Unity Software Inc. Q3 FY2025 Earnings Call

Thank you for joining us for the Unity Technologies Q3 Earnings Call. I will now turn the conference over to Alex Giaimo, Head of Investor Relations. Alex, please proceed.

Thank you, Nicole. Good morning, everyone. Welcome to Unity's third quarter 2025 earnings call. Today, I'm pleased to be joined by our CEO, Matt Bromberg, and our CFO, Jarrod Yahes. Before we begin, I would note that today's discussion contains forward-looking statements, including statements about goals, business outlook, industry trends, expectations for future financial performance and similar items, all of which are subject to risks, uncertainties and assumptions. You can find more information about these risks in the Risk Factors section of our filings at sec.gov. Actual results may differ, and we take no obligation to revise or update any forward-looking statements. Finally, during today's meeting, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to financial performance prepared in accordance with GAAP. A full reconciliation of GAAP to non-GAAP is available in our press release and on the sec.gov website. And with that, I'll hand it over to Matt.

Thanks, Alex, and good morning. On behalf of everyone at Unity from across the globe, I'd like to thank each of you for joining us today. On our last call, we posited that the second quarter of 2025 would ultimately be seen as an inflection point in Unity's trajectory, the moment where it became clear that the company was poised to deliver sustainable long-term growth in the years ahead. Today, with the third quarter now behind us, it's clear that's precisely what was happening. In Q3, Unity showed strength across both our Grow and Create segments, driving results that once again meaningfully exceeded both our guidance and consensus for both revenue and adjusted EBITDA, including an 11% quarter-over-quarter lift in our Grow segment, driven by Vector AI. Progress in the Create segment has been equally exciting. After backing out the impact of non-strategic revenue, our Create subscription software business increased 13% year-over-year, reflecting the fundamental improvements we've made in both the quality of our product and the connection we have with our customers. But this inflection point we're referencing is about so much more than just the financial results we're reporting because in the new Unity, we're not choosing between execution and vision. We need to achieve both. The video game industry has already overtaken Hollywood, music and linear video combined in scale. We believe social media and short-form video are the next targets. As consumers increasingly demand that their entertainment be interactive in nature and creators search relentlessly for ways to increase engagement and time spent, all roads lead to gaming as the solution. Unity has always been about democratizing access to technology. We aim to give every software developer the tools and the platform to become a game developer. That's in our DNA. Advancements in artificial intelligence will enable us to enhance and extend this mission. Soon Unity Software will empower any creator, not just any software developer, to build interactive experiences. We believe this new form of democratization will not only spark an unprecedented explosion of content creation and more time spent in games, it will also make user acquisition and personalized discovery through Unity Vector more vital than ever. Players will have more choices about how and where to play than at any other point in history with Unity uniquely positioned at the intersection of the creation, discovery and monetization of those games, all powered by Vector AI. For the most talented segment of developers, this increase in the efficiency of content creation won't just be about making more content; it will mean making more time, more time to build something truly different and great as the basic game elements increasingly become just table stakes. We believe the real metric for the skilled game developers of the future won't be time to market; it will be time to innovation. How long did it take not just to complete the basic requirements, but to ship something that changes the nature of the art. And Unity will continue to be the bridge between that creativity and the players who turn it into the next global phenomenon. For now, let's dive a little more deeply into some of the product improvements we delivered in the quarter. During Q3, we continued to make rapid fundamental advancements in Unity Vector, delivering stronger returns for our customers. These performance gains are broad-based, spanning client size, geography, operating system and genre. As we continue to ingest higher-quality