Earnings call transcript: zSpace Q1 2025 sees revenue dip, stock rises
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Overview
The earnings call highlights several negative factors: a 14% revenue decline, funding uncertainties, extended sales cycles, and significant international market volatility. Despite some positive aspects like increased gross profit and software revenue, the overall sentiment is negative due to operational challenges, backlog issues, and tariff impacts. The Q&A session revealed continued uncertainty and management's reluctance to provide clear guidance, further contributing to a negative outlook. Given these factors, the stock price is likely to experience a negative reaction in the short term.
Key Financial Performance
Revenue $6,800,000, down 14% year-over-year due to hardware revenues down 26% as K-12 customers faced funding challenges and delayed orders.
Software and Services Revenue Increased by 11% year-over-year, contributing to the overall revenue despite the decline in hardware sales.
Bookings $8,300,000, down 6% year-over-year, with U.S. bookings at $6,700,000, down 8% year-over-year, reflecting a 4% growth in the U.S. market but a 78% decline in international bookings.
Gross Profit $3,200,000, up 19% year-over-year, driven by a mix shift of revenue from hardware to software and services, and improved hardware margins from the new Inspire II model.
Gross Margin 47.4%, up 13 percentage points from 34.5% year-over-year, due to a 9% mix shift from hardware to software and services, and improved hardware margins from the Inspire II model.
Operating Expenses $7,600,000, up 11% year-over-year, reflecting increased costs associated with business growth.
Annualized Contract Value of Renewable Software $11,600,000, up 10% year-over-year, indicating strong retention and growth in software revenue.
Net Dollar Revenue Retention Rate 97% for customers with at least $50,000 of ACV, indicating high retention rates amid challenging market conditions.
Convertible Financing Facility Closed a $20,000,000 facility, with $13,000,000 funded, used for debt repayment and acquisitions.
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Operating Highlights
New Product Launch: zSpace has fully transitioned to shipping the Inspire II laptop, which replaces the original Inspire I, delivering the same high-impact experience while driving cost efficiencies.
Acquisition of BlocksCAD: In March, zSpace completed the acquisition of BlocksCAD, enhancing its software capabilities for STEM education through 3D design and modeling.
Acquisition of Second Avenue Learning: In April, zSpace acquired Second Avenue Learning, expanding its content capabilities and bringing expertise in curriculum-aligned digital tools.
Market Positioning: Despite a 14% year-over-year revenue decline, zSpace's software and services business grew by 11%, indicating a strategic shift towards higher-margin offerings.
Geographic Market Performance: Bookings in the US market grew by 4%, while international bookings (excluding China) saw a 78% decline, reflecting volatility in global markets.
Operational Efficiency: Gross profit increased by 19% year-over-year to $3,200,000, with gross margins improving to 47.4% due to a shift in revenue mix from hardware to software.
Backlog Management: zSpace concluded the quarter with $9,700,000 in unfulfilled orders, indicating a backlog influenced by funding source changes.
Strategic Focus: zSpace is focusing on enhancing its digital platform through acquisitions and organic growth, aiming for recurring revenue streams.
Financial Strategy: The company closed a $20,000,000 convertible financing facility to support acquisitions and general corporate purposes.
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Risk or Challenges
Revenue Decline: Revenue for the quarter was $6,800,000, down 14% year-over-year, primarily due to funding challenges and delays in hardware deliveries in the K-12 market.
Funding Uncertainty: Ongoing turbulence in federal and state funding programs creates uncertainty for customers, impacting their purchasing decisions and sales cycles.
Sales Cycle Extension: Sales cycles have extended from 60-75 days to 75-90 days in the K-12 sector, indicating increased hesitation among customers.
Tariff Impact: Products are subject to a 20% tariff, which may affect costs and pricing strategies. The company plans to pass these tariffs onto customers.
International Market Volatility: There was a 78% decline in international bookings (excluding China), indicating significant volatility in international markets.
Operational Challenges: The company faces challenges in managing operating expenses while navigating the uncertain market environment.
Backlog Issues: The company concluded the quarter with $9,700,000 of unfulfilled orders, reflecting customer reactions to funding changes.
Economic Factors: The broader economic environment remains dynamic, with potential impacts on business volume and revenue projections.
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Guidance & Outlook
Revenue Growth in Software and Services: Despite a 14% decline in overall revenue, zSpace experienced an 11% year-over-year growth in its higher margin software and services business, which is a critical part of their strategy.
