Q4 2024 ZSpace Inc Earnings Call
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Speaker Change: Good morning everyone and thank you for participating in today's conference call to discuss these space and financial results for the fourth quarter and full year ended December 31, 2024.
Speaker Change: Joining us today are ZSpace CEO , Paul Kellenberger, CFO , Eric De Oliveira, and Greg Robles from Industrial Relations. Following the remarks, we'll open the company's safe hardware statement. Greg, please go ahead.
Greg Robles: Thanks operator. Good morning and thanks for joining our conference call to discuss our fourth quarter and full year 2024 financial results.
Greg Robles: Before we begin I'd like to remind everyone that certain statements made on this call may be considered forward-looking statements.
Greg Robles: These statements are based on our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially.
Greg Robles: These risks and uncertainties are described in our most recent annual report on Form 10K filed with the Securities and Exchange Commission.
Greg Robles: Additionally, we may discuss certain key business metrics which are non-GAAP financial measures.
Greg Robles: A description of these non-GAAP measures and any comparison to the most directly comparable GAAP measures can be found in our earnings release on the Investor Relations section of our website. Now, I would like to turn the call over to the CEO of ZSpace, Paul Kellenberger. Paul?
Paul Kellenberger: Thank you Greg and good morning everyone. Happy Friday by the way. Thank you for joining us for ZSpace's first public earnings call.
Paul Kellenberger: Into over 50 countries worldwide.
Paul Kellenberger: Before we discuss our 2024 highlights I'd like to provide an overview of <unk> market presence and growth potential that positions us for long term success.
Paul Kellenberger: Together, the K 12, education, and Cte markets exceed $69 billion.
Paul Kellenberger: Globally.
Paul Kellenberger: The global AD Tech market is valued at over $142 billion in 2023 and is projected to grow at 13, 6% CAGR through 2030.
Speaker Change: Now the E R V. Our education segment.
Speaker Change: As expected to reach $14 2 billion by 2028 growing at a 30% CAGR.
Speaker Change: And both of these factors reinforce our confidence in these spaces long term growth potential.
Speaker Change: Specifically to the U S market.
Speaker Change: Our platform today is currently implemented in more than 3500.
Speaker Change: The approximately 13000 public school districts, including were installed in over 80% of the largest 100 school districts.
Speaker Change: And another opportunity, we see strong cross sell between our two markets, enabling further expansion.
Speaker Change: And to date, 73% of our existing K 12 customers have adopted our Cte solutions demonstrating the success of the cross sell.
Speaker Change: Our flagship product inspire along with our recently introduced imagine product offer key advantages.
Speaker Change: They feature proprietary hardware and software designed to create an immersive and interactive learning experience without the need for headsets or glasses, which can be impractical and in education and learning setting.
Speaker Change: We believe the space is redefining the classroom experience, enabling students to explore concepts that would otherwise be too dangerous expensive or impossible to replicate.
Speaker Change: In a traditional learning environment.
Speaker Change: Stem education to hands on technical career training, we provide a scalable and repeatable learning solutions that equip students with the skills needed to succeed in the workforce.
Speaker Change: Looking at the business side 2024 has been a pivotal year for <unk> space as we continue to drive growth.
Speaker Change: And expand our reach in the education sector.
Speaker Change: A few highlights of note.
Speaker Change: Our largest customer win to date was with St. Louis Public schools, where we secured a roughly $5 million deal to provide a complete K 12 stem solution.
Speaker Change: This win is a great example of how we're making a real impact on education at scale.
Speaker Change: We also made significant strides in expanding our content offering, particularly with the launch of our career readiness solutions.
Speaker Change: This includes a unique feature a personalized AI career coach which has been met with a lot of excitement from our customers and it shows how there is a growing demand for solutions that help bridge students gap that helps students bridge the gap between education and the workforce.
Speaker Change: We were also very proud to receive the best of show Award at Eli 24.
Speaker Change: Is the largest annual K 12 education conference globally.
Speaker Change: Tech and learning over our career readiness solution.
Speaker Change: This recognition is a testament to the value, we're delivering to our customers and reinforces our leadership in the education technology space.
Speaker Change: In addition, these space has built a very robust IP portfolio, we have over 80 issued patents.
Speaker Change: Any of which are particularly unique given our display based augmented reality solution with interactions.
Eric: Now before turning the call over to Eric.
Eric: I'd like to cover briefly for near term initiatives that we believe will drive further expansion of the business.
Eric: Number one we will continue to focus on increasing our penetration within the existing K 12 stem and Cte markets capitalizing on the growing demand for immersive learning solution.
Eric: Today, we're in over 80% of the top 100 school districts. However, we have an incredible growth opportunity just within this existing customer base.
Eric: Second through our network of over 25 resellers, reaching more than 50 countries worldwide. We are actively expanding our international presence.