signals and refine our models, Vector will keep learning, driving sustainable, healthy revenue growth well into the future. We expect these efforts to be further enhanced by the highly differentiated behavioral data available through our runtime, which should begin having a financial impact in 2026. In August, we rolled out the Developer Data Framework, a unified system featuring dashboards that allow our customers to control how data is collected, shared and used in the production and operation of the interactive applications they build with Unity. This framework is designed to enable developers to unlock the power of the runtime to better diagnose problems and to optimize the experiences they offer their players. We are pleased to report that over 90% of new projects built with Unity 6.2 are now utilizing the new Developer Data Framework. In October, we announced our expansion into cross-platform commerce with Unity IAP, enabling developers to manage their entire global commerce and catalog from a single dashboard within Unity. The scale of this opportunity is meaningful. Each year, more than $120 billion of in-app purchases are made in mobile gaming alone. The majority of these purchases are taking place in a made with Unity game. As the gaming ecosystem continues to open beyond the traditional app stores, providing developers with a central Unity-native commerce capability is a big win for our customers in the ecosystem. Alongside our announced partnership with Stripe, we also recently entered into a new partnership with Coda and are in active discussions with several other payment providers. With the Unity Engine and runtime at the core and our industry-leading distribution, we are uniquely positioned to help developers capture value from the generational platform shifts that are taking place. And we'll help them drive success through accessible, open, easily integrated commerce solutions. That's just the first step for us. Over time, you'll see us take every opportunity we can to provide content creators with the trusted, open, developer-friendly platform they need to develop, deploy and grow interactive entertainment. The increased velocity of our product release cadence is occurring against the backdrop of steadily improved quality, stability and performance of the Unity engine. Since the launch of Unity 6, customer reported issues are 22% less frequent. And with enhanced quality and features, we're seeing significant continued momentum and adoption. Unity 6 has now registered over 9.4 million downloads, a 42% increase from just last quarter. Developers of all sizes are using Unity to create many of the most popular games in the industry. In the last few months, we've seen a meaningful increase in high-quality Unity games hitting the charts from developers of previously modest scale. PEAK, a co-op climbing adventure game built by just a handful of developers in a few weeks, has sold well over 10 million copies worldwide since its launch in June. Megabonk just became one of the most played games on Steam of all time. Schedule I, a made with Unity game created by a single incredibly talented developer is one of the highest revenue-generating games over the last 6 months. Kenny Son and friends' BALL x PIT sold over 300,000 copies in its first 5 days, all made with Unity, all made with very modest-sized teams. This is the dream that Unity lives to serve. And each week, we're seeing new breakout hits like these. This is not an outlier. It's a trend. Before passing the mic to Jarrod, I do want to take a moment to highlight the advancements we're making with respect to emerging technologies like extended and augmented reality. We recently announced day 1 support for Android XR in close collaboration with Google and Samsung. This initiative enables teams across gaming, education, entertainment and enterprise to quickly build new games and apps or port existing Unity apps to the Android XR ecosystem. With shipments of AR and VR headsets expected to grow 39% in 2025, this is an area where we're fully leaning in and will ensure that Unity has the capabilities in place to support robust industry growth. And finally, we're incredibly excited to connect with thousands of creators and industry professionals at our upcoming user conference, which we call Unite, just 2 weeks from now in Barcelona. Unite offers us an opportunity to celebrate and showcase the incredible talent and success of Unity creators as well as to highlight some of the exciting new Unity products that are going to be pivotal to our vision and the future of gaming. Thank you again for your time and attention this morning, as always. With that, I'll pass over to Jarrod for an overview of our financial performance.

