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Unity (U +6%) is modeling some nice greenery today after posting a penny beat on the bottom line and its third straight quarter of over 40% revenue growth for Q3. The software development and 3D modeling company also agreed to acquire Weta Digital's tools and talent for $1.625 bln in cash and equity. Although the acquisition is only expected to generate about $70 mln in revenue in FY22 (mostly through a licensing agreement with Weta VFX, a former division of Weta) with no material revenue or operating impact in FY21, we think the purchase is an excellent fit.

Weta was the company behind the 3D modeling in blockbuster films such as Avatar and Lord of The Rings; its tools have only ever been used in-house at Weta VFX. Now Unity is gaining access to these tools and will release them for game developers, movie producers, and companies in the automotive, architecture, and e-commerce industries. Also, as the metaverse has become a talking point for massive tech giants like NVIDIA (NVDA) and Facebook (FB), Unity will now have even more tools at its disposal to assist in the creation of whatever the metaverse turns out to be.

• Turning to Q3, Unity continued to post net losses, recording adjusted EPS of $(0.06). This was an improvement from its loss of $(0.09) a share in the year-ago period. Meanwhile, revenue growth has been stellar since Unity went public in September 2020; revenues jumped 42.6% yr/yr in Q3 to $286.33 mln after the company had already posted growth of +53.4% in 3Q20.
• Customers generating over $100K annually also continued to show strength in Q3, expanding 32% yr/yr to 973. Furthermore, Unity's dollar-based net expansion rate was 142%, showing that revenue expansion is continually coming from existing customers, a bullish sign of stickiness with Unity's services. Unity's net expansion rate has only grown since it posted a rate of 138% in its first quarter after going public.
• Unity also continued to win deals outside of the game developing space. For example, during the quarter, Unity beat out the competition and won a manufacturer of farming equipment's product configurator business. Unity is also going live with its 3D sports platform, Metacast, in partnership with the UFC. Although Unity doesn't expect any material impact from the launch, it could lead to multiple sports deals given how Metacast allows viewership from virtually every angle, which could change how sports are broadcasted.

Overall, Unity posted a solid quarter and expects to cap off a great year with about 30% yr/yr revenue growth in Q4. Although the Weta acquisition may seem pricey at 23x expected sales, by using the deal to give developers across multiple industries access to the tools created by Weta to produce 3D models, Unity is in an excellent position to benefit greatly from the acquisition over the long term.