your conversion rates now are versus what you see as best-in-class or where this could go?

Matthew Bromberg: Jason, thanks for the question. The way we've articulated this a little bit earlier in the call in our prepared remarks is, I think, the right conceptual model for you to think about. The improvements are multifaceted and happen at each portion of the development of Vector, quality of signal, optimization of models, improvement of returns and all of that process that I've been through is really the right way to think about it.

Jason Bazinet: But don't all those drive to a conversion rate? I mean, at the end of the day, if you're making product enhancements.

Matthew Bromberg: They ultimately drive to advertiser return and advertiser return drives revenue. One of the things to think about at a high level, just notionally is that industry conversion rates are in the single digits. So when you think about opportunities for improvement in our business and an improvement in the -- for everybody in the industry, they're almost infinite. And this is why this is so incredibly exciting. As we get better and better at this, there is so much headroom for everybody in the industry to be better at conversion at a high level.

Operator: And your next question comes from the line of Omar Dessouky with Bank of America.

Omar Dessouky: Can you hear me?

Matthew Bromberg: Yes.

Omar Dessouky: It's Omar Dessouky. So let's see. For the remainder of this year, you're going to get some runtime data. Your engineers are going to be experimenting and hopefully finding improvements to your models with every passing month. I wanted to know how you think about the evolution of cloud costs and your contribution margin in the context of that and whether you want to maintain some minimum kind of contribution margin above which investments would not exceed.

Matthew Bromberg: So Omar, it's a great question. We've experienced 82%, 83% adjusted gross margins, which are inclusive of our cloud costs as the largest contributor to that COGS line. It is true that when we are in the process of investment and testing, those cloud costs can bump up in any one particular quarter, and we typically see an operating leverage that follows as a result of the revenue growth that comes from those investments. We do believe that as this business scales and grows, that there is an opportunity for long-term operating leverage with respect to cloud costs.

If you look at larger competitors in this space, their cloud costs as a percentage of revenues are materially lower than Unity's at a larger size and scale in a similar business. And so that is a significant opportunity for us. The reason why we don't talk about gross margin leverage and commit to that in concrete terms is we really want to make sure that we preserve the flexibility for our teams to invest in AI and to invest in Vector and make sure that they have those degrees of freedom to invest for growth. That is our current focus.

And so if given a preference of optimizing cloud costs versus accelerating revenue growth in the future, we would tilt towards accelerating revenue growth in the future with the knowledge that we will optimize cloud costs over time as the business scales and grows.

Omar Dessouky: Okay. So if I'm looking at the second quarter, it looks to me like your margins are guided down a little bit. Does that come from operating expenses or from this kind of contribution gross margin leverage, right? Obviously, you have runtime data coming online. I would imagine you're running more experiments. Is that the driver of the slightly lower margin? Is it something else? Or am I missing it?

Matthew Bromberg: There's a couple of components of that. One is we're continuing to invest heavily from a cloud perspective. And so as I mentioned, the gross margins would bounce around based on where we are in that investment cycle. I would say the larger contribution is the fact that we have taken some strategic actions, which are bringing down total revenue in the second quarter. There's 2 fewer months of the ironSource Ad Network, the cost of which are still in the system in the second quarter, and we would expect to leave the system in the back half of the year.

So it's that operating deleverage that hits us in the second quarter, but we know we're going to get those costs out in the back half of the year.

Operator: And your next question comes from the line of Bernie McTernan with Needham. [Operator Instructions]

Stefanos Crist: Can you hear me?

Matthew Bromberg: Yes, sir.

Stefanos Crist: This is Stefanos Crist calling in for Bernie. You mentioned the run time would be steady improvements. Could you maybe give us more detail maybe what you're seeing on the tests you're running? And when do you think that could show meaningful revenue contribution?

Matthew Bromberg: Yes. As I noted, we're really excited and encouraged by what we're seeing in our off-line testing currently, and we expect to graduate that testing to our live production models during the course of this quarter. And not to be a broken record, it's the kind of signal that builds over time and compounds rather than producing immediate spikes. We think of it as a long-term quality enhancement, a really durable mode and differentiation, but we're not expecting immediate spikes. And other than that, I would just I would observe again that we couldn't be more excited about it.

Operator: And your next question comes from the line of Benjamin Black with Deutsche Bank.

Benjamin Black: It seems that the 2028-day ROAS targeting release was a decently sized unlock. So maybe talk about the feedback you're getting from your clients. And Matt, you spoke about a promising product road map at Vector. So beyond runtime, where do you think Vector could benefit from upgrades? And Jarrod, I can't help but notice that cash is piling up on the balance sheet. Your free cash flow is improving. I'd be curious to hear throughout capital allocation priorities and how you think philosophically about supplementing the business with perhaps inorganic growth.

Matthew Bromberg: Yes. Listen, the set of product improvements that we have planned for Vector over the course of the next quarter is really exciting, and it's designed really to provide 2 different kinds of advantages for customers. The first kind is like the kind of day 28 product, more flexibility and more insight that will enable greater spend. Keep in mind, as I said before, we are very much at the beginning of this -- of the process of Vector. It's still a very young product.

And so from a features perspective, just setting aside the model and the efficiency model from the features perspective, there is still much, much more that we can do and that we're really, really quite excited about. The second piece of improvement for our customers that we're working on is ability for them to automate meaningfully in terms of how they interact with our systems and enabling them to buy more efficiently, track performance more efficiently in a more automated fashion, which we think is going to really help drive greater conversions and more spend as well.

Jarrod Yahes: And then to your second question, you are correct. Cash is building up on the balance sheet. We have $2.15 billion of cash as of the first quarter. It's a function of extremely strong free cash flow. On a trailing 12-month basis, free cash flow is up 50% to $463 million, up from $308 million last year. So there's a tremendous amount of free cash flow the business is generating with and we're poised for margin expansion in the back half of the year as well. Right now, we are planning on paying off the '26 convert that's coming due in November.

Other than that, in terms of uses of cash, we're really focused on our product road map, organic investment in our business. We think we have an extraordinarily exciting AI road map in front of us, and there is a high threshold as we evaluate M&A opportunities. So I think you'll see us be prudent with our cash, not distract our product teams and make sure we can execute on the really strong organic growth opportunity we have in front of us.

Operator: This concludes the question-and-answer session. I will now turn the call back to Alex for closing remarks.

Alex Giaimo: Thank you, everyone, for joining this morning. Look forward to speaking to everyone throughout the quarter. Have a great day.