zSpace, Inc. (ZSPC) Q4 2025 Earnings Call Transcript

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Overview

The earnings call reveals declining financial metrics, including revenue, bookings, and cash reserves, indicating operational challenges. Despite improved gross margins, the reduced revenue and macroeconomic issues overshadow potential positives. The Q&A section highlights cautious optimism but acknowledges funding disruptions and geopolitical risks. While there are some positive signs, such as potential breakeven EBITDA in 2026, the immediate outlook is negative due to significant revenue declines, funding uncertainties, and limited concrete guidance on international expansion.

Key Financial Performance

Revenues (Full Year 2025) $27.9 million, down 27% year-over-year. Decline attributed to macroeconomic factors, including tariff policies, education funding freezes, and the federal government shutdown.

Software and Services Revenue (Full Year 2025) Down 15% year-over-year, but increased as a percentage of total revenue from 42% in 2024 to 49% in 2025, contributing to gross margin expansion.

Annualized Contract Value (ACV) of Renewable Software (as of December 31, 2025) $9.9 million, down 12% year-over-year. Decline attributed to two large customers not fully renewing their commitments due to macroeconomic factors.

Net Dollar Revenue Retention (NDRR) for Customers with at least $50,000 ACV (as of December 31, 2025) 71%, down from the previous year. Decline attributed to the same two large customers mentioned above.

Bookings (Full Year 2025) $26.1 million, down 34% year-over-year. Decline attributed to macroeconomic challenges and funding uncertainties.

Gross Profit (Full Year 2025) $13.3 million, down 15% year-over-year. Decline influenced by discontinued software license inventory, tariffs, and duties.

Gross Margins (Full Year 2025) 47.6%, up 6.7 percentage points year-over-year. Improvement driven by increased software revenue mix, hardware cost reductions, and first-party software content.

Operating Expenses (Full Year 2025) $28.3 million, up 11% year-over-year. Increase driven by people-related costs, which rose 6%.

Revenues (Q4 2025) $4.8 million, down 43% year-over-year. Decline attributed to the U.S. federal government shutdown, which froze orders and shipments.

Software and Services Revenue (Q4 2025) 57% of total revenue, up 10 percentage points year-over-year, contributing to gross margin improvements.

Bookings (Q4 2025) $3.4 million, down 21% year-over-year. Decline attributed to macroeconomic challenges.

Gross Profit (Q4 2025) $2.4 million, with gross margins at 49.1%, up 8.4 percentage points year-over-year. Improvement driven by revenue mix shift and rate-based factors.

Operating Expenses (Q4 2025) $6.5 million, up 9% year-over-year. Increase includes $2 million in stock-based compensation expenses.

Cash, Cash Equivalents, and Restricted Cash (as of December 31, 2025) $1 million, down from $4.9 million as of December 31, 2024. Decline reflects operational challenges and restructuring efforts.

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Operating Highlights

zStylus One: Launched as a next-generation AI-enabled stylus designed to simplify AR deployment and enhance precision. Features embedded sensors powered by machine learning algorithms, eliminating the need for external sensor modules or embedded tracking in laptops. Early feedback has been positive, and it is expected to support broader adoption of next-generation platforms.

Career Explorer powered by Career Coach AI: Recognized with Tech & Learning's Best of 2025 Award of Excellence. Provides immersive career exploration tools that engage students through real-world simulations and align with emerging skill trades and technical careers.

Global Expansion: Leveraging AI to eliminate language barriers, enabling platform translation and interaction in over 50 languages. This initiative broadens global reach and ensures accessibility for students and educators worldwide.

Regional Customer Wins: Achieved significant customer wins in Pennsylvania, California, and Atlanta Public Schools, showcasing the adoption of AR/VR technology to enhance STEM learning, career pathways, and immersive educational experiences.

Revenue Composition: Software and services revenue comprised over 50% of total revenue, contributing to gross margin expansion of nearly 850 basis points. This was driven by strong customer renewals and software adoption.

Cost Management: Undertook significant restructuring in December 2025, reducing approximately half of FTE positions and one-third of people costs. Board size reduced from 7 to 5 seats, and the executive bonus plan for 2026 was abolished.

Focus on Software: Shifted revenue mix towards software, with software and services representing 57% of Q4 revenues. This shift contributed to gross margin improvements.

Restructuring for Profitability: Implemented cost reductions and restructuring to align revenues and costs, aiming for breakeven EBITDA performance in 2026.

