--- title: "From AI gloom to ad breakout, U finally stands tall" type: "News" locale: "en" url: "https://longbridge.com/en/news/295128545.md" datetime: "2026-08-06T16:36:08.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/295128545.md) - [en](https://longbridge.com/en/news/295128545.md) - [zh-HK](https://longbridge.com/zh-HK/news/295128545.md) --- # From AI gloom to ad breakout, U finally stands tall Hi everyone. This is Dolphin Research. Q2 was a rare clean beat for $Unity Software.US, showcasing the payoff from its post-reset inflection. Let's get into the details. **1\. Grow outpaced expectations: how much was self-driven vs. share gains?** In recent quarters, one metric has dominated the print: QoQ growth in the Grow segment. For both last quarter and this quarter, the buy-side broadly modeled Vector at 15%+ QoQ. Netting the IronSource wind-down and slower Supersonic, that implies strategic Grow should do 12%+ QoQ by rough math (Vector likely \>80% of strategic Grow in Q2). Drivers include Vector itself (D28 fully rolled out, ROAS improved, and Runtime data covering 3bn players by end-Q2), plus the late-Apr shutdown of IronSource. Jefferies channel checks suggest Unity likely captured a meaningful portion of IronSource's vacated share. Why did investors anchor on ~15% QoQ? A quick take follows. **First, 15% QoQ has been management's guidepost for four straight quarters,** effectively a floor for expectations. Missing that would be an obvious miss. **Second, on valuation,** with Q1 Vector at +15% QoQ, assuming a natural decel to 15%→10% QoQ for the remaining three quarters implies 60–70% annualized YoY for Vector. Grow, diluted by IronSource and other slower pieces, could land ~40–50% YoY. At a 30% Adj. EBITDA margin, that implies $600–650mn Adj. EBITDA this year; on a 25–30x sector-neutral to slightly premium multiple, the implied equity value is ~$15–20bn. Put simply, to support a $15bn mkt cap (vs. $15.5bn pre-print), Q2 needed Vector at ~+15% QoQ. In reality, strategic Grow rose 18% QoQ in Q2, and guidance implies +16% QoQ in Q3, both well above the 10% QoQ bar the Street had. On a Vector basis, Q2/Q3 are +23%/+20% QoQ, again ahead of the usual 'mid-teens' tone. Watch management's color on ad growth drivers. With IronSource shuttered in late Apr, Q2's ad strength needs parsing between share gains from IronSource vs. Vector's organic uplift. If Vector's organic contribution dominates, the beat is higher quality. **We lean toward Vector as the primary driver.** **2\. Create remains middling: near-term pressure likely** Create was lackluster, and RPO trends imply near-term growth pressure. Two factors likely weigh. (1) The Unity 6 launch cycle has largely passed. RPO fell 4% QoQ in Q2, and new bookings likely declined QoQ as well. Despite a ~5% price increase for Unity 6 early this year, it appears to have had limited lift on new contract value. (2) Some AI substitution is plausible: early prototyping/demos can be done cheaply with LLMs to validate playability. For solo or small hyper-casual developers, LLMs can replace more workflows and cut costs. In late Jul, the company announced Unity 7, with testing planned early next year. As an upgrade to Unity 6, Unity 7 introduces a multi-agent Coding Agent workflow, plus engine/runtime advances to accelerate the pipeline, such as a modernized **CoreCLR runtime**, near-instant hot reload, and free MCP/CLI access to break down the editor wall. Graphics adds **Surface Cache GI** real-time global illumination and **Neural** rendering, enabling 60fps fully dynamic lighting on mobile. Beyond tech, the key is that Unity 7 will natively embed a game store and AI ad system, extending the engine from upstream creation into mid/downstream ops to raise barriers vs. general-purpose LLMs. Until Unity 7 goes live, Create likely stays roughly stable, with app store fee relief offset by AI substitution. **3\. Profitability improved sharply: gross margin lifted by ads** Q2 OP and Adj. EBITDA both beat, with solid Q3 guides. The main driver was mix: stronger ads naturally lifted corporate GPM, up 550bps YoY in Q2. On opex, R&D rose 30% YoY, driven by a 17% increase in internal investment tied to ad recommender optimization and engine work, plus severance charges from business integration. Sales and G&A declined YoY but modestly. Hence margin expansion was primarily from mix-driven GPM improvement. Opex efficiencies were a secondary factor. **4\. Outlook: near-term growth tailwinds; medium/long-term AI impact still matters** AI-disruption narratives roiled the stock early in the year, notably after Google's Genie world model. We argued here ([link](https://longbridge.cn/topics/38343273?