Thanks, Matt, and good morning, everyone. The inflection in Unity's business we spoke about last quarter is rapidly translating into faster revenue growth and improved profitability. In the third quarter itself, we added $30 million of high-margin incremental Grow revenue on a sequential basis, resulting in $19 million of additional adjusted EBITDA, well in excess of the top end of our guidance range. Grow revenue in the third quarter was $318 million, up 11% sequentially and up 6% year-over-year. Revenue upside compared to our guidance was driven by the exceptional performance of Vector, which drove further acceleration of the Unity ad network even when compared to the rapid sequential growth we saw last quarter. We are proud of the turnaround in our Grow business, sparked by the launch of Unity Vector, and we're confident that this business will continue to grow strongly into the future. In Create, revenue was $152 million, up 3% year-over-year. As a reminder, we lapped $12 million in nonstrategic Create revenue from the third quarter of 2024 and $12 million of revenue from a large customer win recorded in the second quarter of 2025. Excluding the impact of nonstrategic revenue, our Create business grew 13% year-over-year, powered by strength in our subscription business. Growth was driven by ARPU improvements from ongoing price increases and continued momentum in China, which has been an extremely bright spot for us in 2025. Turning from revenue to non-GAAP profitability. Adjusted EBITDA for the quarter was $109 million, representing 23% margins, an improvement of 200 basis points year-over-year and versus the second quarter as both sales and marketing and G&A costs came down as a percentage of revenues. As a team, we're executing steadily around operating expense reduction opportunities, maintaining our cost discipline and increasingly leveraging automation and AI. Over a multiyear time horizon, we believe Unity has the potential for dramatically higher margins driven by extremely high flow-through contribution margins, combined with operating leverage resulting from faster revenue growth. Unity had record free cash flow in the third quarter of $151 million, representing an improvement of $36 million year-over-year. This represents our second straight quarter of record free cash flow, showcasing the success of the restructuring efforts we have taken over the last 2 years. While there are always quarterly movements due to working capital, investors should expect Unity to continue to convert an extremely high percentage of our adjusted EBITDA to free cash flow, highlighting the cash flow generative nature of our business. Our balance sheet remains strong with cash of $1.9 billion and convertible debt of $2.2 billion. With that, I'd now like to turn to guidance for the fourth quarter. We're expecting total fourth quarter revenues of $480 million to $490 million and adjusted EBITDA of $110 million to $115 million. In Grow, we're forecasting mid-single-digit sequential revenue growth. We expect Vector to continue to drive strong performance while also experiencing benefits from work we've done to leverage Vector in other Grow products. In Create, we're forecasting steady revenue growth. Excluding the impact of nonstrategic revenue, our guidance assumes high single-digit year-over-year revenue growth driven by continued strength in our subscription business. We expect adjusted EBITDA margins to remain stable in the fourth quarter. While revenue growth remains strong and flow-through margins highly attractive, we have some known expense items in the fourth quarter, including Unite, our global user conference. We are also seeing outperformance in Create bookings, resulting in end-of-year accelerators for Unity's sales force. With that, I'd like to thank you for joining us on Unity's third quarter 2025 conference call. Let me now turn the call over to Alex so that we can take your questions.

Thanks, Jarrod. Nicole, I'll hand it to you for questions.

Your first question comes from the line of Matthew Cost with Morgan Stanley.

I would like to know more about the factors contributing to the faster revenue growth for Grow in the second quarter. Is this due to Vector enhancing its ad targeting for existing users, the expansion of Vector to more customers, or the acquisition of new customers in your ad business? Please help us understand the components behind the acceleration in Grow for the third quarter. I also have a follow-up question.

Matt, thanks for the question. Vector AI is proving to be scalable and highly effective. What's crucial is its ability to process significantly larger volumes of data, handle more complex data types with additional features, and adapt to changes in the real-time marketplace more efficiently. The self-learning AI keeps improving as we invest in its development and the datasets that support it. We believe our roadmap, combined with positive trends in mobile gaming advertising spending, positions us well for sustainable growth over the long term. As I mentioned earlier, we are seeing strong performance across all regions, platforms, and game genres. However, that doesn't mean every customer experiences this every day. There is always room for optimization, and we are diligently working on that. Nonetheless, we do not see any structural issues hindering broad-based improvements for our customers, which is quite promising. We are confident in our infrastructure and systems to enable continued sustainable growth with Vector. We are very pleased with the progress we are making.

Great. And then on the Developer Data Framework and the runtime data, very encouraging to hear about the high uptake of the Developer Data Framework with new customers. I guess, how should we think through the impact in 2026 that, that data might have? Obviously, Vector in the absence of that data is clearly improving. How big of a sea change might that be? And how should we think through the timing and magnitude of that impact?

