U Q1 Earnings Call: Unity Highlights AI Ad Platform Progress Amid Lower Revenue Outlook

Game engine maker Unity (NYSE:U) beat Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 5.5% year on year to $435 million. On the other hand, next quarter’s revenue guidance of $420 million was less impressive, coming in 1.9% below analysts’ estimates. Its non-GAAP profit of $0.24 per share was significantly above analysts’ consensus estimates.

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StockStory’s Take

Unity’s first quarter performance reflected the early impact of its AI-driven advertising platform, Unity Vector, and strong adoption of Unity 6 in its Create segment. CEO Matthew Bromberg credited the company’s “accelerated rollout of Vector ahead of schedule,” which delivered a 15% to 20% increase in installs and in-app purchase value on iOS compared to previous models. Management pointed to double-digit subscription growth in Create, particularly from non-gaming industries, as another positive factor, and emphasized that transitioning away from low-margin professional services has improved the revenue mix. CFO Jarrod Yahes highlighted disciplined cost management—especially in general and administrative and sales and marketing expenses—as a key contributor to margin improvement.

For the coming quarter, Unity’s guidance reflects a cautious stance, shaped by a mix of internal transitions and ongoing industry challenges. Management noted that although Unity Vector has begun to yield higher advertiser returns, the financial benefits will take time to be fully visible as legacy ad products are phased out. Bromberg stated, “Our confidence in the future of our Grow business has never been stronger,” but also cautioned that the company is “being prudent about how we’re guiding this business” given its early stage. Yahes explained that increased cloud costs from operating both legacy and new ad models will normalize in the second half, supporting better profitability. Management also acknowledged the broader macroeconomic environment but said gaming’s resilience and the focus on performance-based advertising should buffer major impacts.

Key Insights from Management’s Remarks

Unity’s leadership attributed Q1 results to rapid AI ad platform deployment, strong subscription momentum, and deliberate resource reallocation. Management also identified a multi-quarter transition period as a significant factor affecting near-term results.

• AI-powered ad platform rollout: The full migration of Unity’s ad network to the new AI-driven Vector platform was completed ahead of schedule. Management reported that Vector delivered a 15% to 20% lift in installs and in-app purchase value for iOS advertisers compared to the legacy system. Initial Android results are tracking similarly.

• Shift toward high-margin subscriptions: The Create segment saw double-digit year-over-year subscription growth, offsetting declines in low-margin professional services. Subscription revenue now comprises nearly 80% of Create, with industry verticals outside gaming contributing meaningfully to growth.

• Resource reallocation to Vector: Unity aggressively shifted investment toward machine learning and cloud infrastructure to support Vector, while reducing costs in general and administrative and sales and marketing. R&D spending increased, but management expects these costs to normalize as legacy ad models are retired.

• Non-strategic revenue runoff: CFO Jarrod Yahes clarified that sequential declines in Create are primarily due to planned reductions in non-core revenue streams, which now account for under 2% of total revenue, providing a clearer focus on core growth areas.

• Platform expansion beyond gaming: Management highlighted new customers in healthcare, industrial training, and digital twins, citing consistent revenue growth from non-gaming verticals for nine consecutive quarters. These emerging use cases are now the fastest-growing part of Unity’s subscription business.

Drivers of Future Performance

Unity’s near-term outlook is shaped by ongoing migration to its AI ad platform, normalization of costs, and continued uptake of core subscription products.

• AI-driven ad business ramp: Management expects Unity Vector to drive long-term revenue growth as advertisers see higher returns and shift budgets to the platform. However, in the immediate term, overall Grow segment revenue is tempered by declines in legacy ad products as customer spending transitions to Vector.

• Normalization of cloud and R&D costs: With the completion of the Vector migration, Unity anticipates cloud and R&D expenses will decrease in the second half of the year, supporting margin improvement. CFO Jarrod Yahes noted that operating leverage from high gross margins should enable profitability as ad business scales.

• Industry diversification and new pricing: The company is seeing early success from expanding Create into new industry verticals and implementing price improvements. Management expects these trends, along with continued seat growth, to support double-digit subscription revenue growth through 2025.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will monitor (1) the pace at which advertisers increase spend on Unity Vector and whether it sustains its reported performance gains, (2) the impact of normalizing cloud and R&D costs on margins as legacy ad models are fully retired, and (3) the continued expansion and retention of non-gaming industry customers in the Create segment. Developments in product pricing and successful delivery of new platform features will also be critical for validating Unity’s growth strategy.

Unity currently trades at a forward price-to-sales ratio of 5.7×. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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