Product Transition to Inspire II: zSpace has fully transitioned to shipping the Inspire II laptop, which is designed to drive cost efficiencies and protect gross margins.
Acquisition of BlocksCAD: The acquisition of BlocksCAD enhances zSpace's software capabilities, aligning with their mission to promote hands-on project-based learning.
Acquisition of Second Avenue Learning: This acquisition expands zSpace's content capabilities and brings expertise in curriculum-aligned digital tools for K-12 and higher education.
Focus on Digital Platform Enhancement: The acquisitions reflect zSpace's strategy to enhance their digital platform, which is a long-term growth and profitability lever.
Revenue Guidance: Due to significant uncertainty in the education market, zSpace refrains from providing formal financial guidance for the remainder of 2025.
Capital Allocation: zSpace closed a $20 million convertible financing facility, with $7 million available for acquisitions and general corporate purposes.
Operating Expenses Management: The company continues to control spending strictly, particularly in sales and marketing, to manage operating expenses effectively.
Market Uncertainty: The company acknowledges ongoing uncertainty in the education market, affecting the timing of deals and funding sources.
Future Outlook: While zSpace is optimistic about improving the quality of hardware and software revenues, they cannot credibly project business volume under current circumstances.
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Shareholder Return Plan
Convertible Financing Facility: Closed a $20,000,000 convertible financing facility, of which $13,000,000 was funded. Used approximately $6,000,000 to pay down debt, with $7,000,000 in dry powder for acquisitions and general corporate purposes.
Stock-Based Compensation: Recorded stock-based compensation of $1,000,000 and issued grants for 1,300,000 restricted stock units to employees and non-employee directors.
Burn Rate: Targeting an overall burn rate of less than 7% for the full year.
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Key Q&A
Q:Can you provide an update on the sales cycle in K-12 and CTE given the current funding uncertainties?
A:The sales cycle in K-12 has expanded from 60-75 days to 75-90 days, with no significant changes in CTE. The uncertainty remains high, and it may take longer for things to settle.
Q:Did the surge in late orders continue into April, or was it an end-of-quarter phenomenon?
A:The surge was not necessarily an end-of-quarter phenomenon, but the performance in Q2 is not being characterized yet due to the unpredictable nature of the sales cycle.
Q:What is the impact of tariffs on your BOM costs, especially with the recent changes?
A:Currently, products are subject to 20% tariffs, and plans are in place to pass these costs to customers. There is a 90-day hiatus, and the BOM cost for the new INSPIRE II is lower than its predecessor.
Q:How have the integrations of BlocksCAD and Second Avenue Learning gone?
A:BlocksCAD is fully integrated and part of the standard bundle. Second Avenue is in the integration process, with key team members onboard and specific product work underway.
Q:What feedback have you received from elementary schools regarding the Imagine product?
A:Initial feedback on the Imagine product has been very positive, but more substantial feedback is expected as usage increases during the back-to-school period.
Q:Can you provide the split between K-12 and CTE bookings?
A:The split for the quarter was 71% K-12 and 29% CTE.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the split between INSPIRE and Imagine bookings, stating that it would be more relevant in future quarters.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
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ZSPC Transcript
zSpace, Inc. (ZSPC) Q3 2025 Earnings Call Transcript
Unknown11-13
The earnings call reveals negative trends: a decline in ACV, NDRR, bookings, and Q3 revenues, despite improved gross margins. The Q&A highlights risks from government shutdowns affecting purchasing and funding, and significant customer renewals not materializing. While there are international expansion efforts, uncertainties in education funding and supply chain challenges persist. Management's avoidance of guidance on Q4 revenues further adds to negative sentiment. Overall, the negative aspects outweigh the positives, suggesting a likely negative stock price movement.
Earnings call transcript: zSpace Q1 2025 sees revenue dip, stock rises
Unknown5-14
The earnings call highlights several negative factors: a 14% revenue decline, funding uncertainties, extended sales cycles, and significant international market volatility. Despite some positive aspects like increased gross profit and software revenue, the overall sentiment is negative due to operational challenges, backlog issues, and tariff impacts. The Q&A session revealed continued uncertainty and management's reluctance to provide clear guidance, further contributing to a negative outlook. Given these factors, the stock price is likely to experience a negative reaction in the short term.
ZSPC Report
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