Unity Software Inc.

Ladies and gentlemen, thank you for joining us and welcome to the Unity Technologies Q2 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 relations. Alex, please go ahead.

Thanks, Nicole. Good morning, everyone. Welcome to Unity's second quarter 2025 earnings call. We're joined this morning by Matt Bromberg, our CEO, and Jared Yays, our CFO. Before we begin, I'd like to note this conference call includes forward-looking statements, including statements about goals, business outlook, industry trends, expectations for future 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 actual results to differ, please refer to the risks 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 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 it over to Matt.

Thank you, Alex, and good morning, everybody. On behalf of everyone at Uni from across the globe, I'd like to thank each of you for joining us today. It's a distinct pleasure and a privilege for me to showcase our team's progress each quarter. After a full year leading this company, my enthusiasm about the opportunity we have in front of us has never been more profound. We believe that the second quarter of 2025 will be remembered as an inflection point where accelerated product innovation and enhanced delivery of customer value came together to spark demonstrable, sustainable growth, led by the full emergence of Unity Vector, which has far exceeded our expectations at this early stage of its development. Strength in the second quarter across both Grow and Create helped drive results that once again exceeded expectations, substantially beating the high end of our guidance for both revenue and adjusted EBITDA. Let's begin in the Grow segment. To fully understand our enthusiasm, it helps to narrow the focus a little bit. Vector-led performance inside the Unity ad network sparked 15% sequential revenue growth in the second quarter, growth which we are seeing continue into the third quarter as well. You'll recall we anticipated some softness across our other ad products during Q2, driven in part by redeployment of technical and -to-market resources towards the launch of Vector. And that dynamic did indeed temper the impact of the Unity ad network's growth on the overall ad segment revenue in Q2. However, we're anticipating that the third quarter will evidence a very different trajectory for three primary reasons. First, we're now seeing clear stabilization outside of the Unity ad network, as product enhancements and greater operating discipline bring results back into line and we begin to spread our AI-driven capabilities across our broader ad portfolio. Second, the Unity ad network now comprises approximately half of total Grow revenue, and we expect that percentage to continue to increase. As a consequence, our fastest growing product should have a greater impact on overall results in the quarters ahead. And finally, we're seeing continued increases in the value that Vector is bringing to our customers as we continue to invest in the development of the quality of our AI. Last quarter, we talked about the 15 to 20% lifts we are seeing in both the volume and quality of new users delivered through Unity Vector. In the second quarter, those results continued to climb. We now believe that the combined impact of these three factors should drive -single-digit sequential growth across the total combined growth segment in the third quarter of this year. It's worth taking a moment to understand precisely how delivering stronger results to our partners translates directly into a willingness to scale spend with Unity. Remember that performance advertisers are not allocating budget in the traditional sense, nor are they necessarily pulling share from competitors. Performance advertisers consistently increase spend up to the limit of their return requirements all the way across the efficient frontier. We are already working with 85 of the top 100 mobile games in the world, and as we strive to deliver better returns, we expect our partners will continue to invest in growth and our business will grow alongside. We also anticipate that Vector will move from strength to strength in the years ahead, as the quality and efficiency of the AI that powers our performance engine continues to improve, and we continue to extend Vector's capabilities to enhance some of the other ad products in our portfolio. The increase in confidence we have in the future of our business is actually partially derived from the fact that we've not yet tapped into our biggest competitive advantage. The deep consumer understanding we possess by virtue of Unity's position as the operating system for games globally. Unity is the leading provider of the software used to build, distribute, and run gaming applications used by billions of consumers worldwide. 70% of the top mobile games in the world are built on Unity. In our advertising business, this unique vantage point will provide our Vector AI Engine access to new and highly differentiated behavioral data, will provide a significant potential future catalyst for enhanced performance and growth. We anticipate seeing the impact of our work in this area beginning in 2026 and extending well into the future. As excited as we are today about Unity, we're equally sure that this is just the beginning. The foundation for this next generation of Unity is being launched this summer with the Unity which includes the introduction of the Developer Data Framework. The Developer Data Framework is a unified system featuring privacy dashboards that allow developers to control how data is collected, shared, and used in the production and operation of the interactive applications they build with Unity. This launch marks a critical step to ensure transparency, safety, and privacy as we improve the quality and utility of the tools that game developers use to build and grow their audiences. Since we're discussing Unity 6.2, let's take the opportunity now to transition to discussion of our Create segment, where a transformation in the way we build and support our software is now well underway. Our rededication to quality, stability, and improving the developer experience is catalyzing strong financial results in Create, including another quarter of double-digit subscription growth in Q2. We're also seeing momentum around the continued adoption of UD6, the most stable and performant version of Unity we've ever shipped, which has now registered more than 6.6 million downloads, up 50% from last quarter. The transition we're making from Unity 6 from prior versions is taking place quickly and far more smoothly than at any previous point in our history. The beta feedback we received for the Unity AI in 6.2, which is still in very early stages of development, has been both positive and extraordinarily helpful. With Vector now successfully underway, you'll see us substantially ramping our ambitions for the role AI will play in the core Unity content creation experience. Within the financial parameters we've already established, we're making significantly increased investments in talent and product in this area, and expect to be talking about it much more in the quarters ahead. Just as data from applications that are distributed on the Unity runtime have the potential to provide a long-term competitive advantage in our ad business, data from applications developed in Unity will enable our AI to transform the content creation experience, leveraging our awareness of each product and each project to predict the needs of each developer, transforming the way content is built, empowering