Eric: Third we have always been focused on R&D and remain committed to investing in R&D to enhance our overall platform.
Eric: Ensuring we stay ahead of emerging trends and continuing to meet the needs of our customers.
Lastly, and as part of our growth strategy. We are focused on acquiring complementary software solutions to accelerate the growth of our software revenue.
Eric: Notably we acquired blocks CAD.
Eric: Q1.
Eric: Of 2025.
Eric: Which strengthens our immersive learning solutions with their three D design platform.
Eric: <unk> education.
Eric: Looking ahead, we remain open to opportunities that accelerate our strategy and drive value for shareholders.
Eric: With that I would like to turn the call over to Eric <unk>.
Eric: <unk> our CFO.
Speaker Change: Over to you Eric.
Eric: Yes.
Eric: Thank you Paul expect it to be with you today.
Speaker Change: Before diving into our results it's important to communicate how we recognize revenue.
Speaker Change: Our revenue consists of hardware revenue software applications revenue and services revenue.
Speaker Change: The latter at approximately equal mix of product warranty is <unk>.
Speaker Change: Pedagogical training to support educators efforts to integrate the space.
Speaker Change: VR content with their classroom curriculum.
Speaker Change: Hardware revenue was derived from the initial upfront deployment of platforms to class works.
Speaker Change: Hardware revenue is generally recognized upon shipment to the customer.
Speaker Change: Software content is predominantly device based licensed software for annual and multiyear terms.
Under our agreements, we generally account for the entirety of the license value in period upon shipment of the associated hardware.
Speaker Change: Our issuance of a license renewal regardless of term life.
Speaker Change: Only a small portion of our software revenue was recognized.
Speaker Change: As a result of this accounting treatment, our revenue may exhibit quarter to quarter variability due.
Speaker Change: Factors, such as the underlying seasonality of customer budgeting cycles from which we derive our bookings.
Speaker Change: These patterns have occasionally been exaggerated when the company has lacked working capital to fulfill backlog quickly, which pushed fulfillment and revenue into later periods.
Speaker Change: Growth rates measured in future periods can be significantly affected by these comparisons.
Speaker Change: In the long run we expect the business to match seasonality seasonally stronger sales periods in the second and third calendar quarters of the year.
Speaker Change: And seasonally weaker sales periods in the first and fourth quarters of the year.
Speaker Change: Given these dynamics and in order to provide a normalized view of our software ecosystem.
Speaker Change: We presented two key operating metrics.
Speaker Change: Annualized contract value or <unk>, and net dollar revenue retention or M. D. R. R.
Speaker Change: Both metrics will be provided quarterly and will be measured using trailing 12 month data.
Speaker Change: ACD of renewable software is calculated as the total value of the software license.
Speaker Change: Added by its term length.
Speaker Change: Tung over all renewable license agreements currently active with customers.
Speaker Change: We believe that the long term health of our business is correlated with the growth of this metric.
Speaker Change: Our measure of the stickiness of our <unk> solutions in the classroom is the envy of our software ACB at the customer level.
Speaker Change: <unk> calculated for customers present at the start of a 12 month period with at least $50000 in renewable software ACD.
Speaker Change: When compared to the ACD for that same group of customers at the end of that same 12 month period.
Speaker Change: Customers with at least $50000 represented slightly more than half of our total renewable software ACB.
Speaker Change: I would now like to discuss full year 2024 results as well as our fourth quarter performance.
Speaker Change: 2024 revenues were $38 million down 13% year on year as capital constraints prior to our IPO limited our ability to fulfill orders from backlog.
Speaker Change: We concluded the year with $9 $2 million of unfulfilled orders stranded in backlog.
Speaker Change: As of September 31, 2024, the annualized contract value of renewable software revenue was $11 $3 million.
Speaker Change: Up 6% compared with 12 months ago.
Speaker Change: The net dollar revenue retention as of December 31, 2024 for customers with at least $50000 of ACB as of December 31, 2023 with 92%.
Speaker Change: A reminder, that each of these metrics require that we have fulfilled the underlying software licenses and in the course of our accounting in each period revenue was recognized at the time of settlement.
Speaker Change: We're very pleased that our efforts to focus on the importance of our software content and driving student outcomes has generated continued growth in the ACB metric.
Speaker Change: And high retention rates.
Speaker Change: The headwinds we incurred this year as we proceed capital.
Speaker Change: Bookings for the year were $41 5 million up 1% year on year.
Speaker Change: Excluding China, where we have made a deliberate decision to deemphasize.
Speaker Change: U S and rest of world bookings were $39 9 million up.
Speaker Change: Up 7% year on year.
Speaker Change: This reflects growth of 4% in the core U S market and 37% growth in international geographies other than China.
Speaker Change: Gross margins for the year were 49% compared with 38, 5% from the prior year, an improvement of 240 basis points.