Thinking about runtime data as a long-term growth opportunity is essential. It is a strategic advantage for us and serves as a protective barrier. It's not something that will yield immediate results. I want to stress that without any contribution from runtime data, we are still very confident in Vector's growth trajectory, which is evident in our recent progress. We are excited about the launch of the Developer Data Framework in August, and we are pleased with the opt-in rates and developer feedback. We believe we have the necessary infrastructure, processes, and privacy measures in place. As more games are developed using Unity 6, these tools will increasingly influence results. The positive adoption trends will help accelerate this. However, it's important to remember that this is a long-term endeavor. While we are committed and working diligently, it's a marathon, not a sprint. Overall, we feel very optimistic about the progress we are making.

Your next question comes from the line of Brent Thill with Jefferies.

Jarrod, on the guide for Grow at mid-single digit, you just put up 11% sequential. Maybe just talk through what you're embedding in the guide, why you're expecting the sequential slowdown.

Sure, Brent. And thanks for the question. I think, firstly, just taking a step back and looking back, we're really excited about the progress we've made with Vector. This is sort of the second quarter where we've seen extremely fast, rapid sequential growth. There's nothing looking forward that gives us any pause about where we are with respect to the momentum, where we are with respect to leveraging data to help with model improvements, and our product roadmap is really exciting as we look forward. Ultimately, the guide is a function of many things. It's a function of where we are run rating into the quarter. It's a function of the seasonality that takes place in the fourth quarter, and it's a function of the data that we expect to flow into the model. We outperformed our third quarter expectations based on where we were when we reported the second quarter. We feel great about where we are. There's nothing to say that our performance will not continue to improve over the course of the fourth quarter, and we'll end up in as phenomenal of a place as the third quarter. So again, on our side, there's no reservation. There's no hesitation. I think we feel really good about the guide and about where we came out vis-à-vis the third quarter.

And just the one thing I'd add to that, Jarrod, and that's well said, is that like, keep in mind, we're not running this business to a quarterly earnings clock. New product rollouts, enhancements, these are things that are organic to the business. They come when they come. The quarter ends on whatever day it ends. It's just not how we're running the railroad. So I wouldn't read anything into where particular things happen to fall over the course of one month or another month. The long-term prognosis for this business is really, really good.

Your next question comes from the line of Alec Brondolo with Wells Fargo.

With regard to the non-Vector Grow business, could you call out some specific points of improvement, maybe ways that you were able to leverage the learning from Vector into other areas of the business? I think you mentioned in the prepared remarks, there was some improvement in the third quarter driven by that, but maybe some specific examples might be helpful for us.

Yes. Thank you for the question. We are very excited about our entire advertising business. I appreciate your focus on Unity Vector, which is indeed the largest and fastest-growing segment. However, we see great opportunities across the whole segment. We have plans to integrate technology and insights from Vector into our other ad businesses. Now that we have completed the initial phase of the Vector launch, we can dedicate additional resources to it. We have already started this process and are optimistic about the early results and the future potential. Our ultimate goal is to achieve healthy and sustainable growth across the entire business, and we feel confident in our ability to do so.

Your next question comes from the line of Chris Kuntarich with UBS.

I want to ask on the Unity in-app payments initiative here. How should we be thinking about this from the perspective of an incremental monetization opportunity versus more of a value add for your customers?

Thanks for the question, Chris. We're really excited about this opportunity. There was some news this morning that highlights the global trend of app stores opening up due to legal challenges and regulations. Combined with the rise in mobile in-app purchase spending, this is very encouraging. As we mentioned, there is a huge opportunity for Unity to deliver value to our developers, enabling them to manage their full catalogs and payment providers seamlessly within the engine they already use for their live service businesses. We're enthusiastic about it, and based on our conversations with customers, they seem to be thrilled as well. A recent survey indicated that more than three-quarters of game developers plan to integrate alternative app stores into their business models in the coming years, which may even be an underestimate of what we'll see. This presents a real opportunity for us to create value. Our product is free for users; we will take a modest fee negotiated with the merchant of record, but that’s not our primary focus. We believe that as time progresses, we'll develop new commerce products that provide more value to developers and enhance this offering over time, potentially creating a significant product opportunity for us. The key point we want to convey to our customers is that this represents a unique product that only Unity can offer, seamlessly integrated into the tools they already use. This is a major step in enhancing our role as a platform across the video game industry—mobile, PC, and eventually console—supporting developers in an increasingly complex and open landscape.

