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.

Despite these challenges, management expressed cautious optimism, citing strong underlying customer demand and recent wins in both U.S. and international markets. The company remains confident in its long-term growth potential and path to profitability, anticipating a stronger outlook as U.S. federal education funding mechanisms become more predictable.

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).