Speaker Change: Approximately three quarters of this margin expansion is attributable to a mix shift of five percentage points of revenue out of hardware and in software and services.
Speaker Change: We credit the responsiveness of our direct quota carrying sales team to a new incentive plan prioritizing software content.
Speaker Change: And strong customer renewals for driving this mix shift in our 2020 for bookings and revenue composition, which was particularly evident in the second half of the year.
Speaker Change: The remainder of our gross margin improvement was rate base and linked to the abolition of certain incentives for term length.
Speaker Change: That were deemed to have insufficient correlation with sales success.
Speaker Change: As well as some modest software content acquisitions in.
Speaker Change: In verticals, where we previously sold third party content and incurred a revenue share.
Speaker Change: Yeah.
Speaker Change: Operating expenses for the year were $33 2 million compared to $25 5 million, an increase of $7 7 million or 30%.
After normalizing for stock based compensation expense in the first quarter of the year operating expenses were flat year on year.
Speaker Change: Now moving to the fourth quarter.
Speaker Change: Revenues in the fourth quarter were $8 $5 million down 29% year on year as capital constraints prior to our IPO limited our ability to fulfill orders from backlog.
And the timing of receipt of IPO proceeds in the first week of December left insufficient time to pull product through our supply chain and fulfill the backlog.
Speaker Change: As previously noted we concluded the year with $9 $2 million of unfulfilled orders.
Speaker Change: Bookings for the fourth quarter, which along with the first quarter is our seasonally slow period.
Speaker Change: Were $5 $3 million.
Speaker Change: <unk>, 3% year on year.
Speaker Change: Excluding China.
Speaker Change: U S and rest of world bookings were $5 $3 million up 5% year on year.
Speaker Change: This reflects growth of 21% in the core U S market and a decline of 92% growth in international geographies other than China.
Speaker Change: The fourth quarter decline in international geographies outside of China.
Speaker Change: Similar patterns of seasonality and should be read in the context of 37% year on year growth International ex China for the entire year.
Speaker Change: Gross margins for the quarter were 47%.
Speaker Change: Compared with 34, 7% in the comparable quarter of the prior year.
Speaker Change: An improvement of 597 basis points.
Speaker Change: Although revenue composition improved modestly in the quarter compared with prior year almost all of the improvement is attributable to the write down of excess and obsolete inventory in the prior year quarter.
Speaker Change: Creating a favorable comparison.
Speaker Change: Some benefit was noted from margin improvements related to software content from the factors previously discussed.
Speaker Change: Although we began shipping inspire two units in the fourth quarter we.
Speaker Change: We do not expect the margin benefits to appear on our P&L until early 2025, when our fulfillment volume is exclusively made from stocks of the newest model.
Speaker Change: Operating expenses for the quarter was $6 2 million.
Speaker Change: Compared with $6 $1 million in the comparable quarter of the prior year at.
Speaker Change: An increase of zero point $1 million or 2%.
Speaker Change: Guidance for Q1, 'twenty five the first quarter of 2025 has brought significant uncertainty in our markets, but with countervailing theme.
Speaker Change: Although some education customers have demonstrated a mixture of hesitancy in their decision making.
Speaker Change: Which is being driven by uncertainty of funding sources for these spaces, K 12, and AR VR classroom solutions.
Speaker Change: Others have accelerated their purchases to lock in pricing and availability for Q2, and the coming school year.
Speaker Change: The net impact on our business remained somewhat unclear at this time.
Speaker Change: But may materialize as a lengthening of K 12 sales cycles.
Speaker Change: At the same time.
Speaker Change: <unk> solutions are finding favor driven by large funding announcements at the state level, such as California $417 million allocation for workforce development.
Speaker Change: And similar announcements in states, such as Texas, Florida, Pennsylvania, New York and others.
Speaker Change: Given this landscape along with the fact that our first quarter was nearly closed we would like to provide insight into Q1 revenues.
Speaker Change: We see realized revenues for the quarter slightly above $5 million.
Speaker Change: The uncertainty for the current quarter reflects timing of deal closing in our end markets given broader turbulence in the education market.
Speaker Change: Although uncertainty is likely to persist for the remainder of the year, we remain comfortable in our ability to capture and win new business across the K 12, and Cte content segments, even though performance may not be linear.
Speaker Change: Delivering growth on the full year.
Speaker Change: Regarding our capital allocation and management of operating expenses in particular, we continue to control spending strictly.
Speaker Change: As noted last year, we managed opex flat on a year on year basis. After normalizing for a one time true up of employee equity.
Speaker Change: This year, we anticipate keeping operating expense growth constrained.
Speaker Change: Less than half the rate of revenue growth on the full year.
Speaker Change: This excludes the impact of restricted stock unit grants to employees.