Really appreciate that. Maybe just one follow-up. As we think about Vector and where it is bidding across various mediation solutions, you called out really strong scalability here. Is there any evidence that Vector is going out and bidding more into non-level play mediation solutions?

At a high level, Chris, I'd just say that we've seen that Vector is really competitive across all platforms, and we're seeing that continuing.

Your next question comes from the line of Vasily Karasyov with Cannonball.

Congratulations. I wanted to ask for details on the growth of the Grow segment in Q3. Can you explain how the revenue from the solutions, excluding Unity Vector, performed during the quarter? What does your guidance for Q4 indicate for that portion of revenue? Additionally, how should we consider it in the long term? Is it expected to grow sequentially, remain stable, or how should we approach modeling it?

Vasily, thank you for the question. We are not reporting breakdowns in the ad revenue number. So we really can't get into that. I would say that in general, we couldn't be more thrilled with the progress we're making across the entire segment. We're seeing really positive trends across all of our ad businesses, and we expect that number to grow over time. But beyond that, I don't think we want to comment too much.

Your next question comes from the line of Andrew Boone with Citizens.

Matt, in your prepared comments, you spoke about empowering any creator, not just software developers. Can you flesh out that comment and help us understand the kind of the bigger picture strategy and the product roadmap as generative AI becomes more impactful? And then, Jarrod, is there anything on the cost side that we should be aware of as we think about 2026? It sounds like you may have some opportunities here. What does that look like?

I'll address the first part of your question, and then Jarrod can chime in. Thank you for asking. What I meant is that Unity's core mission has always revolved around making game development accessible to everyone. Twenty years ago, this meant providing tools and technologies that allowed any software developer to enter the gaming industry. Our vision was that one day, an individual could create a game from home that could be enjoyed by millions. That dream has truly come to fruition. Now, we are seeing how AI technologies can further simplify the game development process, benefiting not only professional developers but also allowing them to create more efficiently and effectively. This will free up time for them to innovate, rather than being bogged down with the initial setup. Developers often find themselves spending too much time replicating features found in competitor games before they can innovate. We believe our tools will help them streamline those repetitive tasks so they can focus more on innovation, which is crucial for the industry. Additionally, our vision of democratization is expanding. We expect Unity's tools will not only attract software developers-turned-game developers, but also enable regular content creators to develop interactive experiences easily within the Unity ecosystem. From our experience in building interactive applications, we've learned that engagement and time spent are vital. Creators seeking to increase engagement often turn to interactivity as the solution. Interactivity fosters engagement and social interaction, which is at the heart of content creation. We are genuinely excited about combining improved tools and greater interactivity across various content types, and we believe we have a significant role to play in this evolving landscape.

And just following up on the second part of your question, Andrew, on the cost side, we're excited about the progress we've made so far this year. EBITDA margins are up 200 basis points year-over-year and sequentially in the third quarter. They're up 400 basis points from the beginning of the year. What we've seen is operating leverage across the business, and we are blessed with extremely high gross margins. Gross margins at Unity are about 82%, 83%. Contribution margins are dramatically higher than that. There's a significant portion of our cost of goods sold that are actually fixed. What that really means for us looking forward into 2026 is that we can expect to benefit from the revenue growth that we expect in the form of significant operating leverage. If you look back over the last couple of years, we've had to battle against operating deleverage from the simplification and streamlining of our business. The opposite is going to happen looking forward in 2026. When you combine that operating leverage with cost discipline and our ability to leverage AI and automation to improve our business, we really think there's the potential to both expand margins and invest in some of the really important product initiatives that Matt has been laying out. We think there's a huge organic growth opportunity in our industry. We think we're really blessed with the assets that we have. I think when you think about elements like IP, when you think about collaboration, when you think about some of the data that we uniquely have access to, we think that we can expand the margins of the business while also significantly investing in the product opportunity, really resulting in a nice setup for 2026 from a margin perspective.