the future of our create business. As Unity reconnects with its customers and community and fully embraces the role it plays as the operating system for games, the opportunities available for partnerships in create also move into new territory. This quarter we were proud to announce major multi-year partnerships with Tencent, one of the largest developers and publishers of games in the world, and Scopely, creator of one of the world's top-grossing mobile games, Monopoly Go. With Tencent, our expanded multi-year partnership will keep Unity at the core of some of the most popular multi-platform titles in the world for many years to come. It also highlights the continued strength of our business in China, the largest market for games in the world. We are the only company we know of able to support development seamlessly across the entire ecosystem in China, including with Open Harmony, a rapidly growing mobile operating system in that country. With Scopely, we're embarking on a new multi-year agreement that includes a long-term technical partnership across both create and grow, designed both to support the growth and operation of Scopely's games as well as to improve the Unity engine for all of our customers. On the platform side, we announced an exciting multifaceted partnership with Nintendo, who's experiencing tremendous success with the launch of the Switch 2. Our collaboration ensured that Unity 6 would be fully optimized on day one for the release of the Switch 2, so that Unity could play a foundational role in the growth and support of Nintendo's ambitions for third-party game development, commerce, and live service operations on their platform. These new partnerships are not built around selling seats. Rather, our goal is to create new business opportunities for our partners by leveraging our platform and portfolio of products in new ways. And finally, on industry, we remain extremely excited about the momentum we are seeing outside of gaming, which once again was our fastest growing subscription business, increasing sequentially for the 10th straight quarter. In automotive this quarter, we announced a deepening of our relationship with BMW, who uses Unity Asset Manager to power its groundbreaking 3D asset management platform globally. Unity's 3D technology has also been integrated into the Mercedes-Benz operating system to enhance the in-car experience of the new Mercedes-Benz CLL. In healthcare, Specto Medical is redefining pre-surgical planning and patient communication through immersive 3D visualization tools built on Unity. The use cases continue to expand, and we're more confident than ever in the long-term growth opportunity across a broad range of categories and applications. I'd like to thank all of our teams globally for their relentless effort as we transform Unity and earn our customers' trust each day and express our continued gratitude for the support of our partners and our community worldwide. We believe Unity is just one of a few companies in the world poised to benefit from the incredible opportunities that abound at the intersection of AI, digital content creation, digital advertising, and interactive entertainment. And all of us here are dedicated to making that future a reality. 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? Thank you so much, Matt, and good morning, everyone. I'm pleased to report that Unity exceeded the top end of our guidance on all measures in the second quarter. Revenue exceeded the top end of our guidance by $16 million, with adjusted EBITDA coming in $15 million above the top end of our guidance. Grow revenue in the second quarter was $287 million, down 4% -over-year and up 1% sequentially. With revenue upside compared to our guidance, driven by strong performance from the Unity ad network, where we are seeing significantly better results than expected at this early stage from Vector. As expected, the growth of the Unity ad network was partially offset by declines in other ad products. In Create, revenue was $154 million, up 2% both -over-year and sequentially, reflecting strength in our subscription business, which once again delivered double-digit -over-year growth in the quarter. I'd also like to remind investors that we lapped $21 million in non-strategic Create revenues as compared to the second quarter of 2024. Adjusting for the non-strategic revenue, Create grew at 16% -over-year in the second quarter. Non-strategic Create revenue in Q2 2025 was minimal, and we expected to remain so moving forward. Turning from revenue to non-GAAP profitability, adjusted EBITDA for the quarter was $90 million, representing 21% margins. Adjusted EBITDA exceeded the high end of our guidance, driven by continued operating leverage in the model from faster revenue growth, combined with tight controls around headcount costs and cloud spend. Our aggressive stance on improving efficiency is also allowing us to simultaneously invest behind high-impact initiatives, such as driving an aggressive roadmap around Unity Vector and incorporating AI throughout the editor experience. We continue to see opportunities for further margin expansion and operating leverage over time, particularly as we scale and grow our ads business. Unity had record free cash flow in the second quarter, coming in at $127 million and representing an improvement of $47 million -over-year, partially driven by larger restructuring payments we incurred last year. The dramatic uptick in free cash flow from the first quarter was driven by strong profitability, combined with the timing of publisher payments, which were concentrated in the first quarter. In terms of our balance sheet, cash at the end of the quarter was $1.7 billion and convertible debt was $2.2 billion. With our strong free cash flow profile and modest leverage, we have an extremely flexible capital structure that allows us to invest against our key initiatives to drive accelerated organic growth for shareholders. With that, I'd now like to turn to guidance for the third quarter. We're expecting total third quarter revenues of $440 million to $450 million and adjusted EBITDA of $90 million to $95 million. In Grow, we expect -single-digit sequential revenue growth, driven by continued performance in the Unity Ad Network, where the strong momentum has continued into Q3. Outside of the Unity Ad Network, we are seeing stabilization and expect sequentially steady revenues from Q2 to Q3. As Matt mentioned, the Unity Ad Network now represents about half of total grow revenue, and we expect that percentage to grow over time. In Create, we are forecasting a slight sequential decline from Q2 to Q3, due to the impact of a large customer win in Q2. I would note that excluding the impact of this deal, our strategic Create revenue is expected to be up in the third quarter, from both Q1 and Q2, as well as up high single digits on a -over-year basis. Our adjusted EBITDA guidance factors in the deliberate controls we're implementing around G&A and R&D spend, including efficiencies we're driving around cloud spend. Unity is also just starting to benefit from improved operating leverage, supported by adjusted gross margins of 83%. The return to revenue growth with high adjusted gross margins, combined with a lean operating structure, should result in expanded operating margins over time, even taking into account aggressive investments in Unity Vector, AI, and other high potential R&D investments. With that, I'd like to thank you for joining us on Unity's second quarter 2025 conference call. Let me turn the call over to Alex so that we can take your questions.