Speaker Change: 2025 restricted stock unit grants.
Speaker Change: By the count of <unk> issued this year 2025.
Speaker Change: As a percent of shares issued and outstanding are expected to be below a burn rate of 7%.
Speaker Change: Now I will turn the time back to the operator for Q&A.
Speaker Change: Thank you Sir.
Speaker Change: If you would like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
Speaker Change: Meanwhile, the compiles the Q&A roster.
Our first question comes from Noah <unk> with Northland Capital markets. Your line is open.
Speaker Change: Alright. Thank you. Thank you for the question.
Speaker Change: Got a few here.
Speaker Change: Help us understand why bookings is impacted by the timing of the IPO because it would appear that demand should be largely a couple to supply I think it would be really helpful to get that.
Speaker Change: Explanations out there.
Speaker Change: Thank you for being with us today and I appreciate the question.
Speaker Change: A key driver of bookings was the anticipated release of.
Speaker Change: Two new products that we unveiled earlier the second generation of our flagship inspire two product, which was unveiled in Q4 of 2024.
Speaker Change: And our imaging solution the smaller 14 inch form factor designs for the larger elementary school market.
Both of those products required capital to deploy and have available in quantity to launch bookings, while we had previously anticipated releasing those products much earlier in 2020 for delay in capital.
Speaker Change: US to unveil those at a later point in the school year and impacting their availability or sales launches and customer demos.
Speaker Change: And when did you actually have the inventory on hand to start getting yourselves demos done.
Speaker Change: So inventory for inspire two became available late in Q4.
Speaker Change: Inventory for imagine.
Speaker Change: <unk> is now available in Q1 of this year, we recorded bookings for the new imagine product in Q4 in advance of that launch.
Speaker Change: And are continuing to accelerate back now in Q1.
Speaker Change: Okay.
Speaker Change: Right.
Speaker Change: And then given the.
Speaker Change: $5 million revenue guidance for the March quarter.
Speaker Change: With.
Speaker Change: Now, having the supply in and.
Speaker Change: Obviously theres a lot of external factors that are impacting demand now.
Speaker Change: But it does seem like.
Speaker Change: Their bookings, Florida March quarter is indeed being impacted negatively.
Speaker Change: Looking at the segmentation that you provided for the December quarter, specifically it looks like you had a weak European bookings.
Speaker Change: Is that the continued trend that you expect into March quarter or is there some other mix shift going on.
Speaker Change: Driving was likely.
Speaker Change: Some weeks bookings activity that youre seeing.
Speaker Change: Now, let me break that follow up into two parts, one around geographic mix and the other around the uncertainty here.
Speaker Change: Internationally, we've seen significant strength in the last two years, we have growth rates in the mid <unk>. That's after excluding China, where we've made a deliberate decision to deemphasize growth and we anticipate continued strength on that trend line for international ex China.
Speaker Change: In our U S markets, we continue to see very strong interest in the solution.
Speaker Change: And.
Speaker Change: Our business is probably best characterized by a comment I heard recently, where we don't see a demand problem for RSV space solutions in the U S, particularly in the K 12 educational space.
Speaker Change: But the turbulence that we're seeing in the market challenges our end users to identify which pot of money will be used to fund the solutions now because there is so much interest in Cte solutions, we feel pretty confident in capturing that demand because our car.
Speaker Change: Library is fairly broad.
Speaker Change: But we see this as potentially accelerate or sorry, not accelerating extending the duration of sales cycles.
Speaker Change: As individual schools and school districts make a decision to move ahead with Z space.
Speaker Change: Now need to reapportion, where we identify which funding source will be used.
Speaker Change: To cover their Z space purchases is.
Speaker Change: Is that helpful.
Speaker Change: Yes, absolutely very very helpful.
Speaker Change: Alright, I'll see the floor I'll get back into the queue here. Thank you.
Speaker Change: Thank you. Our next question comes from Rohit Kulkarni with Roth Capital Partners. Your line is open.
Rohit Kulkarni: I hear you. Thank you. Thank you guys.
Rohit Kulkarni: A few questions here in terms of.
Rohit Kulkarni: Just the overall kind of breakdown of new products that you've launched a perhaps talk about the the biggest kind of learnings from our.
Rohit Kulkarni: Or from the sales force in terms of what has been the reception and.
And the last 100 days from the two new products and.
Rohit Kulkarni: Where do you see.
Rohit Kulkarni: More optimistic about.
Reception in terms of rich pockets or which use cases are there any.
Rohit Kulkarni: Cohorts of.
Rohit Kulkarni: To your broader market as such.
Paul Kellenberger: Yes, let me take that one rohit good morning, its Paul.
Paul Kellenberger: I think right now and by the way the word that we certainly hear used a lot is uncertainty given what's going on in the market in general.
Paul Kellenberger: I would say over the course of the last.
