Unity Software Inc. (NYSE: U) saw its shares surge 14% in Tuesday trading, reaching $40.42 by late morning after the company reported second-quarter results that exceeded expectations across key metrics. The stock touched an intraday high of $42.70, reflecting strong investor sentiment following the earnings release.
The company reported total revenue of $546.5 million for the quarter, up 24% year-over-year and surpassing the upper end of its May guidance range of $505–$515 million. Adjusted EBITDA came in at $160.2 million, well above the $130–$135 million forecast, representing a margin of 29.3%. Free cash flow also improved significantly, rising 59% to $202 million.
Strategic revenue, which includes the company's core growth and creation segments, accounted for 89% of total sales, up from 80% in the prior-year quarter. This category grew 38% year-over-year to $486.4 million, driven by a 63% jump in strategic Grow revenue, which reached $329 million. Strategic Create revenue rose a modest 5% to $157.5 million, though excluding a one-time $12 million item from last year, growth was 14%.
CEO Matt Bromberg hailed the quarter as "arguably the best in Unity's history as a public company," highlighting the strength of the Grow segment, which is increasingly powered by its Vector advertising solution. The company's strategic pivot toward advertising is evident in the revenue mix: Grow now represents 60% of total revenue, up from 46% a year earlier.
Looking ahead, Unity provided third-quarter guidance that implies continued momentum. The company expects strategic revenue of $540–$550 million, up 11% to 13% sequentially, with strategic Grow projected at $380–$385 million, a 16% to 17% increase. Non-strategic revenue is expected to drop about 67% to roughly $20 million, reflecting the recent sale of Supersonic, which closed on August 4. Total revenue is projected at $560–$570 million, with adjusted EBITDA of $185–$190 million, implying a margin of approximately 33.2%.
Despite the strong performance, the stock's current price of $40.42 is already 9.5% above the average analyst target of $36.91, suggesting that much of the good news is priced in. The consensus rating remains Overweight, with 18 buy ratings, 3 overweight, and 9 holds. The median price target stands at $36, with a high of $54.
Investors are now focused on whether analysts will raise their targets following the results. The company's increasing reliance on Vector and mobile advertising presents both opportunity and risk, as does its continued GAAP losses, which narrowed to $23.6 million from $108.8 million in the prior year. Stock-based compensation also declined to $75.6 million from $101.4 million.
The key challenge for Unity will be sustaining this growth trajectory. With the portfolio streamlining nearly complete, Vector must deliver the bulk of the projected sequential growth in strategic revenue. The market will be watching closely to see if the company can maintain this momentum in the coming quarters.
