Key Points

Unity beat expectations for the first quarter but suffered declines in revenue and adjusted EPS as the portfolio reset continued. The AI-powered Vector advertising platform launched earlier than expected, providing a tailwind for the Grow Solutions business. Unity’s outlook was a bit weak, possibly due to economic conditions.

Here's our initial take on Unity Software's (NYSE: U) financial report.

Key Metrics

Metric Q1 2024 Q1 2025 Change vs. Expectations Revenue $460 million $435 million (5%) Beat Earnings per share (adjusted) $0.28 $0.24 (14%) Beat Create Solutions revenue $164 million $150 million (9%) n/a Grow Solutions revenue $297 million $285 million (4%) n/a

Subscription Growth and Vector Launch

Unity revenue declined by 5% year over year in the first quarter, but with the video game engine developer's "portfolio reset" nearly in the rearview mirror, a return to growth is inching closer.

Driving any growth will be Unity's subscription business within the Create Solutions segment. The company dropped a plan to charge developers onerous fees based on the number of game installs last year and instead boosted its subscription pricing. Unity noted that while professional services revenue and consumption services revenue slumped in the first quarter, subscription revenue enjoyed strong growth.

In the Grow Solutions segment, which houses the company's advertising business, revenue was down just 4% as the early rollout of Unity's new Vector platform helped offset declines elsewhere. Vector is an AI-powered rebuild of the company's core advertising technology that aims to boost results for advertisers through better targeting and other improvements.

Unity posted a GAAP loss in the first quarter, but both adjusted earnings per share and free cash flow were in positive territory. Adjusted EPS was down 14% to $0.24, while free cash flow rose to positive $7 million from negative $15 million in the prior-year period.

For the second quarter, Unity expects revenue between $415 million and $425 million along with adjusted EBITDA between $70 million and $75 million.

Immediate Market Reaction

Unity stock was up about 2% in premarket trading on Wednesday soon after the release of the first-quarter report. The company beat expectations for revenue and earnings per share, but the revenue outlook for the second quarter was slightly below analyst estimates. Shares of Unity went into the earnings report down 5% year to date and down 89% from their all-time high.

What to Watch

Unity's earnings call on Wednesday morning should shed some light on how the company views the current macroeconomic environment. Neither the video game industry nor the advertising industry is immune from an economic slowdown, and Unity's advertising comeback could come under pressure if advertisers pull back on spending. The company's weak outlook for the second quarter could be a reflection of that uncertainty.

Story Continues

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Unity Software. The Motley Fool has a disclosure policy.

Unity Earnings: Vector Launches Early was originally published by The Motley Fool

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