I think we're ready for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press star nine to raise your hand and star six to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matthew Cost with Morgan Stanley. Your line is open. Please go ahead.

Good morning, everyone. Thanks for taking the questions. Is there a potential to expand the strength that you have on the Unity ad side to the other products that grow? I guess, is there anything preventing you from taking the technology that's driving the stronger performance at Unity ads and just deploying it across the rest of the grow portfolio? And then I have one follow-up. Thank you.

Hey, Matt. Thanks for the question. Unity Vector is a highly modular system, and there is nothing that prevents us from taking that modular system and using it to improve select parts and, in fact, maybe sometimes significant parts of our other ad products.

Great. Thank you. And then in terms of just the rate of improvement with Vector, I mean, it's been a sort of a fast deployment over the course of the year. I think it was in May that you rolled it out across Unity ads. Vector was fully rolled out there. But Vector itself, what is the pace of improvement that we can expect from Vector over time? It seems like we're not even necessarily going to see the benefits of runtime data until 2026. I mean, how much low-hanging fruit is there left to drive these potential improvements just in the performance of the model?

Thanks, Matt. Yeah, listen, Vector was a really important inflection point for our business, and we implemented what was effectively a generational upgrade of our capabilities, and we moved them to a brand new neural network-based platform. It's more powerful, it's more versatile, it's more scalable than our old systems, which means that it can handle more data, can handle more complex types of data, and it can respond in real time to changes in data. So

these

are capabilities that will continue to grow as the model continues to learn, because we can process more features, both dense and sparse, and we can find important signals in what would otherwise be a vast sea of noise for us. So we expect that this investment, which to your point is really just very much at the beginning, will continue to provide lifts for us for years. And indeed, even in the immediate term, we are already seeing lifts above the 15 to 20% improvements that we saw in installs and user value last quarter. But again, these are quarter to quarter moves. But to your point, this is a long-term shift that we think is going to transform our business for many years to come. Great. Thank you.

Your next question comes from the line of Brent Phil with Jeffries. Your line is open. Please go ahead.

Good morning. Matthew on Grow, maybe if you could just characterize the next steps you're going to take in the evolution of the product. What areas are you pleased with? What areas would you like to see more improvement? And how do you characterize the next chapter, if you will, over the next few months for the rollout of the solution?