Paul Kellenberger: Couple of months in this first quarter in particular.
Paul Kellenberger: Clearly there is.
Paul Kellenberger: Cte workforce development focus continues very strongly and we continue to see very strong demand there.
Paul Kellenberger: In this uncertain market and all the things that are going on.
Paul Kellenberger: I think the other thing that we.
Paul Kellenberger: We're very bullish on right now is our.
Paul Kellenberger: Relatively recently launched imagine elementary solution and I think we've seen already that.
Paul Kellenberger: It had.
Paul Kellenberger: Real positive impact.
Paul Kellenberger: And positive reception, so I think amidst all of the uncertainty going on in the market in general I mean, those are a couple of things that I would point to.
Paul Kellenberger: And again.
Paul Kellenberger: Still we see the demand there so we feel good about that.
Paul Kellenberger: Okay, and then just in terms of.
Paul Kellenberger: The kind of outlook on what Youre seeing with regards to.
Paul Kellenberger: The uncertainty is there.
Paul Kellenberger: The lengthening of sales cycles and Oh.
Paul Kellenberger: In the school K through 12 schools.
Speaker Change: Can you compare this to any prior periods, if you have seen a year ago.
Speaker Change: This company for quite some time, but as if I were stronger alright with regards to how such.
Speaker Change: Our conversations tend to evolve there.
More comfort around how perhaps as we get into your peak.
Speaker Change: Seasonally strong seasons.
Speaker Change: Barring in Q2, and Q3, you hope those cycles come to a head.
Speaker Change: So I just was wondering really red would it compare to this current period of uncertainty too.
Speaker Change: Rohit I have to tell you I don't have a comparison.
Speaker Change: I think and part of it.
Speaker Change: Has to do with the timing of the buildup of the company over the last eight or nine years in terms of the.
Speaker Change: The business itself.
Speaker Change: I don't have a comparison bankruptcies we've seen this before.
Speaker Change: Again, I think right now there is no question that the.
Speaker Change: The uncertainty is particularly more so on the K 12 side than on the CPE side of it.
Speaker Change: It's lengthening the sales cycle, a little bit because people are hesitant to move forward I think on the other side of it. The other thing that we're hearing pretty strongly as people still have funds and the second quarter here and you could in the third quarter as you know in our business tend to be the really strong quarters.
Speaker Change: People are talking about making sure they spend there.
Speaker Change: Your money in the second quarter.
Speaker Change: So I think theres, a positive component to that and without getting into specific deals.
Speaker Change: That gives us some pretty strong confidence that.
Speaker Change: The people are going to move things ahead, regardless of how much uncertainty there is in the broader market.
Speaker Change: Okay great.
Speaker Change: Maybe a quick one for Eric.
Speaker Change: The gross margin trend how should we think about the gross margin that you saw in <unk> and.
Speaker Change: And you made comments around.
Speaker Change: Some of the potential uplift from the new hardware mix is still yet to come maybe just help frame Oh.
Speaker Change: What we saw for <unk> gross margins and how should we think about the gross margins coming forward.
Speaker Change: Thanks, Rohit, yes, we're particularly pleased with our success of driving increased software and services content and you saw that in three different ways in our 2024 results.
Speaker Change: The 5% mix shift out of hardware and the software and services compared to full year 2023.
Speaker Change: See it in the.
Speaker Change: Relative performance of software and services P&L revenue compared to hardware.
Speaker Change: And the result of that is the 240 basis points of margin expansion. This year over last year and I would note that that is an acceleration of margin expansion. If you go back to 2023 and compare that to 2022 results.
Speaker Change: That margin expansion has been driven by the software ecosystem.
Speaker Change: In at least a couple of ways firstly, as we add new clients and when you are older clients, we see increasing layers of software in the ecosystem being renewed.
Speaker Change: And that's where we look at our net dollar revenue retention and we're very pleased at the extent, we're able to hang on to existing business once we acquire it.
Speaker Change: That trend, we see continuing.
Speaker Change: And that's just a testimony of the extent to which educators district superintendents and principals.
Speaker Change: See our ARV, our solutions is not a shiny bell and whistle in a classroom, but a very real tool to drive student outcomes.
Speaker Change: On top of that the launch of inspire too and we imagine solutions, while not only providing a path for additional revenue acquisition as we provide a form factor if you imagine that better suits. The elementary school segment, which is seven to eight time.
Speaker Change: <unk> larger.
Speaker Change: The high school segment in K 12.
Speaker Change: Those new laptop platforms come at a favorable bond cost relative to their predecessor versions and that should be a source of hardware driven margin expansion.
Speaker Change: Essentially contributed a one time step function improvement.
Speaker Change: With additional benefits coming from innovations in our tracking and interaction devices. Both the stylists in the tracker, we anticipate that that could provide a tailwind of an additional 4% to seven percentage points of gross margin as that hardware rolls out.
