What happened

Shares of Unity Software (U -1.40%) were up 27% as of 12:24 p.m. ET on Thursday after the company delivered better-than-expected earnings results for the third quarter.

The stock has fallen sharply this year after an internal performance problem caused revenue growth to slow with one of its advertising products and the stock is down about 80% year to date. But in the most recent quarterly report, released Wednesday evening, management said those issues were behind them, which got the market enthused about business momentum heading into 2023.

So what

Unity makes money from subscriptions to its 3D software solutions used in making video games. In the third quarter, revenue from the "create solutions" segment grew 54%, driving total revenue up 13% over the year-ago quarter. 

Revenue growth accelerated over the second quarter's 9%, despite a 7% year-over-year decline in the "operate solutions" segment, where Unity offers advertising tools to help game companies monetize their games. Most importantly, the "operate" business grew 8% sequentially over the second quarter, which is a sign that the business is turning the corner.

Now what

One area of concern has been Unity's profitability. Unity's net loss has widened this year, to $641 million through the first nine months of 2022, from $370 million last year. That's a large loss for a business generating $1.3 billion in annual revenue, but with growth starting to accelerate again, this shouldn't be a problem.

Management expects to report a small profit for the fourth quarter, with adjusted operating margin between 1% and 3%. The recent acquisition of ironSource will play a big role in helping Unity reach a larger profit over the next few years. 

To some degree, Unity's stock performance is dependent on the growth of the video game industry. There was softness in player engagement at the start of the year, but engagement saw an increase in the third quarter, according to management, and that bodes well for the business heading into 2023.