Yeah, as we've indicated and Matt pointed out, we are still very, very early in the process of rolling Vector out. And we have what we think is an extraordinary team investing in improvements and aiding the learning process for our AI. And again, very, very early for us. So what the future looks like is we continue to invest and we're going to continue to see improvements over time in the existing in our existing capabilities. And then to your point, as I noted in my preparatory remarks, we really believe there's also another inflection point for us that sits out in the future where some of the natural structural advantages that we have in the marketplace having to do with our position as the operating system for games globally. As those as as as those insights into consumer behavior on the billions of for billions of consumers that are using made with Unity applications, as we begin to bring that insight into the into our AI, we're going to see enhanced performance. And as we indicated, we we expect to see that beginning in 26 and then continuing out for many, many years to come. But in a way, this is what's so exciting for us very, very early on to a major transition, immediately seeing enhanced performance, enhanced spend and still at the very beginning of of a tactical development roadmap and not yet having taken advantage of some of the unique position that we have. In the marketplace. So that's what accounts for our for our great enthusiasm in this business.

Okay, just a quick follow up maybe for Jared, just on the 12 million dollar perpetual deal and create what can you just describe what what happened there, why that's not recurring, what what what you saw there that maybe just doesn't is an anomaly. Give us a sense of the color that that the background. Thank you.

Sure. So, you know, we're we're excited about some of the larger partnerships that we signed during the quarter. Matt mentioned several of them, namely Tencent, Scopely. There are several others that we didn't mention by name. Those those contracts are fairly far reaching. They touch multiple parts of our business. And there are some elements of those contracts, whereby virtue of the way that they are structured. There is an upfront recognition of the revenue component of them with the majority of that revenue being a traditional SAS based subscription revenue that continues to benefit the business over time. We felt necessary to call out as one component of one of the contracts. It is less than the totality of the contract by far. It's a small component of it. Just because it did positively benefit the second quarter and wouldn't continue on into the third quarter. As I mentioned, the create business continues to see strength on strength, double digit subscription revenue growth, 16 percent growth year over year of the strategic revenue and create. So we're feeling really good about the growth and create with and without this particular element of one of the contracts.

Great. Thanks.

Your next question comes from the line of Andrew Boone with Citizens. Your line is open. Please go ahead.

Thanks much for taking the questions. I wanted to go to grow guidance. You guys talked about an improvement in the non-unity ads portion of the business in terms of kind of stabilization there. If I think about commit single digit growth, does that imply that vector gains or unity add gains or slowing as I think about three Q compared to two Q. You guys just break that apart. And then Matt, as I think about the data potential of you guys incorporating more data in the data framework that's coming out with six point two. Can you just help us understand how customer conversations are going in terms of including more data within your ad products. Thanks so much. Yeah,

let me take the second one first and then Jared will take your first question. You know the. The importance of the developer data framework, Andrew, is that is that the the interaction around what data is shared and how we use it and is we're putting that control completely in the hands of customers and we're doing it in a highly automated fashion in a way that's deeply integrated into the product. So, you know, the, the, the, the sort of mental model you, you want to have here is not lots and lots of conversations with folks all over the world, but rather just as with every other technology product that that customers interact within the world. There are, there are toggles and menus where you could control what data you share with us and, and how we use it and and folks will have different, will have different predilections about that but conversation is not really required. And that's, that's really, that's really the goal here. It's just to completely normalize this to put control into the hands of our customers and allow them to to to work with us and whatever way they'd like.

And just the second part of your question on the grow guidance we've guided for mid single digit sequential revenue growth and grow comparing Q2 to the third quarter. And we do expect stabilization in the non vector part of our ad business which as we talked about is about 50% of the business so if half the business is basically going to be stable from Q2 to Q3, and the aggregate of that business is going to grow mid single digits let's call it 5%. What that implies is that there's double digit growth that we are set up for sequentially in the Unity ad network. What's exciting about that is we're seeing 10% or more sequential growth on top of the 15% sequential growth we saw the early stage of vectors development.

And I just to add it we're not expecting to break that number out every quarter as we go forward but we thought it was important to do it this quarter. Just so you could understand the drivers of what we're seeing and understand our enthusiasm about the direction of the business. Thank you.

Your next question comes from the line of Vasily Kurasiev with Cannonball. Your line is open. Please go ahead.

Thank you very much. Wanted to follow up on what you said earlier on the call here. I think you mentioned that you see a strong growth in installs. So, can you help us understand what it is that you're seeing Unity Vector doing different differently. Is it finding more impressions? Is it finding impressions that are underpriced? Are you seeing more installs per thousand impressions bought? So, would appreciate you if you could help us dimensionalize this.