Speaker Change: Okay. Okay. Thanks, Thanks Erika.
Speaker Change: Again, I'll go back into the queue and thanks for all the color.
Rohit Kulkarni: Thank you Rohit.
Speaker Change: Our next question comes from Alex Paris, with Barrington Research. Your line is open.
Speaker Change: Hi, guys. Thanks for taking my question I got a couple and I'll start the top down.
Speaker Change: First of all with regard to the length of the potential lengthening of the sales cycle within case K 12 due to uncertainty.
Speaker Change: Which definitely makes sense.
Speaker Change: K through 12 education is largely funded on a state and local basis.
Speaker Change: 85% plus.
Speaker Change: The federal money.
Speaker Change: <unk>.
Speaker Change: Which could cause some concern given dose and its effect on the department of education is really in title one in <unk>.
Speaker Change: Individuals with disabilities.
Speaker Change: I'm wondering if you could kind of go over the typical funding sources for your product in K through 12.
Speaker Change: Yes sure.
Alex Paris: Good morning, Alex.
Alex Paris: You are correct in everything you said.
Speaker Change: And the reality is most of the funding that goes towards the space whether it be in in K 12.
Alex Paris: Or Cte is not connected to the Doe.
Speaker Change: And.
Speaker Change: The other the other big one out there is perkins.
Speaker Change: And albeit the even though the money and the <unk>.
Speaker Change: 85% is state and local.
Speaker Change: I think what we see is the hesitancy, which is causing some of the uncertainties. So even though the funding is there and available I think it's just the uncertainty that goes around all the things going on and I think the nervousness on the part of a lot of senior leaders within the educate within our market system.
Speaker Change: And with what they see in the headlines.
Speaker Change: So to your point.
Speaker Change: The money is there the funding is there. It's the then the decision to go ahead and actually spend it.
Speaker Change: Got you that makes sense.
Speaker Change: And then here's another question for you.
Speaker Change: To what extent did you benefit from Essar funding before that program was sunset It last September.
Speaker Change: Yes.
Speaker Change: So really good question.
Speaker Change: The statistic I think we had for 2023 was that roughly a little over 10% I think was under 11%.
Speaker Change: Of our 2023 revenue.
Speaker Change: Essar related.
Speaker Change: So we didn't have the big run up like a lot of other education companies that really benefited from Essar.
Speaker Change: And consequently, we didn't have a really big falloff either.
Speaker Change: Relative to to the Essar on piece of it.
Speaker Change: So when Essar ran out your customers found other buckets of money to pay for the product for your 2020 for revenue.
Speaker Change: Correct correct.
Speaker Change: Okay, Great and then lastly on that topic, you said the sales cycle is.
Speaker Change: As a link sitting a little bit can.
Speaker Change: Can you give us like an order of magnitude what was the K through 12 average sales cycle and what does it look like today.
Speaker Change: Yes, I would have said no.
Speaker Change: We would've traditionally said, 60% to 75 days in the K 12 World and I think we've now probably say, 75% to 90 days.
So it's not too extreme but it certainly is a little bit longer.
Speaker Change: I don't think its changed radically in the Cte side, and I would probably say it hasnt changed.
Speaker Change: Markedly, but you could add a couple of weeks, it's probably the right way to think about it.
Speaker Change: Okay.
Speaker Change: Makes sense and then I'll move on from the education sector and move on to <unk>.
Speaker Change: Other dose issues primarily tariffs.
Speaker Change: You get your hardware primarily from China.
Speaker Change: Two PC Oems relationships today.
Speaker Change: And then I think your Stylus is also produced in China.
Speaker Change: What are your thoughts there I know, we don't know all the details yet but.
Speaker Change: But how are you viewing tariffs and.
Speaker Change: How would that be dealt with is would there be a pass through of cost.
Speaker Change: Which could have an impact on revenue growth anyway, just any thoughts or color there I'd appreciate it.
Eric: Let me give you a high level and Eric can add too specifically.
Eric: This is an area we have experience in given we went through the exact same thing in 2018.
Eric: And at the time, we were shipping our older product the all in one.
Eric: We really passed that through and so in the first round of tariffs, we passed that through to our customers.
Eric: Added another I'll.
Eric: I'll just say.
Eric: Level.
Eric: Detail that went into the invoicing, but it didn't we didn't see it as a major negative impact, but it does create more.
Just like we see it in the world with tariffs right now whether it's automotive industry whatever it is today that's in the news.
Eric: So we don't see it as a big negative impact I'll, let Eric add his comments to this including.
Speaker Change: Our own interactions.
Speaker Change: Yeah, Paul I don't have a lot to add there I guess the two comments that I would offer are firstly that the extent to which tariffs tariffs affect deployment of hardware.
