Unity Narrows Losses as Strategic Revenue Growth Accelerates to 38%
Unity Software swung to a $23 million net loss in the second quarter from a $347 million loss the prior quarter, as Strategic revenue growth accelerated to 38% and the company guided to GAAP profitability by the third quarter.
Unity Software (U) reported second-quarter revenue of $546 million, up 24% from a year earlier, as the videogame-engine maker's core Strategic business grew faster even as its total results reflected a shrinking legacy advertising segment. Strategic revenue, the metric management now treats as the comparable base, rose 38% year over year, up from 35% growth in the first quarter.
The quarter capped a two-quarter wind-down that Unity first disclosed in a preliminary release on March 26, when it announced plans to sunset the ironSource Ads Network and sell its Supersonic publishing unit. Both moves are now complete: ironSource was shut down effective April 30, and the Supersonic sale closed August 4, two days before the earnings release. Non-Strategic revenue, which captures what remains of that legacy ad business, fell 33% year over year to $60 million, and Unity guided to just roughly $20 million of Non-Strategic revenue in the third quarter, effectively retiring the category from its reporting going forward.
Growth within Strategic revenue was uneven across its two components. Strategic Grow revenue, Unity's advertising and monetization software, rose 63% year over year, sharply ahead of the 49% growth in the first quarter and well above the 48% growth the company had guided to in its March release; the acceleration was driven by Unity Vector, its newer advertising product. Strategic Create revenue, the engine and development-tools business, grew a slower 5% year over year, or 14% excluding a one-time $12 million item, decelerating from 15% growth in the first quarter.
Unity's net loss narrowed to $23 million, a margin of negative 4%, from a $107 million loss a year earlier and from $347 million in the first quarter, when results were weighed down by $279 million of impairment charges tied to the ironSource sunset and Supersonic divestiture. Adjusted EBITDA margin expanded to 29% from 27% in the first quarter and 21% a year earlier, extending a trend that had already lifted the margin to 25% in the fourth quarter of 2024 from 23% a year before that. Free cash flow reached $202 million, up from $66 million in the first quarter and $127 million in the same quarter last year.
The GAAP figures still carried scars from the restructuring. Gross margin for the first half of 2025 fell to 56% from 74% a year earlier, largely because of a $226.5 million intangible impairment embedded in first-quarter cost of revenue; adjusted gross margin held flat at 83% across the periods, indicating the compression was a one-time accounting effect rather than a change in the underlying business. Restructuring and reorganization costs nearly tripled to $31.4 million from $10.9 million a year earlier, tied to the execution of the ironSource and Supersonic transactions, and GAAP R&D expense rose to 51% of revenue from 49% even as adjusted R&D held roughly steady near 30%.
Unity expects to be GAAP profitable for the first time in the third quarter and plans to pay off its 2021 convertible notes in November to reduce debt. Cash and restricted cash grew to $2,357 million as of June 30, up $293 million from year-end 2024, on higher operating cash flow.
For the third quarter, Unity guided to Strategic revenue growth of 44% to 47% and Adjusted EBITDA growth of 69% to 74%, both above the growth rates it had guided to for the second quarter back in its first-quarter release, when it called for 29% to 32% Strategic revenue growth and 44% to 49% Adjusted EBITDA growth.