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Below is Dolphin Research's Trans of $Unity Software(U.US) FY26 Q3 earnings call

I. Key takeaways

1. Cash and capital allocation: FCF hit a record $220 mn in Q3, with an end-quarter cash balance of $2.65 bn. The convertible notes due Nov 15 will be settled in cash. Cash provides flexibility for product investment, potential M&A, and shareholder returns, with no specific buyback or dividend plan disclosed.

2. Q4 guidance

a. Revenue: Strategic revenue of $683–691 mn, up 65%–67% YoY, marking a seventh straight quarter of accelerating growth.

b. By segment: Strategic Grow up 105%–107% YoY, with Vector up 21%–23% QoQ. Strategic Create up 4%–6% YoY.

c. Profit: Adj. EBITDA of $290–295 mn, up 132%–136% YoY, with a 42% margin. Margin is set to expand by another ~100 bps QoQ.

d. Non-strategic revenue: Non-strategic Grow at $5 mn in Q4, trending to zero by 2027.

3. Net income modeling assumptions

a. Amortization: Falls to $50 mn in Q4 (vs. $77 mn in Q3), then to $15 mn per quarter by 2027.

b. SBC and tax rate: SBC at approx. $75 mn per quarter by 2027, with an effective tax rate of 5%–10%. Amortization and SBC as a percentage of revenue are expected to continue declining, improving operating leverage.

c. Create long-term growth: Strategic Create up 9% for full-year 2026 and expected to sustain a similar annual growth rate thereafter, driven mainly by ARPU increases.

4. Profit drivers this quarter

a. First GAAP profitability: Net income of $122 mn with a 20% net margin, the first since listing. Management said this supports potential inclusion in major indices, a broader institutional base, and possible ratings upgrades.

b. EBITDA: Adj. EBITDA of $257 mn with a 41% margin, up 1,800 bps YoY.

c. Gross profit and opex: Adj. GPM expanded 200 bps QoQ, mainly from cloud cost leverage within COGS. Adj. R&D, S&M, and G&A were flat to down QoQ.

d. S&M: Down $22 mn QoQ to 12% of revenue, primarily reflecting the sale of Supersonic in H1.

II. Call details

2.1 Management highlights

1. Overview: Strategic revenue grew 59% YoY, and Adj. EBITDA rose 134% YoY. Management expects Q4 revenue growth and margins to accelerate further YoY.

a. Revenue mix: Strategic revenue was $597 mn. Strategic Grow reached $432 mn, up 90% YoY and 69% of total revenue. Strategic Create was $165 mn, up 11% YoY, supported by ARPU gains and China.

b. Scale: Nearly 3 bn people play games built with Unity each month.

2. Vector: The core of the flywheel, with revenue up 126% YoY and 40% QoQ in Q3, double the 20% QoQ guide.

a. Three pillars: Self-learning AI models that keep improving, customer-centric new products such as the Day 28 optimizer, and proprietary high-quality data. The quarter also benefited from a sharp improvement in infrastructure efficiency.

b. Growth drivers: Primarily from higher installs and player value rather than take rate changes. Growth spans customers, OS, ad formats, and geos.

c. Advertisers: Vector advertiser accounts rose 27% QoQ.

3. Create-side AI: Opened the platform to coding Agents and a CLI, making the creation stack fully programmable for Agent-driven automation.

a. Model-agnostic: Clients can avoid vendor lock-in and continually optimize token spend.

b. Usage: Coding Agent usage surged over the past quarter, and Unity's overall DAU is up 25% since early Aug.

4. Spark: A no-code creation platform co-launched with Google to widen the creator funnel.

a. Positioning: Announced in early Oct, a browser-based collaborative platform for creators with no coding experience, with direct access to Asset Store content from artists.

b. Timeline: Private beta this year, full roll-out in 2027, expected to contribute meaningfully to platform revenue over the coming years.

c. Distribution: Provides an upgrade path for users of Google's lightweight creation tools, potentially reaching billions of users across Google's consumer products.

d. Monetization: Pricing not disclosed. A freemium model plus subscriptions, usage-based fees, and ads are planned to drive downstream revenue in Create and Grow.

