Unity Software Inc. 10-Q Summary: Q1 2026
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended March 31, 2026. Unity Software Inc. provides a suite of tools for developing, deploying, and growing games and interactive experiences through its "Create Solutions" and "Grow Solutions" platforms. The company is a large accelerated filer with 436.5 million shares of common stock outstanding as of April 30, 2026.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 |
|---|---|---|
| Revenue | $508.2 million | $435.0 million |
| Gross Profit | $156.6 million | $321.0 million |
| Gross Margin | 31% | 74% |
| Operating Loss | $(351.4) million | $(127.9) million |
| Net Loss | $(346.9) million | $(77.9) million |
| Diluted Net Loss Per Share | $(0.80) | $(0.19) |
| Operating Cash Flow | $71.3 million | $13.0 million |
| Free Cash Flow | $66.5 million | $7.3 million |
| Cash and Equivalents | $2.14 billion | $1.55 billion (end of period) |
| Total Debt (Convertible Notes) | $2.24 billion | $2.24 billion |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17% year-over-year, driven by a 23% increase in Grow Solutions revenue (primarily Unity Ad Network) and a 4% increase in Create Solutions revenue.
- Margin Compression: Gross margin collapsed from 74% to 31%. This was primarily due to $279 million in impairment charges recorded in Q1 2026 related to the decision to sunset the ironSource Ads Network and divest the Supersonic game publishing business. Of this, $227 million was recorded in Cost of Revenue and $47 million in Sales and Marketing.
- Operating Expenses: Total operating expenses rose to $508.0 million from $449.0 million. Excluding impairments, restructuring costs were approximately $7 million in Q1 2026 compared to $20 million in Q1 2025.
- Non-GAAP Performance: Adjusted EBITDA improved to $138.3 million from $83.9 million, and Adjusted EPS was $0.23 compared to $0.24 in the prior year.
Guidance, Outlook, and Risks
- Strategic Shifts: Unity announced the sunset of the ironSource Ads Network (effective April 30, 2026) and engaged advisors for the divestiture of Supersonic. Future Grow Solutions revenue is expected to rely primarily on the Unity Ad Network.
- AI Strategy: The company is heavily investing in AI (Unity Vector, AI Assistant, Unity Sentis). Risks include reliance on third-party models, regulatory uncertainty (e.g., EU AI Act), and potential IP infringement claims.
- Liquidity: Management believes existing cash ($2.14 billion) and operating cash flows are sufficient for the next 12 months, including the settlement of $558 million in 2026 Convertible Notes maturing in November 2026.
- Restructuring: Ongoing workforce reductions and business realignment continue. The company expects to incur GAAP operating losses for the foreseeable future due to continued investments in R&D and sales.
Investor Verification Checklist
- Impairment Details: Verify the specific valuation methodologies used for the $279 million impairment charge and the timeline for the Supersonic divestiture.
- Debt Maturity: Confirm the company's plan to settle the $558 million 2026 Convertible Notes in cash upon maturity in November 2026.
- Non-Strategic Revenue: Assess the impact of excluding ironSource and Supersonic revenue on future growth projections for Grow Solutions.
- AI Costs vs. Returns: Monitor the trajectory of AI-related R&D spending against the adoption rates of new AI-native products like Unity Vector.
- China Exposure: Review the status of Unity China (20.5% third-party ownership) and any potential repurchase obligations for redeemable noncontrolling interests.