Speaker Change: Two classrooms, they do not affect our ability obviously to renew software and so when we're looking at growth of our key.
Speaker Change: Annualized contract value of renewable software that's not impacted there.
Speaker Change: And so we anticipate to see the continued strength on on that line of the P&L with respect to the actual pass through of tariffs to a large degree because we were already anticipating margin improvements coming from hardware.
Speaker Change: And the majority of tariff expenses will be passed through to customers and.
Speaker Change: And the fact that we saw this behavior in 2018 leads us to believe that the the business.
Speaker Change: <unk> place to manage that part of it even though obviously on the backend it creates.
Speaker Change: Some challenge in churn just in our internal systems does that helpful. Alex.
Alex Paris: Absolutely. Thank you that's about as much as we can know at this point.
Speaker Change: So thank you for that color.
Speaker Change: And then I guess the last thing I would.
Speaker Change: Ask you about is related to the IPO and use of proceeds.
Speaker Change: Among other things.
Speaker Change: A portion of the proceeds.
Speaker Change: We're used to.
Speaker Change: Within the sales force increased quota carrying reps and support staff.
Speaker Change: And then M&A and you did announce an acquisition in the first quarter here and merchant 11 black skirt. So just a little.
Speaker Change: Maybe color on what you've done within the sales force so far.
Speaker Change: And then.
Speaker Change: Maybe some color on the recent acquisition, particularly because this seems more like a technology or infrastructure acquisition, rather than a software acquisition.
Speaker Change: I might be wrong.
Speaker Change: Please give me a little additional color to them.
Speaker Change: Yes.
Speaker Change: Speaking specific to block Scott.
Speaker Change: It really is something that we had already been selling.
Speaker Change: It's not.
Speaker Change: It's not a major platform play if you will but it is.
Speaker Change: It's something that is very much used within the classroom play. So it's really now just integrating it into our core bundles.
Speaker Change: So that said we have other things planned.
Speaker Change: That we will that we think are going to take us in in other directions, but the blacks blocks cat acquisition is really the first one for us to really start to move things ahead.
Speaker Change: Our field team was already selling blocks cat as a part of <unk>.
Speaker Change: <unk> space, but now it's tightly integrated into our own bundle. That's what it allows the acquisition allows us to do.
Speaker Change: Yes.
Speaker Change: Great that on Salesforce actions, you've taken since the IPO.
Speaker Change: Yes, Alex this is Eric I'll take that and I'll come back with the commentary on acquisitions and software on sales and marketing we had said throughout the IPO process that two of our intentions for use of proceeds was to expand the quota carrying sales force.
Speaker Change: In the U S.
We've done that predominantly through the fourth quarter and earlier in Q1 to add approximately a 50% increase in quota carrying heads in the U S.
Speaker Change: The uncertainty notwithstanding that we've talked about we want to be well poised for driving growth here and more feet on the street. So to speak has been a key part of that.
Speaker Change: We've also added to the quota carriers.
Speaker Change: The additional support on the account management side.
Speaker Change: And some modest support field marketing as well.
Speaker Change: Now while we have also previously discussed a similar expansion in international to build out a direct sales force to supplement our reseller network, we have not yet pursued that but remain interested in identifying key geographies to build out that kind of a presence.
Speaker Change: To add another comment to what Paul assuring around our software acquisitions.
Speaker Change: Other than the kind of acquisitions that can be characterizes aqua hires there are two predominant avenues to content acquisition, we would pursue through M&A.
Speaker Change: One is very obviously incremental software titles to unlock access to new verticals.
Speaker Change: And drive revenue capture.
Speaker Change: That means.
Speaker Change: The other is to acquire partners or applications in entirety, but we may currently be reselling and incurring a rev share off.
Speaker Change: Those acquisitions are particularly attractive because we see them as the lowest risk.
Speaker Change: It's immediate accretive to gross margins.
Speaker Change: And those acquisitions do not figure into any forward looking guidance that we would provide.
Speaker Change: They are attractive because again to the extent that those titles are already in our libraries and our sales catalogues and in some cases already deployed.
Speaker Change: Incurring immediate pickup in gross margin and EBITDA as a result of those kinds of acquisitions.
Speaker Change: Great. Thank you very much that answers my questions I appreciate it.
Speaker Change: Thanks, operator.
Speaker Change: Yeah.
Speaker Change: Please go ahead operator.
Speaker Change: As a reminder to ask a question. Please press star one one.
Speaker Change: Our next question is a follow up.
Nahal Chachi: From Nahal Chachi with northern capital markets. Your line is open.
Speaker Change: Yes, Thank you guys.
Nahal Chachi: So.
Nahal Chachi: Eric.
Nahal Chachi: Your prepared remarks, you had.
