Unity’s second-quarter results were better than I expected.
The turnaround is no longer based only on layoffs, discontinued products, and promises about future technology. Vector is producing real revenue growth, margins are expanding, cash flow is improving, and management now expects Unity to reach GAAP profitability one quarter earlier than previously projected.
That is the good news.
The less exciting news is that the stock has already noticed. At approximately $45.45, Unity is no longer priced like a broken company that merely needs to survive. It is increasingly priced like Vector will continue working.
A Much Better Business
Unity reported second-quarter revenue of $546 million, up 24% year over year. Strategic revenue, which excludes the businesses management is discontinuing or selling, grew 38%.
The profitability improvement was even more encouraging.
GAAP gross margin increased from 74.1% to 79.6%. Adjusted EBITDA rose 77% to $160 million, producing a 29% margin. Free cash flow reached $202 million, up 59%, with a 37% margin.
GAAP EPS improved to a loss of only $0.05. Management now expects Unity to become GAAP profitable in the third quarter, one quarter earlier than its previous Q4 target.
One quarter of free cash flow should not be confused with normalized earning power. Working capital and the timing of customer payments can make quarterly cash flow uneven. Nonetheless, the direction is becoming difficult to dismiss.
This is no longer just a cost-cutting story. Revenue growth and operating leverage are now working together.
Vector Is the Main Story
The most important number was Strategic Grow revenue, which reached $329 million, up 63% year over year.
Vector grew nearly 23% sequentially during the quarter. Management had originally expected approximately 12% growth. Its annualized revenue run rate has now exceeded $1 billion, reaching that milestone ahead of schedule.
The obvious question was how much of this growth came from migrating customers away from Unity’s discontinued ironSource advertising network. If Vector were simply moving revenue from one Unity product to another, the headline growth would be much less meaningful.
According to the CFO, only approximately $3 million of Vector’s sequential growth came from ironSource migration. Most of the improvement was organic, driven by better advertising performance and customers allocating more money to the platform.
That distinction matters. Vector is not merely replacing a declining Unity product. It appears to be taking additional advertising budgets.
Unity expects Vector to grow another 19% to 21% sequentially in Q3. Strategic Grow revenue is projected to reach approximately $382 million, representing nearly 69% year-over-year growth.
At some point, this growth will slow. The question is whether it slows after Vector becomes a much larger business or before.
Why D28 Matters
Unity introduced more than 20 significant Vector updates during the quarter. The most important was D28, which expands the return-on-ad-spend measurement window from seven days to 28 days.
A seven-day model can undervalue users who continue spending money several weeks after installing a game. By observing a longer period, Vector should be able to make better predictions about which users are genuinely valuable.
More than 25% of Vector customers have already adopted D28, and advertising spending using the feature nearly tripled sequentially.
This does not guarantee that the improvement will continue indefinitely. Advertising models can reach diminishing returns, and AppLovin, Google, and other competitors will continue improving their own systems. If competing platforms close the performance gap, Unity’s ability to retain an outsized share of advertiser budgets—and its long-term margins—could come under pressure.
Still, better models across the ecosystem do not necessarily make mobile advertising a zero-sum game. An analyst raised this issue on AppLovin’s earnings call, asking whether advertisers that increase spending on one platform are simply shifting budget away from another. Management’s answer was that improved targeting can expand the overall market: when better models produce stronger returns for game publishers, those publishers earn more and can reinvest more in user acquisition.
In other words, differentiated data and better prediction can raise the ceiling for the customer, leaving room for multiple platforms to grow.
That is encouraging for Unity. Vector does not need to take every dollar from AppLovin or Google to become much more valuable. It needs to deliver sufficiently strong incremental returns that developers and advertisers expand their total spending on the platform.
The Data Advantage Is Only Beginning
Potentially more important than D28 is Unity’s integration of runtime data into Vector.
Approximately three billion people play games built with Unity every month. Unity has started feeding data from those games into Vector’s models to improve its understanding of player behavior.
This rollout began late in the second quarter and had only been active for approximately six to eight weeks by the August 6 earnings call. Its contribution was therefore only partially reflected in Q2.
This is the part of the Unity thesis I find most interesting.
Unity has always had enormous distribution through its game engine, but it historically failed to turn that distribution into a strong advertising advantage. If Vector can use Unity’s runtime data without harming developers or violating privacy restrictions, the engine and advertising businesses could finally reinforce each other.
More games built with Unity would generate more behavioral data. Better data could improve Vector’s predictions. Better advertising results would attract additional advertiser spending and produce higher revenue for developers. That, in turn, would make Unity’s ecosystem more valuable.
It is still too early to call this a durable moat. But for the first time in years, the theoretical Unity flywheel appears to be producing visible financial results.
Create Is Quietly Improving
The advertising business received most of the attention, but Strategic Create also performed reasonably well.
