zSpace, Inc. (ZSPC) Q3 2025 Earnings Call Transcript

zSpace, Inc. (ZSPC) reported Q3 2025 revenue of $8.8 million, a 38% year-over-year decline but an 18% sequential increase, with year-to-date revenue down 22% to $23 million. Despite revenue headwinds, the company achieved significant gross margin expansion to 51.2% in Q3, primarily driven by software and services accounting for 57% of revenue and new product introductions. Strategic advancements include the launch of the AI-powered Career Explorer application, international expansion into the UAE and Europe, and leveraging AI for language translation. While facing persistent U.S. K-12 funding uncertainties, tariff impacts, and reduced renewals from two large customers, zSpace narrowed adjusted EBITDA losses to below $2 million and maintains a cautiously optimistic outlook for long-term growth and profitability through continued focus on high-margin software, product innovation, and operational efficiency.

Analysis

zSpace (ZSPC) reported Q3 2025 revenues of $8.8 million, a 38% year-over-year decline, though representing an 18% sequential improvement. Year-to-date revenues stood at $23 million, down 22% year-over-year. Despite revenue challenges, the company achieved significant gross margin expansion, reaching 51.2% in Q3 and 47.3% year-to-date, driven by a favorable mix shift towards high-margin software and services, which comprised 57% of Q3 revenue. Adjusted EBITDA losses narrowed to below $2 million for the quarter, indicating improved operational efficiency.

The company's strategic focus on software and innovation is bearing fruit, with the launch of the AI-powered Career Explorer application and leveraging AI for language translation across 50+ languages to support global expansion. International deployments, including a significant partnership with GEMS Education in Dubai and wins in Europe, demonstrate growing global traction. Upcoming hardware innovations, such as a new "game-changing" stylus, are expected to further enhance user experience and contribute to structural margin improvements.

However, zSpace continues to navigate significant external headwinds, including persistent U.S. K-12 funding uncertainties, unpredictable purchasing patterns, and the impact of a recent government shutdown on shipment timing. Annualized Contract Value (ACV) for renewable software decreased 10% year-over-year, and Net Dollar Revenue Retention (NDRR) was 77%, primarily due to two large customers not fully renewing their expanded commitments, though normalizing for these shows broader customer stability. Tariffs also had a modest 1 percentage point impact on Q3 gross margins.

Key Decisions for Investors

• Monitor the U.S. K-12 funding environment for signs of stabilization, as it directly impacts zSpace's revenue and booking predictability.
• Assess the continued gross margin expansion driven by the shift to high-margin software and services, and the market reception of new AI-powered educational products.
• Evaluate the success of international expansion efforts and the ability to re-engage or replace large customers impacting annualized contract value (ACV) and net dollar revenue retention (NDRR).