Yeah, so, you know, the short answer is yes, which is to say we're seeing broad based improvement against all of the drivers that indicate we're delivering more value to add customers. And again, the best way to gauge that is just to gauge continued and increase enthusiasm. I'm spent. And it's really that simple. These are models will continue to improve. As we continue to invest in the quality and efficiency of the models, and as we continue to provide more and unique data signals over time. That's a kind of process that we feel really comfortable with.

Thank you. Quick follow up. Is the take rate changing compared to Unity ads?

No, Vasli. We're not seeing sort of material shifts in the way we're thinking about take rate and installs. We're seeing broad based growth in installs and value per customer with no significant changes in the margin profile of the business to generate net revenue.

Thank

you very

much.

Your next question comes from the line of Tom Champion with Piper Sandler. Your line is open. Please go ahead.

Hi, this is Jim on for Tom. Thanks for taking the question. Curious on the China piece. It looks like the revenue by geo there was sort of a big sequential step up in China spend. Is this vector related or or something else?

Let me take the first part of that. Jared, you can you can jump into the second part. We're really excited about the opportunities we have in China, as I mentioned. And the vast majority of that activity is really related to improvements in our core create business. Where we have expanded our relationships with some major customers in that space and where the utility of the Unity engine and its ability to work across all the platforms in China are really kind of starting to take root to help us grow that business.

Yeah, and Jim, I would just add to that that our business in China was up about $20 million sequentially, which is truly very exciting. Some component of that growth was due to growth in the create element and other parts of the growth was due to growth in grow. And so we are seeing broad based growth in China across both the platform side of our business as well as the advertising side of our business.

Great, that is helpful. And just a point of clarification on the 49% for Unity ads. Is this solely the DSP?

Not exactly sure what you mean, Jim, but this is the entire Unity ad network component of the grow business. The other portion of the grow business that is not related to the Unity ad network is the piece where we are later to introduce vector. And that comprises a number of different ad products. So I think the Unity ad network is really the DSP side that you are referring to.

Okay, got it. Thank you.

Your next question comes from the line of Alec Brondolo with Wells Fargo. Your line is open. Please go ahead.

Yeah, hey guys. Thank you so much for the question. Maybe I'll say I think the debate on the stock this morning is the extent to which the better Unity ad network growth in the second quarter was cannibalizing iron source spend as opposed to incremental to kind of like Unity corporate or the business overall. And so maybe any thoughts on that concept kind of incrementality relative to cannibalization would be helpful. And perhaps a sense check on your level of confidence that as iron source or the non vector portion of grow revenue starts to stabilize, we won't see a deceleration or deterioration in the improvement in the rate of growth of the Unity ad network. That would be super helpful. Thank you.

Yeah, I'll take a piece of that. And Jared, if you have anything else to add, let me know. So we're quite clear that the cannibalization that there is really no meaningful cannibalization impact at all. It's important to understand that our ad products operate in a big broad competitive marketplace with some of the largest most sophisticated companies competing every day. It is not unity against unity. So spend flows to where the return is. And we estimate that the cannibalization of our other ad network to unity is less than 10%. So that's just demonstrably not what's happening. What's happening is that as we continue to increase the value we provide to customers, they will continue to spend and that will drive growth. I don't think there are any natural structural barriers to that continuing. All we need to do is continue to improve the quality of the AI we use to deliver that value, which we'll do and we'll continue to grow the quality and base of the of the data that's provided.

Alec, I think we've done some detailed analysis around this and it really supports the number that Matt put out there with respect to cannibalization. I think the other proof point I would look to is as you look to the third quarter, we're seeing ongoing continued significant growth in the unity ad network and stabilization and some of the non vector ad elements. And so it's really starting to come through for us and we're really excited about what we're seeing. Yeah,

and just to add again, part of the reason in my prepared remarks where I spent a little bit of time trying to explain the dynamic with customers is because I do think there's often this mental model where folks thinking or thinking about share shifts and cannibalization and other things. And I just don't think that's the best way to understand the dynamics in our business.

Perfect. A 10% data point is really helpful. Thank you, guys. Yep.

Your next question comes from the line of Dylan Becker with William Blair. Your line is open. Please go ahead.

Hey, gentlemen, appreciate it here. Maybe Matt, since you called out kind of the content creation side of the equation, I wonder how your view on kind of like the strategic importance of the create platform evolves around kind of the proliferation of content, particularly in kind of managing quality and relevance and kind of reducing friction around that kind of user and publisher experience, if that makes sense.