Your next question comes from the line of Dylan Becker with William Blair.

Matt, maybe going back to the idea of in-app purchase monetization. I think the opportunity there is fairly clear. But wondering as well kind of the economics of that shift to a third-party payments provider, how that impacts your customers, the publishers, the studios themselves, right? Is that something that's going to be flowed through 100% to kind of their bottom line? Is that something that they're going to redeploy maybe lower ROAS threshold, maybe they accelerate content creation? It feels like there are other indirect ways that, that can be valuable and accretive to your business. Just wondering how you guys kind of think through the indirect opportunity there as well.

Yes. I think from the perspective of the developer, Dylan, the way to think about this is they're going to recapture some margin taking over more responsibility for their own commerce. But they're not going to recapture all that margin because there are things to do, right? To your point, they've got to be more responsible for processing payments, and they've got to do some promotion to potentially encourage customers to move to their commerce solution. So there are ways that both costs and promotional costs that chip away at that. Having said all that, there's meaningful money left over. And we have, I think, on prior calls, talked about the fact that we believe that a lot of that leftover margin is going to be turned into a fuel for growth. That's what companies do. If they can continue to buy ROAS positive advertising to drive growth, that's what they're going to do. And when your business gets more profitable, that's the first thing you're going to think about. And so we expect that to be, over time, I think, a real positive for us and for the industry as a whole, frankly. And then as we talked about on the commerce side itself, we're excited about the opportunity to be an open partner to the developer and to help the developer navigate what is going to be an increasingly complex hybrid world as it relates to commerce and transactions going forward.

Your next question comes from the line of Benjamin Black with Deutsche Bank.

I'm curious, is there anything you're seeing in the performance of Vector and the Unity ad network today that may change your strategy to potentially go after the larger e-commerce or web-based advertising opportunity earlier? And then a follow-up on the runtime, just looking beyond data retrieval, what other steps are necessary for the data to be distilled, to be put to work? And when next year do you think we should start seeing sort of the early innings of the impact on the financials?

Ben, thanks for the question. I think over the long term, we're really bullish about the opportunities outside of gaming in the advertising space. We are primarily focused on the gaming market. It's what we know best. We think it's what's most valuable for our customers and our partners. But we are mindful of the opportunity over time. As I think we've shared before, our first foray into non-gaming revenue is more associated with programmatic advertising. And we’re excited about the opportunity in programmatic. We think we can create a more efficient, really transparent path for brands to bid on mobile gaming ad opportunities and to enrich that path with additional data that they have not had before to create better outcomes. Programmatic ads is something like a $700 billion in ad spend in 2026 is a projection. So there are real opportunities, and we think that spend is going to move more from the traditional open web into other environments like CTV and retail media. And we think with the scale that we're operating in, combined with the privacy-safe way that we can help advertisers access the mobile customer, we think there's a real opportunity here. We made a really big hire in this space last month. We launched a product we call the Audience Hub, which is kind of our first foray into helping brands of all types reach this new audience. And we've recently seen that campaigns powered by our Audience Hub are delivering meaningful lifts in engagement rates. So we're pretty excited about that in non-gaming. And then we'll think about e-commerce potentially next, but it's not something that's really close in for us. I'm sorry, please continue. Would you like to reiterate? Or I can...

Yes, go ahead.

The runtime opportunity is significant for us and is unique to Unity. While it has some aspects of a science project, it is primarily an applied science project that we are diligently working on. We're pleased with the progress and are optimistic about the potential. One of the aspects that makes Unity interesting across all areas of our business is our horizontal operation with tens of thousands, even hundreds of thousands of applications connected through our runtime, reaching billions of consumers. This provides us with an extraordinary opportunity to help our developer customers better understand their game players and app users, making user acquisition more efficient.