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=b1674235-902b-49e4-b45f-7af0aa1b2d83)) that erosion wouldn't be that fast—concerns were early, not nonexistent. By product, LLM substitution is most acute for hyper-casual single-player titles. By workflow, LLMs fit pre-prod grey-box prototyping to validate playability at low cost. But a game is more than content creation, and Unity is more than an editor. It spans live ops with built-in store, ad matching, and cross-platform distribution—a full-stack ecosystem solution, covering development and monetization. Thus, unless it's a simple offline casual game with limited live ops/monetization needs, LLMs can only replace so much. Larger, longer-lived titles—especially multiplayer online—still benefit from a mature end-to-end stack. That said, AI evolves fast and defies absolute calls. With sentiment now leaning positive on Vector's beats, we would stay mindful of sudden 'AI scare' headlines and manage exposure proactively. **Intraday, Unity is at ~$17.7bn mkt cap, within our $16–20bn neutral-to-premium range; implied EV/Adj. EBITDA is ~27x, not cheap, yet below the ~40x froth zone. Position per your risk tolerance.** **Given we're at an execution inflection, there's less need to insist on a 'conservative' base case now (cf. last quarter's notes** [**link 1**](https://longbridge.cn/topics/40528998?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=cc1e058b-1d8b-4f37-9db3-605cc6a1d4a6)、[**link 2**](https://longbridge.cn/en/topics/39567448?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=69247ab5-3aa0-463e-a84d-8038e519f016)**; cautious band was $10–11.8bn), unless another AI panic hits.** **5\. Key metrics snapshot** **6\. Notes: Unity's core biz** In Q1 2023, Unity consolidated IronSource and revamped segment reporting, moving from three segments (Create, Operate, Strategic) to two (Create, Grow). The new Create includes the legacy engine products plus UGS (Unity Game Services) previously in Operate and certain Strategy revenues, **while Professional Services and Weta have been wound down since 2023.** Grow includes Unity Ads and IronSource marketing (primarily Aura; **Luna closed in Q1'24, IronSource closed late Apr**) and publishing (Supersonic, **expected to be divested in early Aug 2026 to** **Tripledot Studios**). Supersonic contributes modest growth and is lower quality vs. core ads. Revenue is driven by engine seat subscriptions, the ad marketplace that matches and clears demand/supply, and game publishing. Mix shifts across these lines affect GPM and growth cadence. **Dolphin Research - more on 'Unity'** **Earnings season (last quarter)** May 8, 2026 call recap [Unity (Trans): Q2 guide excluded potential Runtime data uplift](https://longbridge.cn/topics/40529679?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=93dc3d29-e885-4a99-a965-0fd2ce071484) May 8, 2026 earnings take [Under AI-disruption shadows, Unity is climbing out](https://longbridge.cn/topics/40528998?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=cc1e058b-1d8b-4f37-9db3-605cc6a1d4a6) Feb 12, 2026 call recap [Unity (Trans): Vector +70% YoY in Jan](https://longbridge.cn/topics/38688635?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=71d47742-1235-430d-a703-333a932b24f7) Feb 12, 2026 earnings take [Down 30% overnight: what hit Unity?](https://longbridge.cn/topics/38679781?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=3ab59576-eabd-4ae5-96ff-56abb76bbbb4) **Hot takes** Mar 27, 2026 [Unity Q1 pre-ann take](https://longbridge.cn/en/topics/39567448?channel=SH000001&invite-code=355628&app_id=longbridge&utm_source=longbridge_app_share&locale=zh-CN&share_track_id=69247ab5-3aa0-463e-a84d-8038e519f016) Jul 17, 2025 [Unity rally recap](https://longportapp.com/en/topics/31898990?invite-code=032064) **Deep dives** Jan 10, 2025 [Can Unity replicate AppLovin's 'money-printing' playbook?](https://longportapp.com/en/topics/26553047?invite-code=032064) **Risk disclosure and disclaimers:** [**Dolphin Research disclaimer and general disclosure**](https://support.longbridge.global/topics/misc/dolphin-disclaimer) ### Related Stocks - [U.US](https://longbridge.com/en/quote/U.US.md) ## Related News & Research - [These Analysts Boost Their Forecasts On Unity Software After Better-Than-Expected Q2 Results](https://longbridge.com/en/news/295231610.md) - [Unity Software Target of Unusually High Options Trading (NYSE:U)](https://longbridge.com/en/news/295123926.md) - [Unity (U) To Report Earnings Tomorrow: Here Is What To Expect](https://longbridge.com/en/news/294906102.md) - [Edgestream Partners L.P. 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