So are you interested mostly in sort of the role that AI is going to play and create in terms of helping folks make games or are you more interested in the, just maybe, maybe just clarify for me.

Yeah, no, in this kind of proliferation of content, right, the strategic importance that unity can play in that ecosystem of kind of helping publishers navigate in sift through that to maintain kind of optimal user experiences, if that makes sense.

Yeah, I mean, look, one of the things that we're really excited about is how much AI and how quickly I has moved the center of our future, you know, we've talked a lot about vector and, and we talked a lot about how our investment and our investments in AI are driving our grow business. On the create side, the AI opportunity is also really, it's really enormous. Because remember, as I've said before, uni's greatest strength is its extensibility and openness. We're an assembly point for folks who create interactive content. We're agnostic as to which tools they use and where 3D assets come from. We're going to be the platform, the orchestration layer for AI led interactive content creation going forward. And the fact that we are context aware of the project, the fact that the, that we're the platform where the project is being built, is going to give us unique insights that will allow our customers both to make games more quickly and efficiently, and to be able to apply much more innovation and have much more time to create. Because we're going to take away over time, some of the drudgery and complexity of content creation. And at the same time, when it comes time for customers to then reach out and grow those games and to find new customers. The fact that that the game is being distributed on our runtime is going to give us unique capability to power our AI to enable folks to acquire new users more efficiently and more effectively. So we just, we're extraordinarily excited about sort of how the world is developing around us. And we're really excited to see how having made some investments in core capabilities at the company, we're able to bring those capabilities to bear for our customers over time.

Perfect. That's all. Thank you, Matt. And maybe Jared, I think you had a vector point has kind of been hammered home here as well too. But as we think about kind of the performance improvements on the grow side of the business, understanding the opportunity to reinvest and really kind of double down on some of those initiatives, but how should we be kind of thinking about the incremental flow through from a margin perspective within the growth side? Thank you.

Yeah, so we spoke about this a little bit in our prepared remarks, but the company is blessed with very high contribution margins are adjusted gross margin in the business is 83% with the incremental contribution margins, probably higher than that. We expect fully and are beginning to see meaningful operating leverage in our business. And we've done some of the hard work of getting the cost structure to the right place to make ourselves more efficient, more effective in the way we run and operate the business to really prepare ourselves for benefiting from that operating leverage as we return to growth. So we're excited about that. We think there's a lot of potential for upside in the margin structure of the business. And I think we're doing the right things to make sure the cost structure is lean and mean to benefit from the return to revenue growth that we're starting to experience and grow.

And it's a great point. And I would just add and amplify that part of what's what's really exciting about the way the opportunities laying out for us is that, you know, despite making really aggressive investments and everything that we feel like we need to invest in to create future growth, we're seeing substantial and sharp improvement in margins as we go. And that's not always the case. But to Jared's point, a combination of making really tough choices and prioritizing what is important to us as a business and some quality execution of our of our teams around the world are enabling us to have a little bit of have our cake and eat it too. And that's really exciting. Thank

you both.

Your next question comes from the line of Bernard McTernan with Needham. Your line is open. Please go ahead.

Great. Thanks for taking the questions. Just a couple of follow ups on Grow. One to ask on bringing vector to the other parts of the UND ad network and to simply like when will you know it's the right time to do so and what do you need to see, or what are you looking to see to eventually make that change or bring it over?

That's that that's going to be a thanks for your question. That's going to be a gradual and constant process. As I said, the vector technology is highly modularized. And so we're going to see opportunities to use it to improve our other businesses. We see some now we're already investing in starting to see some of the impact. And that will be a process that's ongoing for you know, for many years that the idea of bringing AI and flexed performance enhancements to data driven products, just that concept. That's going to be a theme for us forever. So, you know, the mental model is not one where it's like, hey, we're going to, there's going to be some day where we see this opportunity and then we're going to edit and it's going to begin and end. It's going to be a process of constant improvement. But, but what is exciting for us is that as we get past the vector launch, it is providing some additional bandwidth for us to start to look at other opportunities across our business to invest more in using AI to drive the creation experience on the create side to continue to invest in other ad products and sort of pick our heads up and start to spread some of that goodness throughout the whole company. So the the the launch of vector has provided some additional bandwidth there, but that's going to be a constant a constant thing.

Bernie, one thing I would add is, it's not just using what we've learned in vector and the other ad products that will enable us to get those products back to growth. Each of those products has a right to win in their own individual place. And there are a series of operational improvements, go to market changes, R&D innovations, where we think that those products each have great potential opportunities. So it's not just the application of machine learning and AI to those products. But there are roadmaps for clear returns back to growth for each of those products that we're now, as Matt mentioned, able to return our attention to to reinvigorate the growth in those areas.