Strategic Create revenue reached $157 million, up 5% year over year. Last year’s comparison included a one-time licensing payment of approximately $12 million. Excluding that payment, underlying Strategic Create revenue grew approximately 14%.
Total Create Solutions revenue, which includes the shrinking non-strategic Create business, was $158 million, up 2% year over year.
Growth was supported by pricing changes, higher minimum commitments, and strong performance in China. Management expects Strategic Create revenue in Q3 to grow approximately 7% to 10%.
Create does not need to become a high-growth business for the investment to work. It needs to remain the leading game-development platform, generate dependable cash flow, and provide the distribution and data that strengthen Vector.
The more tightly these businesses work together, the more difficult Unity should become to replace.
Unity 7, Commerce, and Netflix
Unity 7 is scheduled for preview in December 2026, followed by a formal release in the first quarter of 2027.
The central idea is to allow human developers and AI agents to work together inside Unity. The platform will expose MCP, API, and command-line environments so that AI agents can interact more directly with development tools and online services.
Importantly, Unity does not plan to force developers through another disruptive migration. Unity 6 projects should be able to move gradually rather than repeat the frustration created by earlier product decisions.
Unity Commerce was formally launched on June 30. It currently supports in-game web payments and direct-to-consumer stores without charging developers.
In the short term, Commerce is unlikely to contribute much revenue. Its more immediate value is data. Payment information could help Unity understand which users eventually make purchases, improving Vector’s ability to predict long-term value.
Unity also announced a multi-year partnership with Netflix to support Netflix’s cross-platform social-game ecosystem. I would not assign substantial valuation to this partnership yet, but it is another indication that Unity remains relevant to large companies trying to build across multiple platforms.
The Valuation Has Changed
At approximately $45.45 per share, Unity has a market capitalization of roughly $20.0 billion. After accounting for cash and convertible debt, enterprise value is also close to $19.9 billion.
Based on Q3 guidance and my estimate for the fourth quarter, Unity could generate approximately:
$2.2 billion of 2026 revenue
$690 million to $710 million of adjusted EBITDA
$620 million to $680 million of free cash flow
At the midpoint, the company trades at approximately 28 times adjusted EBITDA and around 30 times free cash flow.
That is no longer a cheap turnaround valuation.
The valuation becomes more reasonable if Vector maintains strong growth through 2027. My base case assumes approximately $2.8 billion of revenue next year, close to $1 billion of adjusted EBITDA, and approximately $800 million to $850 million of free cash flow.
Under that scenario, Unity trades at approximately 23 to 25 times 2027 free cash flow.
For a company growing strategic revenue above 30%, that multiple is not unreasonable. But it leaves considerably less room for mistakes than the stock offered below $30.
What Could Go Wrong
The largest risk is that investors extrapolate Vector’s early growth too far.
Vector is benefiting from rapid model improvements, increased customer adoption, and comparisons with a relatively weak prior period. Sequential growth near 20% cannot continue indefinitely.
AppLovin remains a formidable competitor. Google has enormous data and distribution. Privacy policies and mobile-platform rules can change. Game-industry advertising budgets are not unlimited, and some of the current growth may represent customers testing Vector before deciding how much spending to retain.
There is also execution risk around Unity 7 and Commerce. Unity has introduced ambitious products before. The company now needs to demonstrate that it can ship them reliably without creating another developer backlash.
Finally, stock-based compensation remains a real expense even when it is excluded from adjusted EBITDA. GAAP profitability will be an important milestone, but sustained per-share earnings growth matters more than crossing zero in a single quarter.
My View
Q2 strengthened my confidence in Unity’s turnaround.
Vector is growing considerably faster than management initially expected. The growth appears mostly organic. Runtime data is only beginning to enter the models. Create is improving, margins are expanding, and Unity is approaching GAAP profitability.
Those are meaningful changes.
But I am under no illusion that the stock is still priced as a turnaround. Around $45, the debate has changed. The question is no longer whether Unity survives, but how large Vector can become—and how much of that success is already reflected in the share price.
A reverse DCF suggests the market is underwriting roughly 14% annual free-cash-flow growth for the next decade, assuming approximately $600 million of normalized starting FCF, a 10% discount rate, and 3% terminal growth. That implies Unity eventually produces roughly $2.2 billion of annual FCF.
Vector does not need to become AppLovin. But it likely needs to remain a powerful and durable growth engine while Unity converts its much-improved gross margin into sustained operating leverage. Below $30, the market was offering a substantial discount because it doubted whether Unity could repair itself. At $45, investors are paying for a meaningful portion of that repair—and for continued execution.
I still believe the risk-reward is reasonable, particularly if Vector’s runtime-data advantage begins to compound. But the margin of safety is smaller, and position sizing should reflect that.
Unity has finally started executing. Now it needs to keep doing it.
Disclosure: I own shares of Unity. This article represents my personal opinion and is not financial advice.