Unity Software Inc.

quarter 2025 earnings call my name is alex giamo and i recently joined unity to lead investor relations i'm thrilled to join the team and look forward to working with all of you today i'm joined by matt bromberg our ceo and jared yeas our cfo before we begin i'd like to note that this conference call includes forward-looking statements including statements about goals business outlook industry trends market opportunities, financial performance, and similar items which are subject to risks, uncertainties, and assumptions that could cause actual results to differ from those expressed in these forward-looking statements. We undertake no obligation to update any of our forward-looking statements. For more information about factors that may cause results to differ, please refer to the risk described in our most recent Form 10-K, particularly in the section entitled Risk Factors, as updated by additional filings we make with the SEC from time to time. Today's call will include both GAAP and non-GAAP financial measures. Non-GAAP financial measures are in addition to and not a substitute for or superior to GAAP results. A full reconciliation of GAAP to non-GAAP financial results is available in our earnings release, which can be found on our investor relations website and on the sec.gov website. With that, I'll pass the call over to Matt.

Thanks, Alex. That's really good to have you with us, and good morning, everybody. On behalf of all the people of Unity, I'd like to thank each of you for joining us today. The transformation of our company gained significant momentum in the first quarter. Through our commitment to building a culture of execution and discipline, reestablishing trust with our customers in the community, and accelerating both the pace and quality of our product innovation, we're creating the conditions to catalyze rapid growth at Unity. In the first quarter, strength across both the grow and create segments helped drive results that exceeded expectations, beating the high end of our guidance for revenue by 5% and adjusted EBITDA by 29%. The progress in our grow business has been particularly encouraging. Last quarter, we announced the intention to migrate the Unity ad network to our new AI platform, Unity Vector, by the end of Q2. Today, we're excited to report that this migration has already been fully completed, with all of the iOS and Android traffic on the Unity ad network now running on Vector well ahead of schedule. This is a significant first milestone and a testament to our commitment to rapid, continuous product innovation in our advertising business. With Vector now operational, we can begin to leverage data from across the Unity ecosystem to provide deeper insights, optimize performance, and deliver better return on investment for our customers. Our journey to compete in a fundamentally new way has now officially started as our self-learning models adapt in real time, helping customers navigate an increasingly competitive mobile marketplace. The accelerated timeframe of the vector rollout means that our customers are already experiencing a lift in the return they're seeing from spending with Unity. In iOS, where we've now had enough time to develop reliable data, Vector is providing a 15 to 20% lift in both the number of installs and the value of in-app purchases when compared to our old model. That means more players and more players who spend more, providing our advertisers with a higher return on their investment with us. Although our Android migration is more recent, it's happily on a similar trajectory to where iOS was during the same period of development. Now we look forward to the next phase of our plan, where we'll work closely with our customers to help optimize and enhance the performance of their user acquisition capabilities over time, while also continuing to invest in improving the fundamental AI each day. These strong early results not only provide confidence that we're on the right track with Vector, they also enable us to continue to take an aggressive approach with respect to the modernization of our ad business overall. Our primary focus is on creating meaningful, sustainable revenue growth over the long term. That means we don't hesitate to move resources to our best performing products, short-term revenue impacts notwithstanding. As a consequence, in Q2, investors won't yet fully see the vector-driven lift in our financial results. That said, our confidence in the future of our growth business has never been stronger. We're equally excited about progress in the create business. Unity 6, the most stable and performant version of Unity we've ever shipped, has now registered more than 4.4 million downloads since launch. 43% of our active users have already moved to Unity 6, with recent survey data suggesting that more than 80% of users are currently intending to upgrade. And we can see this enhanced connection to our customers flowing through to our financial results as well, with subscription revenues and Create growing double digits year over year in the quarters. In April, we launched Unity 6.1. 6.1 is the first release to leverage our new production testing methodology, which validates our software in real production environments to ensure that our customers never again have to choose between adopting new features and maintaining stability. Unity 6.1 also significantly enhances the number of platforms our developers can reach, including day one support for Nintendo Switch 2, MetaQuest, Android XR, foldable Android screens, instant games, and web GPU. For the Switch 2, we battle-tested Unity through a first-of-its-kind partnership with Konami, where our internal teams built a full launch title called Survival Kids, The valuable feedback obtained during the development process of this game will drive future enhancements to the Unity engine. We're particularly optimistic about the future potential of AR and VR gaming and entertainment. With recent research from new gen apps predicting the market will reach 216 million players worldwide by 2025. Our goal is to stay at the forefront of this evolution and for Unity to continue to be the go-to platform powering AR and VR experiences, where we're already powering the majority of the top applications in the marketplace. As one measure of Unity's continued strength with the next generation of game developers, not four or five, but all nine of the nine game categories at the Independent Gaming Festival Awards of 2025 went to games made with Unity, In addition, Neva by Nomada Studios and Thank Goodness You're Here by Coalsupper both won 2025 BAFTA awards with Made With Unity titles, an incredible recognition of the talent and creativity in our community. And finally, the growth of the Unity platform beyond games into other industry verticals continues to represent the fastest growing part of our subscription business. Consistent strong demand across a wide variety of industries and use cases has resulted in both nine straight quarters of sequential revenue growth, as well as meaningful year-over-year revenue growth as well. New customers include Philips, using Unity for minimally invasive surgery simulation, Siemens, who is modernizing its training and workforce development, and Toshiba Elevator and Building Systems, who is creating digital twins of installation sites. The Unity platform has tremendous potential outside of gaming, and we are increasingly optimistic about our ability to capitalize on this opportunity at scale. I'd like to thank all of our teams globally for their relentless efforts as we continue to transform Unity and earn our customers' trust each day. It's the only company we know of that is capable of supporting developers across the full life cycle of development. Uni plays a unique role in helping our customers move from prototype to profitability faster and more efficiently than ever before. It's a role we feel privileged to play. Thank you again for your time and attention this morning. With that, I'll pass it over to Jared for an overview of our financial performance. Jared?