Understood. Thank you. And just one more, if I could. Understood the guidance on the sequential increase on UD ads. Just wanted to level set just, you know, given this is new, like, are we assuming no additional improvement in the in vector from here? So basically, any continued model improvements would be would be upside to the guide potentially, or just kind of want to understand that the guidance methodology given this is still relatively new.

So, so Bernie, I think we have the benefit of having been through the month of August as we provide this guide and we're, you know, partly partly there. And we're seeing the benefit that we received also in the month of July. So we're, you know, probably six weeks in and have that experience. We really like what we're seeing. We're looking at the run rates. We are continuing to make improvements each and every day. And right now we're guiding based on what we see with six weeks into the quarter. But we are consistently being surprised and we're really thrilled with what we're seeing. But I would also note that we are early. We are early in this journey. And so, you know, we are we are appropriately waiting the risk of future opportunities, but we're also considering the fact that we're early in this journey and we don't want to get too far ahead of our skis in terms of the way we're thinking about the future quarterly growth of the vector in the Unity ad network.

Understood. Thanks, Jared. Thanks, Matt.

Your next question comes from the line of Chris Kentarek with UBS. Your line is open. Please go ahead.

Great. Thanks for taking the question. Can you talk a bit about the scalability of ad spend on vector? We've heard in our checks about the strong performance improvement, but we've also heard a bit of pushback on vector on the scalability side of things. So is there an opportunity to invest in product to improve ease of spend? Thanks.

Listen, just to echo the point that Jared just made, it's important to remember that we are just a very few short weeks into having rolled out this system. And the answer, the short answer to your question is yes. While we're, and let's be clear, while we're really pleased with the results we're seeing, we also see nothing but work ahead of us. I mean, we are just scratching the surface here. So yes, many customers are seeing lifts. And yes, those lifts are being seen across genres and across geographies, but there are also some customers that have not yet seen those lifts or where those lifts have hit a point of diminishing returns where they can't get the scale they want. Every advertiser wants infinite scale at their return requirements. And we want to deliver those, but that's work that needs to be done, both in the quality of our systems and the fine tuning that we do with each customer in terms of how we manage those accounts. And that's the day to day work of our lives. And that's part of what these channel checks that you guys are all doing don't really capture. It's, you know, each customer has, we have a team on each customer. We're working with each customer, and each customer has its own story. We deliver better capabilities across our systems, and then we work with each customer in each genre and each geography to try to optimize those returns. But that is a, and by the way, the macro environment is changing every day as well. Right? So this is just what it is to be in this business, and we're feeling really good about it. But there's, yeah, there's nothing but opportunity.

Got it. Very helpful. And maybe just one follow up. Can you just talk a bit about the pacing throughout 2Q? I just want to make sure I understand the 15% sequential growth in 2Q, and now you're trending to double digit growth, quarter to date in 3Q. Were you, through the months of April, May, and June, trending to that 15% sequential growth, or was there accelerating spend dynamics as you move throughout the quarter? Thanks.

You know, let me just say at a high level, again, it was our goal in sort of getting a little bit granular this quarter and talking about this is what we want to provide as much transparency as we could about, you know, what we're seeing so you guys would understand the overall trajectory of the business. What I don't think would be helpful would be to like to break this down any further. And as I said, we're not going to be delivering this level of detail going forward, because I don't think it's particularly helpful. I think the most important thing to understand is that, yes, we're very early in this. We're seeing very good early returns. We're seeing those returns build. And we expect that we have effectively unlimited runway to continue to build on those returns. And beyond that, I think just our general guidance is what we lean back on.

That's helpful. Thank you.

Your next question comes from the line of Parker Lane with Stiefel. Your line is open. Please go ahead.

Yeah, hi. Good morning, guys. Thanks for taking the question here. Jared, nice to see Dollarbase Net Expansion get back to 100. You know, the changes in the composition of the Create Revenue Base and the new vector model. I was just wondering how you could characterize D, B, and E across the two businesses. And when we look at the upside potential, are you thinking something in line with what we saw towards the end of 22 in the data sheet, or is there potentially a higher upside at a steady state?