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe ask one bigger picture one, and then I'll bring it back to the P&L. When you think about the scope to apply greater and increased levels of compute capacity to your business over the next 3 to 5 years, how do you think about your line of sight into that capacity and the step function changes that increased compute could actually lead to in terms of second and third derivative order effects of how the business could scale and grow in the years ahead? And the second part would be, with that potential on the revenue side, how do you think about any offsetting impacts on margin as compute capacity also scales as well?

Thank you for the question, Eric. What's exciting about our business is the opportunities we see on all fronts. As the cost of compute decreases and we become more efficient, we anticipate growth in our business, particularly on the Grow side. Over time, we believe that the percentage of our cloud costs will continue to decline due to this efficiency. Even as we handle larger amounts of data and increasingly complex inference tasks, this will ultimately benefit our business. Additionally, we expect this trend to positively impact our Create business as well, with more creators building games and utilizing Unity, and relying on compute-intensive solutions. As efficiency improves, we expect that more people will adopt our tools and platforms for content creation, which is promising for our business.

Yes. Eric, I would just add on to that, which is to say that cloud costs for Unity today are the second largest cost in our business. You would have seen that in the third quarter, our cost of revenue would have increased, and that's really directly in line with the very significant growth that we experienced in our Grow business. We are not afraid of building our business where it is computationally intensive for a period of time because what we found is that over time, we are able to make that consumption of compute much more efficient, much more effective. The cloud providers are doing a great job of driving efficiencies over time, reducing unit prices to us, and our developers on our side are becoming much more effective and efficient in terms of the way that they are consuming compute, effectively commoditizing layers of compute on a very regular and recurring basis. So we're not afraid of getting more advanced in terms of the consumption that we use because we know that this is going to go down over time in terms of cost to serve.

Your next question comes from the line of Martin Yang with Oppenheimer.

I'm curious about your prepared remarks comment regarding China. Is there anything different that's happening in China where you see momentum? There are very unique aspects of the ecosystem in automotive and mini apps. Anything that worth elaborating on in China for our business?

Yes, there's actually a lot to elaborate on there. So Martin, thank you for the question. China has been a real bright spot for us. And it's no accident. Unity is the only platform that works seamlessly with all of the Chinese platforms, including Open Harmony, which is increasingly becoming the standard for mobile in China. So we have a really important and growing business there. As I think you know, China is the largest market for gaming in the world, I think, at this point and is growing really, really quickly. And we're really well positioned there on the gaming side, having been there for quite some time and again, having worked really hard and well to ensure that our technology is compatible and will be compatible over the long term. Lots of big hit games in the Chinese market are made with Unity. At the same time, on the industry side, Asia has been a real bright spot for us, particularly with respect to automotive, where the vast majority of the automakers in Asia are using Unity's technology for development of their in-dash experiences, for example. We've also had a lot of penetration in our industry team across more manufacturing businesses in China, lots of work around visualization of factory floors and the like. So China has been and we hope will continue to be a real bright spot for our business.

Martin, I would just add to that. When you look at our Chinese revenue, which we do disclose, it's improved from 15% of revenue to 20% of revenue over the course of the past year. That's a pretty broad-based increase in terms of the revenue growth. So that is both impacting our Create business, which Matt outlined in detail. But what we're also seeing is publishers of Chinese games leverage Unity for global user acquisition. And as Unity Vector improves its efficacy, that is a global phenomenon, and we are seeing that growth in China take place across both Grow and across Create. We're also seeing that as Unity is delivering a quality product, our ability to enforce our intellectual property is resounding with clients. Customers understand that we're providing a high-quality product. They're paying for that high-quality product, and that's also resulting in strong growth in China and globally in Asia.

Your next question comes from the line of Tom Champion with Piper Sandler.

I just wanted to pick up on the last question related to China. It did look like a lot of the year-over-year growth on a dollar basis came from China. I'm just curious, Jarrod, maybe you said that was balanced across Create and Grow. But if we looked at growth on the Grow side on a geographic basis, would that look a little more balanced than maybe it does in aggregate? So that would be the first question. And then, Jarrod, I'm wondering if you could just touch a little bit on capital allocation. It seems like you've gotten awful lot of cash and really nice free cash flow generation here. What's kind of the thinking on capital allocation going forward?