Thanks, Matt. I'm pleased to report that Unity exceeded the top end of our guidance on all measures in the first quarter. Revenue exceeded the top end of our guidance by 20 million, with adjusted EBITDA coming in 19 million above the top end of our guidance. Grow revenue in the first quarter was 285 million, down 4% year over year, with revenue upside compared to our guidance, partially driven by an acceleration of the rollout of Unity Vector, where we're seeing better performance than expected at this early stage. In Create, revenue was 150 million, down 8% year over year, driven by our transition away from the low margin professional services business. Through this deliberate transformation, we've optimized our revenue mix with high margin subscription business now representing nearly 80% of create revenue. Our core subscription business continues to demonstrate strong momentum, delivering double digit year over year growth this quarter, positioning us for sustainable, profitable expansion. Turning from revenue to non-GAAP profitability, adjusted EBITDA for the quarter was 84 million with 19% margins. Adjusted EBITDA margins expanded 200 basis points year over year in the first quarter, driven by operating leverage in the platform and solid cost management across expense lines, particularly in G&A and sales and marketing, where total expense was down roughly 20 million year over year. R&D costs are up $10 million over the last few quarters as a result of heavy investment in Unity Vector. We would expect those costs to normalize in the back half of the year as we transition away from running both our legacy and new Unity ad models in parallel. Pre-cash flow in the first quarter was $7 million, an improvement of $22 million year over year. The first quarter is traditionally the most modest seasonally from a free cash flow standpoint, given the concentration of prepaids, personnel costs, as well as payments to the supply side of the grow network. As we focus on driving per share returns, in the first quarter, we've started to report out on adjusted EPS in our disclosures. Adjusted EPS in the first quarter was $0.24, and investors should expect to see a sharper focus on minimizing shareholder dilution and stock comp expense, which came down nearly $45 million year over year as we lapped M&A-related vestings. In terms of our balance sheet, cash at the end of the quarter was $1.5 billion, and debt was $2.2 billion. In February, we priced a 690 million convert and the offering was extremely well received. The deal was upsized and priced with zero coupon and a capped call with a cap price of $47.74. We used the proceeds of the offering to repurchase $688 million of principal balance of 2026 notes and effectively extend those maturities into 2030. This transaction ensures that Unity has the capital structure with a smoother debt maturity profile, and we now feel extremely comfortable with where we are from a financing standpoint. With that, I'd now like to turn to guidance for the second quarter. We're expecting total second quarter revenues of $415 million to $425 million and adjusted EBITDA of $70 million to $75 million. In Grow, we expect steady sequential revenues driven by improved performance of Unity Vector. This revenue growth is expected to be offset by declines in select legacy ad products in the second quarter. However, as the performance of Vector continues to improve, we expect to see the overall Grow business return to revenue growth with the performance improvement from Vector outpacing any other headwinds we face. In CREAT, we expect continued momentum in our subscription business across the gaming and industry verticals. However, we're forecasting a slight sequential decline in CREAT due to an expected runoff in non-strategic revenues. Before turning the call over for questions, I'd like to extend a warm welcome to Alex Giammo, who recently joined Unity as our new head of investor relations. And with that, I'd like to thank you for joining us on Unity's first quarter 2025 conference call. And let me turn the call over to Alex so that we can take your questions.