2.2 Q&A

Q: Vector revenue was up 40% QoQ, nearly double last quarter's guide. Was there a single breakthrough, and how sustainable is growth into 2027?

A: No single 'silver bullet'; compounding across product, data, and models, and not every quarter will be 40%. Vector is an AI prediction engine that better forecasts which users will like which games and better values those users, then matches them with the right publishers. A typical quarter sees many product upgrades, with Day 28 just one example, and strong demand with a long roadmap. Runtime is part of continuously acquiring higher-quality data. Models are tuned and retrained daily, incorporating product and data changes. Vector has been live only seven quarters and remains early, and management is confident in healthy growth. The business grows steadily with periodic step-ups, with timing hard to predict. The underlying driver is a mobile games ad market of at least $40 bn growing double digits, and Unity is a creation platform rather than an ad network, so more supply intensifies discovery demand.

Q: Can Runtime data help developers retain and monetize existing players, and how big is this vs. UA? What investment is needed?

A: Runtime is a unique advantage to lift LTV and a long-term moat. The industry often asks how much to spend on UA for a given LTV, but publishers spend 99% of their time on engagement and LTV, and monetization follows engagement. As LTV rises, UA budgets also increase. Games built on Unity and connected to Runtime feed publishers real-time, at-scale signals on player behavior: what they are fatigued by, what interests them, and how much they are willing to spend. Runtime is not a static, coverage-only opportunity, as Unity's understanding of player behavior deepens over time. Runtime attach on new projects remains above 90%, and 30% of the top 1,000 Vector spenders share Runtime data, a ratio expected to rise. No specific investment figures were disclosed.

Q: If Vector growth comes more from volume and returns than take rate, how do you view these drivers? Is there take rate upside?

A: The company does not consider or manage take rate; it is not an operating lever. The goal is to maximize player value and deliver more installs for clients. Management did not directly address potential take rate upside.

Q: Does Spark with Google contradict the narrative that frontier models could make traditional engines unnecessary? What can Unity do that native tools cannot?

A: Spark intentionally avoids hyper-casual, aiming for high-quality works integrated with the Unity ecosystem. Unity is rooted in professional developers shipping high-quality games across platforms, with 20 years of know-how on building such titles plus Runtime feedback on game performance, which is a unique asset. The goal is not to make 10–30 second shareables for friends, which management does not disparage but says is not Unity's direction. Spark is a no-code, browser-based, collaborative platform serving non-coding creatives like artists and level designers. Opening coding Agents and Spark both serve the core strategy of expanding the top of the creator funnel, leveraging major partnerships for distribution to potentially millions of new users. Management said they have not seen others doing the same.

Q: Given the big Vector beat, did guidance methodology change, or was Q3 a one-off?

A: Guidance methodology is unchanged, and Q3 was an unanticipated step-up. Since the current team joined, the approach has been consistent: each quarter's guide reflects the run rate, seasonality, expected model and product enhancements. Some quarters produce unforeseeable step-ups, leading to outsized beats. Unity will keep guiding based on what is visible at the time, with unforecasted performance improvements showing up as large beats.

Q: Over the past two months AI appears to have inflected in gaming. What capabilities changed vs. a year or two ago?

A: Models, harnesses, and compute quality have all improved, with coding Agents currently showing the most pronounced impact. Developers are learning to build better harnesses to fully leverage models. Management expects continued improvement across all AI-touching workflows.

Q: Will AI show up in financials first in Create, or in Grow via more potential advertisers?

A: Management expects AI to drive the entire business, not a single segment. More creators making more and better games intensify discovery demand and lift the ad business. As a full-stack creation platform, Unity can offer Agent-driven product enhancements and, combined with Runtime and Vector, help publishers personalize experiences, drive engagement, and monetize. AI will enable new game experiences, with volatility in the early phase as developers adapt to new tools and Unity refines them, which may disrupt developer communities in the short term but should expand the market significantly over time. Unity already sees early signs of this. The company did not sequence Create vs. Grow benefits.