Yes. Thank you for the question. I'll just make a brief comment, and then I'll pass it over to Jarrod. The revenue growth in Create really has three principal drivers in the third quarter. The first one was the impact, the ongoing impact of the price increases that we've had, which are beginning to roll through, now been a couple of quarters, so beginning to roll through the P&L and will continue to do so over the course of 2026. As you pointed out, growth in China is a meaningful piece. And then also more broadly, more generally outside of China, the growth in our industry business as well. And it's really those three that are driving the really positive results in Create.

Yes, I think that's absolutely correct. We talked about a significant customer win in the second quarter, which is important to highlight, especially regarding China. You're right about the capital aspect. We've been successful in generating cash, with an increase of nearly $0.5 billion over the past year. A small portion of that comes from financing and the refinancing transaction we did in February, but the majority is from cash flow generated by our operations and a strong free cash flow conversion on EBITDA. From a business standpoint, we are currently focused intently on certain product opportunities that are intrinsic to our business, which need our complete attention. We will have some refinancing to do in the future and some conversions that are maturing, but we do not need to raise additional capital to meet those obligations. We will be on the lookout for possible acquisition opportunities, but we have a high bar in evaluating them, considering the robust product and organic growth opportunities we see ahead. I am very pleased with our cash generation and will be prudent in how we manage that capital, ensuring we remain focused on what we believe is an improving and highly appealing organic growth opportunity in front of us.

Your final question comes from the line of Clark Lampen with BTIG.

We've dug into a lot of sort of very specific things on the product side and sort of Unity specific. Maybe if we pull back and sort of talk about the mobile market for a second, I wanted to see if you guys could provide some perspective on the way that products like Vector and what some of your peers have released are really impacting the market and developer spend. It sounds like financing companies are stepping in to sort of provide more ubiquitous capital to the market. Are we in a phase right now where you think the market is improving, capturing momentum and that's likely to continue into 2026. Maybe help us think about, I guess, the sort of systematic backdrop and how that's improving alongside the product work you're doing.

Thank you for the question, Clark. We have a positive outlook on the growth of the games business overall, not just in mobile, which we are confident about and expect to expand, but in the industry as a whole. There have been some targeted challenges in this market, but I believe we are experiencing a creative transformation where the games business is evolving while still growing. The surge of exciting new games, which we are already witnessing and expect to see accelerate in the coming months and years, will highlight the importance of AI-driven discovery even more. We aim to support developers and publishers as they navigate this challenging market, which will become more competitive due to the influx of content. We see ourselves as having a significant role in helping our customers capitalize on the expanding opportunities by providing them with better, more effective, and efficient tools to acquire new customers and manage their existing ones. We are enthusiastic about our position within the games industry at this moment, as many other businesses tend to focus narrowly on specific genres or platforms, whereas we operate broadly across all areas. Our main goal is to ensure a healthy ecosystem that enables developers to grow their businesses. We support them throughout the lifecycle of their games, from the initial development stage to live operations, optimizing revenue and engagement, and acquiring new users. As these activities increasingly rely on AI and consumer behavior insights, the interconnected nature of our offerings will be significant for us moving forward. Thus, we are very optimistic about the market's growth and our potential role in it.

Okay. And if I may ask, I guess, just a very quick sort of Vector-related follow-up. In prior quarters, you talked about sort of returns dispersion between your customers and some experiencing sort of better performance than others. Has that narrowed of late? Are you seeing sort of a tighter band right now and sort of higher ROAS on average for all customers? Or is it sort of maybe moving in the other direction and we should think about growth being driven by a smaller handful maybe of larger customers that are leaning into this a lot more aggressively. I'm just curious, I guess, how that's sort of evolved and what you've seen.

You bet. No, we are seeing broad-based improvement across all of our customer sets, small and big geography, genre, the improvements are really quite broad-based.

This concludes the question-and-answer session. I will now turn the call back to Alex for closing remarks.

Thanks, everyone, for joining. We look forward to connecting throughout the quarter. Have a great day.