Core Viewpoint - Unity Software's Q2 2025 earnings report showed mixed results, with a significant stock price fluctuation driven by market expectations and actual performance. The company is experiencing a clear operational turning point, with improving trends in revenue and profitability indicators [2][6]. Financial Performance - Unity reported total revenues of $444 million for Q2 2025, a year-over-year decline of 2%, exceeding company guidance and market expectations [17]. - The Create segment saw a stable growth in engine subscriptions, with a year-over-year increase of 2%, driven by the adoption of Unity 6 and a notable $12 million in licensing revenue [3][17]. - The Grow segment experienced a revenue decline of 3.8% year-over-year, but the advertising revenue showed strong performance, growing 15% quarter-over-quarter [20][21]. Operational Indicators - The company reported a slight improvement in EBITDA margin, reaching 20.5%, indicating a gradual increase in profitability [4][33]. - Deferred revenue increased by $30 million, reflecting new multi-year contracts with several mid-to-large clients, primarily in SaaS subscriptions [7][24]. - The net expansion rate improved to 100%, slightly below market expectations of 102%, with a net increase of 10 large clients [26][27]. Strategic Developments - The Vector system is identified as a key driver for Unity's future growth, with early feedback indicating improved advertising conversion rates [8][9]. - The company is leveraging game engine data to optimize the Vector model, aiming to enhance advertising effectiveness and revenue generation [10][11]. - Unity's management has adopted a cautious approach in guidance, allowing for flexibility in adjusting expectations based on market conditions [32][33]. Cash Flow and Financial Health - Cash and cash equivalents increased to $1.7 billion, reflecting a stable improvement in the company's cash position [37]. - The company reported a GAAP operating loss of $118 million, but adjusted EBITDA reached $91 million, surpassing both company guidance and market expectations [33].

Group 1 - Morgan Stanley is optimistic about Unity Software's advertising business prospects, citing significant improvements in product competitiveness due to strategic restructuring and technological investments over the past 18 months [1] - Recent feedback from Unity's advertising clients indicates a substantial increase in campaign effectiveness, with installation and purchase conversion rates rising by 15%-20%, aligning with management's statements in the Q2 earnings report [1] - The firm anticipates that as Unity continues to provide efficient technological solutions, advertising budgets will increasingly shift towards its platform, driven by a strong focus on return on advertising spend (ROAS) [1] Group 2 - Three key drivers supporting this trend are highlighted: the full launch of Unity's new Vector advertising model in May, which has shown technical strength within just two months, leveraging Unity's scale and leading position in the gaming engine market [2] - Unity's unique user behavior data, recently utilized for ad targeting, is expected to enhance the performance of the Vector model as more real-time gaming data is inputted [2] - The adoption rate of Unity 6 is rapidly increasing, nearing 50% in Q2, with 80% of clients planning to upgrade, which could lead to subscription revenue growth for the Create department and provide richer data sources for Unity Ads, thereby improving clients' ROAS [2] Group 3 - Morgan Stanley believes that Unity's recovery indicates a multi-win scenario in the market, suggesting that if the Vector model can provide differentiated insights, the overall advertising market size may expand rather than being a zero-sum game [2] - The firm maintains a positive outlook on Unity's investment in its high-margin advertising network and the utilization of its unique data assets, noting that market skepticism regarding Unity's competitiveness in advertising presents significant upside potential for its expectations and valuations [2] - Morgan Stanley retains an "overweight" rating on Unity with a target price of $25, suggesting that under bullish scenarios, valuations could reach $40, corresponding to a 10% annual growth rate in the advertising business [2]