Q: After this quarter's success, how is visibility for the coming quarters?

A: Management is confident in durability; Q4 Vector QoQ guide is lifted to 21%–23%. They see the roadmap executed daily. Last quarter they guided 20% and delivered 40%, and now raise the top end to 23% because scale makes model optimization from product enhancements more efficient and infrastructure utilization higher, creating a 'success begets success' dynamic. The CFO added that new Vector advertisers rose 27% QoQ this quarter (QoQ, not YoY), while 90% of this quarter's growth came from existing advertisers. New advertisers are early in testing and spend, and should add tailwinds as they validate returns.

Q: Can you share details on in-flight products and how they support high Vector growth into 2027 and beyond?

A: No specific products were disclosed due to competition, the need to align with customers, and because anchoring on a single product is not meaningful. A typical quarter features 6–10 major product changes. Day 28, live for about a quarter, is seen as 'table stakes' for scaled players, and there is a long list of equally foundational changes. Management wants investors to focus on the flywheel and optimization at both ends (UA and LTV), and on the long-term value of connecting to 3 bn players and deepening understanding of player behavior, rather than any single product.

Q: How are the unit economics of Spark with Google, especially compute costs? What does scale imply for incremental margins?

A: Pricing is not yet disclosed; the plan is to start freemium and add subscriptions, usage-based fees, and ads. The idea is to start creating for free with a daily quota, then pay past a threshold. Levers will be tuned during testing based on compute needed for creation. No quantified incremental margin guidance was provided. The CFO highlighted two monetization levers: each prompt can be used to train and fine-tune models to lower token costs, and Asset Store, the largest of its kind, delivers 100% margin retention when Unity-owned assets are consumed in creation, enabling usage-based billing or upgrades from free to paid tiers, while artist asset sales add incremental profit. Ads will sit outside the aggregation ecosystem, opening Unity-owned ad inventory, which the company views as a new opportunity.

Q: From closed tests to broader 2027 release, what distribution friction must be removed?

A: Cross-platform distribution is why Unity exists: build once and ship to 25+ platforms. Management said Unity is the only engine that can build once and distribute seamlessly and with high performance to consoles, high- and low-end mobile, and the web, which is its core value proposition and hard for many rivals to match in quality. The Google partnership is non-exclusive, and Spark will distribute through additional channels over time.

Q: Is the 25% DAU growth related to the 27% increase in new advertisers? How inclined are new creators to monetize?

A: The two figures are independent; Agent-based creation auto-connects services like Vector at creation time. Previously, developers downloaded Unity, learned it, searched for ad networks, downloaded SDKs and docs, and integrated. With CLI and Agents, Unity services, including Vector, are connected the moment a project is created, removing all friction. Providing a complete platform and services integrated from day one delivers significant value to creators and to Unity. Management says this dynamic is already visible and will intensify. No quantified conversion data on new creator monetization was provided.

Q: With more creators via Spark, how will Asset Store balance content quality and quantity?

A: Offset AI art homogeneity with human-created assets, helping creators build more compelling works. Unity values and enhances the human element in game creation. Management noted a clear backlash to AI-generated art, which often yields 'median' and homogeneous outputs, and they are unaware of any hit game that relies heavily on such art. Asset Store, the largest repository of its kind, will be deeply integrated into Spark as it is in the existing ecosystem.

Q: Is supply sufficient to sustain high growth? How do no-code games affect supply today, and what will Spark add next year?

A: 3 bn refers to monthly players, not ad inventory; creator DAU is up 25% since Aug. Aug was when coding Agents opened on the platform. The number of creators, platform intensity, and growth are all trending up and are expected to accelerate. Spark could bring in potentially millions of new creators. Over the long term, Unity can serve both professionals and a new creator base 10–30x the size, who will build different types of works, expanding the market.

Q: What does owned-and-operated ad inventory imply for accessing third-party supply?

A: No direct response to this, as management addressed the prior question on supply scale.

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