AI disruption overhang; U steadily turns the corner

Hi everyone. This is Dolphin Research.

$Unity Software(U.US) reported Q1 results. With a pre-announcement in late Mar, the focus is on guidance, especially post the IronSource divestiture, to read the growth trajectory of the Vector ad stack.

Key takeaways follow. See details below.

1. Guidance slightly above; Vector on a solid track

Mgmt guides Q2 revenue growth of 15%–17%. Excluding IronSource and Supersonic, core strategic revenue is guided to grow 29%–32%.

Within that, the strategic Grow biz implies roughly +10% QoQ at the high end. Vector should be the main driver, and we estimate Vector growth at 10%+ QoQ, in line with our view.

Beyond Q2, growth should benefit from broader D28 algorithm adoption, Runtime engine data integration, and the launch of the In-App Commerce platform. With competition heating up at the margin, mgmt’s view on Vector’s longer-term trend is critical. Watch the call for any additional KPIs disclosed.

Create growth is slowing on a higher base. Unity Pro/Enterprise list prices rose ~5% in Jan, but a free cloud storage upgrade in Mar should help preserve stickiness alongside the price change.

2. A modest positive surprise: margin improved QoQ

Unity has been stuck in the mud for years, with a glaring issue of low internal efficiency. Compared with AppLovin, a much larger headcount has not translated into higher revenue.

While legacy M&A missteps bear much of the blame, the new team took over in 2023 and is now in year three. Slow integration still points to execution inefficiency, but Q1 Adj. EBITDA margin improved to 27% (ex SBC, D&A and IronSource separation/restructuring), up meaningfully YoY and QoQ, which lifts our sentiment on the print.

3. Under the shadow of the AI-disruption narrative, how to think about further repair?

The AI-disruption narrative has run for nearly a quarter. As software multiples reset and repeated top-line/earnings beats helped digest fears, the near-term impact has faded.

Unity’s market cap is about $11.7bn, within our prior first safety band of $9.9–11.8bn (cf. 27 Mar 2026, Unity Q1 preview).

On this base, valuation roughly reflects this year’s performance at ~21x Adj. EV/EBITDA. The risk-reward is a touch less compelling vs. AppLovin. On GAAP and cash flow, Unity looks softer than AppLovin as SBC and depreciation carry a heavier weight.

In valuing the engine biz, we used a conservative 3–4x P/S to reflect risk appetite under the AI disruption debate. Further upside repair would come from closing the expectation gap here.

We also look for Vector to deliver stronger efficacy, ideally beating our assumed +10% QoQ sequential trend. Near-term channel checks indicate an improving trajectory, but the pace still isn’t fast enough to consistently win share from rivals.

4. Key metrics at a glance

Detailed charts below. See the sections that follow.

I. Unity biz overview

Unity consolidated IronSource starting Q1 2023 and revamped its segment disclosures. Under the new structure, segments were streamlined from three (Create, Operate, Strategy) to two (Create, Grow).

The new Create includes the prior Create products (game engine), plus UGS that was previously in Operate (Unity Game Services: full-stack solutions for game devs covering development, publishing, UA and operations), and the former Strategy revenue. Professional services and Weta began winding down from 2023.

Grow combines the legacy Operate ad biz with IronSource’s marketing (mainly Aura; Luna was shut down in Q1'24) and game publishing (Supersonic). Revenue comes from engine seat subscriptions, the ad marketplace, and publishing.

II. Detailed charts

Q1 revenue was $508mn (+17% YoY), slightly above both guidance and Street estimates.

By segment: Create +4% YoY, Grow +24% YoY, with a clear acceleration in Grow.

Mgmt’s near-term guidance:

Q2 revenue and Adj. profit came in slightly better than expected — revenue guidance of $505–515mn (+15%–17% YoY). Adj. EBITDA is guided at $130–135mn, also ahead of consensus. Given the new team’s conservative guide style, actuals could land higher.

Q1 Non-GAAP EBITDA margin expanded by nearly 300bps QoQ, mainly from focus and execution. Operating cash flow softened QoQ to $66mn due to compensation and other outlays related to this quarter’s portfolio changes.

Dolphin Research 'Unity' related reads:

Earnings season (last quarter)

Feb 12, 2026 earnings call. Unity (Trans): Vector up 70% YoY in Jan.

Feb 12, 2026 earnings recap. Down 30% overnight: who broke Unity?

Nov 5, 2025 earnings call. Unity (Trans): Unique runtime data has monetization value.

Nov 5, 2025 earnings recap. Unity: patience needed as the turnaround unfolds

Hot takes

Mar 27, 2026. Unity Q1 preview

Jul 17, 2025. Unity rally recap

Deep dives

Jan 10, 2025. Can Unity replicate AppLovin’s cash machine?

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