Core Insights - Unity's advertising segment, Unity Ads, has shown strong growth, with a sequential increase of over 10% for two consecutive quarters, totaling a cumulative growth of over 25% [1][5][10] - The company is optimistic about the potential for profit margin improvement in the Grow segment, even with significant investments in future growth [1][11] - The Vector initiative is still in its early stages, with expected noticeable results starting in 2026, which will continue to enhance performance over the years [1][3][12] Financial Performance - Unity Ads has achieved a sequential growth of 15% in the previous quarter, contributing to a total growth of over 25% in the last two quarters [1][5] - The company anticipates a mid-single-digit sequential revenue growth of approximately 5% from Q2 to Q3, with the non-Vector portion of the advertising business remaining stable [1][5][10] - Create business subscription revenue has seen a year-over-year increase of double digits, with strategic revenue growing by 16% [4][5] Vector Initiative - The Vector system is a modular platform that has been successfully deployed, with expectations for ongoing enhancements in AI model performance and data processing capabilities [2][3][12] - The company believes that the integration of Vector will significantly transform its business model and enhance overall growth [3][12] - The introduction of Vector has already led to an increase in installation rates and user value, exceeding previous quarterly growth rates of 15% to 20% [3][12] Market Dynamics - Unity's advertising network growth has not significantly cannibalized other advertising expenditures, such as those from ironSource, indicating a strong value proposition for clients [1][10] - The company is optimistic about the growth potential in the Chinese market, with a revenue increase of approximately $20 million, driven by both Create and Grow business segments [8][10] - Unity's strategy focuses on enhancing user acquisition capabilities and overall platform value, rather than solely relying on mediation market gains [15][16] Future Outlook - The company is confident in the continued growth of Unity Ads, with expectations for sustained performance improvements into the third quarter [1][16] - Future enhancements in AI capabilities and data quality are seen as critical to maintaining growth momentum [10][11] - The company is committed to ongoing investments in both the Grow and Create segments to drive long-term profitability and market leadership [11][12]

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]