Speaker Change: Something about let's see if I can find it here, okay. Excluding shire bookings were up 5% year over year sort of December quarter, and then core something was up 21% year over year I'm, sorry, I didn't quite get exactly what you said could you just repeat that.
Speaker Change: Yes, no absolutely so that was a discussion of our Q4 or full year comment that that you were asking about now.
Speaker Change: In Q1.
Speaker Change: Yes.
Speaker Change: Ashley please okay. So in Q4 that was a discussion of the geographic disaggregation. So bookings for the fourth quarter were $5 $3 million down 3% year on year, but if you back out China, where we've made a deliberate decision to steer away from U S.
Speaker Change: Rest of World bookings were up 5% year on year.
Speaker Change: And the split there to get to the 5% was up 21% in the U S market and down 92 in international.
Speaker Change: And international has the same.
Speaker Change: Quarter to quarter variability that we see in the U S market, but it's much smaller so there is a law of small numbers there that create some volatility in the growth rates on the full year international was up 37%, but the contribution to Q4 was down 92.
Speaker Change: So you see the plus 21 and U S down 92, and international gives us up 5% year on year in books.
Speaker Change: Bookings, excluding China overall.
Speaker Change: Does that is that the piece you're after.
Speaker Change: Yep Yep, Thank you very much.
Speaker Change: And then Paul you talked about for near term initiatives.
One of them really piqued my interest I would like to get a little bit more color on that and does the R&D enhancing the overall overall platform and stay ahead of emerging trends.
Speaker Change: <unk>.
Speaker Change: I would agree with your opening statement that if you have an experience.
Speaker Change: Z space, what you see on the.
Speaker Change: The video is just does not do justice and so help us understand where is the future innovation is going to be focused on because it does seem like you guys are far ahead.
Speaker Change: Yes, I think without getting too specific and too much excuse me looking forward anyhow.
Speaker Change: As in the interaction area that we continue to be Super focused.
Speaker Change: Some of that has to do with some other gross margin improvements we want to do and some of it has to do with just making it.
Speaker Change: Even simpler to use these space so to speak so.
Speaker Change: Referring to the R&D piece of it mostly has to do with that interaction park and again to kind of repeat what I said one of the the real unique things about the space.
Speaker Change: And the augmented reality display based solution is the interaction.
Speaker Change: So that's where the R&D focus is going to continue to.
Speaker Change: To remain.
Speaker Change: Stay tuned okay yep.
Speaker Change: Yes.
Speaker Change: A couple more questions real quickly here.
Speaker Change: Eric You did note that your net dollar revenue retention rate was at 92% for the December quarter that isn't a quarter low do you think that you were trying to indicate that there was some.
Speaker Change: Impact from.
Speaker Change: Revenue being caught in backlog. So if you normalize for that what was your <unk> have been done.
Speaker Change: So that's a good question and I don't want to speculate on a pro forma endear are only because as I noted also for.
Speaker Change: Our MBR measurement is a characterization of how much of our renewable software ACD from customers present, a year ago remain with us today and it requires that we have fulfilled and recognized as revenue the underlying software licenses.
Speaker Change: The revenue recognition there is to some degree tied to backlog and we've seen some quarter to quarter variability in that measure as well. If you look at the overall trend, particularly in growth of the underlying software ACD. It's been very strong as we've been able to win.
Speaker Change: New existing customers some of those customers when they with new are actually moving up to the latest version of hardware to the extent that those orders get caught in backlog it cascades into <unk>, ultimately, but not in a way that.
Speaker Change: Impairs or would indict our outlook for continued retention there.
Speaker Change: Okay Alright.
Speaker Change: And then finally last question.
Speaker Change: What were the reasons behind the recent.
Speaker Change: Debt instrument that you guys took on and just repeat what the terms are on that debt instrument.
Speaker Change: I think you're referring to an 8-K disclosure we made around a $2 million.
Speaker Change: That line that we took on in Q1.
Speaker Change: And.
Speaker Change: So the the terms for that were comparable to similar terms that we had taken on from that same lender previously disclosed in.
Speaker Change: In our earlier filings and the main reason for that was simply just take on some dry powder gives.
Speaker Change: Given the market turbulence, we're seeing.
Speaker Change: Understood. Thank you.
Speaker Change: And with that I'll turn that back over to the operator.
Speaker Change: Thank you at this time. This concludes our question and answer session I would like to turn the call back over to Mr. Kellenberger for closing remarks.
Paul Kellenberger: Thank you Ben Thank you to everyone for listening to today's call. We look forward to reporting Q1 results in May and we hope everybody has a great day. Thanks again.
Paul Kellenberger: Ladies and gentlemen. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Paul Kellenberger: Okay.
Paul Kellenberger: [music].
Paul Kellenberger: Okay.
Paul Kellenberger: [music].
Paul Kellenberger: Yes.
Paul Kellenberger: Okay.