Yeah, so we are pleased with what we're seeing in terms of net revenue retention, which is disclosure we've made. We've seen it go up quarter on quarter for the last several quarters. That's really a function of the underlying business health being there both in create and grow because that metric is ultimately an output that comes from improvements in our pool for our existing create customers, as well as improvements in spend for our growth. And so that's a really important part of our growth strategy for our growth revenue business. As you think about the future potential for upside, the scale of our grow business is such that improvements in that metric is really going to come from customer spend increases and grow. The pace of price improvements in create is going to be modest and stable. We expect to be able to give our customers predictability and stability. And so you would expect that the improvements in that metric will largely be driven by meaningful improvements in our grow business and meaningful improvements in customer spend through our platform.

Understood. Thank you.

Your next question comes from the line of Richard Kramer with a rep. Your line is open. Please go ahead.

Thank you very much, Matt. One of the big questions or debates with investors seems to be over the strategic importance of mediation and collecting signal on ad pricing and inventory. Can you talk about that as part of your unity grow offering and whether you see deeper integration of mediation with other grow features like the DSP is unlocking more potential and inventory and sales?

Yeah. Hey, Richard. Thank you for the question. We believe that we are uniquely positioned in this marketplace, as I've described by virtue of being providing the operating systems for games globally. So it's not our contention that mediation isn't helpful. It's just that it's our contention that that we don't need to win a mediation in order to in order to prosper and grow the business. We have first party relationships with billions of customers already and billions of players of end users already and as well as with the creators of those games. And by the way, I'm not at all sure that the future of that of mediation ought to be a system which locks customers in to mediation by virtue of their use of user acquisition. We'll have to see how that plays out over time. But what we're focused on now mostly is continuing to deliver value and user acquisition, providing more value and user acquisition is sort of the path through which all goodness takes place. And we're going to continue to build out the value and usefulness of our platform and we'll take it from there.

Okay, and then maybe just a very quick follow up, you know, mentioning partnerships with the likes of Tencent and Scopely. They're obviously huge names in mobile gaming and gaming generally for Tencent. Can you give us a sense of the timeline when these sort of partnerships are likely to yield actual deeper integrations or games which which build in all of your SDK elements and how you see those progressing? Because they're obviously both of them are really leading lights in the industry.

Yeah, I won't. I won't. I won't comment specifically about those customers and the title is related to those customers. But let me back and just speak slightly a little bit more general. What the what the announcements there and as well as the conversation we're having around Nintendo is really meant to to to point out is that for the first time I think maybe in our in our history, we've been able to begin to package the full value of our platform for customers and have really high level strategic conversations about how we can partner to both help them grow out to help them grow their business. Their their user base as well as build games more effectively, more efficiently. And there are deep connections between those two things as we've talked about this morning and we've talked about many times before. So our ability to bring those to bear with customers and these broad relationships marks a change in our strategy and our ability to execute, which will enable us to take advantage increasingly of our of our position as a platform as a meaningful platform in this ecosystem. And that's the piece I think that over the years is, you know, it has promised that you need is always had, but we haven't been able to access because each customer is different. Again, I won't go so much into the details there. But generally, these are, you know, it the process is not an incredibly lengthy one. It's it's a process of optimization. So as I as I refer to in a question that we we had a couple of questions ago when you work with customers at an individual level every day to enhance returns and the more connected you are at the at the level of information and data exchange, the more opportunity there is to optimize. But that is something that takes place over time and you work on it every day. All it needs to do is get better and better every day. And you're going to be in really good shape.

Okay, thanks.

Your final question comes from the line of Martin Yang with Oppenheimer. Your line is open. Please go ahead.

Hi, thank you for taking my question. First, I'll grow. Can you talk about maybe interquarter trajectory of vectors benefit for unity at network? Do you see pretty consistent sequential run rate increase for unity ads in the second quarter? And has that trend continued in July and August to date?

Sure, Martin. This is Jared. Let me take that. You know, we are extremely pleased with the 15% sequential growth we experienced in the second quarter. I would remind investors that we did not have all components of unity vector fully rolled out over the course of the second quarter. So that's really exciting. We saw strength on strength. So I think each month was better than the last over the course of the second quarter. That strength has continued in the month of July and into August, which really what gives us the confidence to talk about mid single digit sequential growth in our overall grow business in the third quarter. We're really pleased with what we're seeing. We're pleased with the ongoing momentum. And more importantly, we understand that we have a really robust product roadmap and enhancement roadmap ahead of us. There's a lot of investments and improvements yet to come, followed by the introduction of some of the unique data that we have and data assets that we expect to avail of that should positively impact our business in 2026. So we're really pleased with where we are pleased with the investment roadmap in front of us and pleased with what we're setting ourselves up for for next year.

Thank you. That's it for me.

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

Yeah, we want to thank everyone for joining this morning. We look forward to catching up with everyone throughout the quarter. Have a great day.