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Risk or Challenges

Macroeconomic and Funding Uncertainty: Ongoing macroeconomic and funding uncertainty in the education market in the U.S. is impacting the company's ability to predict and stabilize revenue streams.

Delayed Opportunities in the Middle East: Due to the war in Iran, opportunities in the Middle East are being delayed, affecting potential revenue growth in the region.

Federal Government Shutdown: The longest federal government shutdown in U.S. history caused a freeze in orders and shipments, significantly impacting Q4 revenues.

Decline in Revenue and Bookings: 2025 revenues were down 27% year-over-year, and bookings declined by 34%, reflecting challenges in maintaining customer commitments and securing new business.

Customer Retention Challenges: Two large customers did not fully renew their commitments due to macroeconomic factors, leading to a decline in annualized contract value and net dollar revenue retention.

Tariff Policies and Duties: Unresolved trade and tariff policies continue to negatively impact gross profit and overall financial performance.

Restructuring and Cost Reductions: Significant restructuring in December 2025, including eliminating half of the FTE positions and reducing the Board of Directors, highlights operational challenges and cost pressures.

Cash Flow Constraints: Cash and cash equivalents dropped to $1 million by the end of 2025, compared to $4.9 million in 2024, indicating financial strain.

Volatility in Revenue Recognition: Revenue recognition policies lead to variability in financial results, exaggerating seasonality and complicating financial planning.

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Guidance & Outlook

Revenue and EBITDA Outlook for 2026: Management anticipates that if 2026 revenue performance mirrors 2025, the cost reductions implemented in December 2025 will enable the company to achieve adjusted EBITDA performance at or near breakeven. The company is prepared to scale operations back to historical revenue levels if opportunities arise.

Market Conditions and Challenges: The company remains cautious about the macroeconomic environment, particularly in the U.S. education market, and the ongoing war in Iran, which has delayed opportunities in the Middle East. Management expects the longer-term outlook to improve as federal education policies and funding mechanisms stabilize.

Revenue Mix and Gross Margin Expansion: The company will continue to focus on increasing the mix of software and services revenue, which has been a key driver of gross margin expansion. This strategy is expected to remain a priority in 2026.

Cost Management and Operational Adjustments: Significant restructuring in December 2025, including a reduction in workforce and board size, is expected to align costs with revenue levels and support breakeven EBITDA performance in 2026.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What does the funding outlook look like for 2026, and how has Q1 gone so far?

A:CEO Paul Kellenberger acknowledged that 10% of K-12 STEM revenue comes from federal sources and noted peculiar funding disruptions in 2025, including a state returning federal funds due to uncertainty. He expressed cautious optimism for 2026, though Q1 remains back-end loaded. CFO Erick DeOliveira mentioned encouraging year-on-year strength in January and February but noted mixed results in March due to Middle East conflicts affecting customer opportunities.

Q:If revenues are roughly equal to 2025 levels, can the company achieve adjusted EBITDA profitability or breakeven in 2026?

A:CFO Erick DeOliveira stated that with $27-28 million in revenue, margin expansion of approximately 7 percentage points, and cost reductions from December, breakeven adjusted EBITDA performance is within reach for 2026. Key drivers include retaining and renewing software agreements, hardware improvements, and rolling out more zSpace-owned software.

Q:What is the potential for expanding international sales through the strategic investment from Planet One?

A:CEO Paul Kellenberger expressed hope for international sales expansion but noted delays due to the war in Iran. He mentioned ongoing opportunities in the Middle East, including larger prospects, but provided no concrete timeline or details.

Q:What is the significance of recent announcements regarding Greater Altoona, Bellflower Mayfair High School, and Atlanta Public School?

A:CEO Paul Kellenberger categorized these deals as significant, each in the six-figure range. Atlanta Public Schools, a long-term customer, presents further opportunities. Greater Altoona's deal is strategic in the dental CTE segment, while Mayfair represents a new customer. Over 50% of Q4 revenue came from software and services, which is seen as positive.

Q:How is the mix of Career and Technical Education (CTE) revenue versus other segments evolving?

A:CEO Paul Kellenberger stated that CTE now accounts for 56% of revenue, up from 48% the previous year. Growth is driven by federal Perkins funding and the company's owned applications.

Q:Is it reasonable to expect breakeven operating cash flows or positive EBITDA in 2026?

A:CFO Erick DeOliveira confirmed that breakeven adjusted EBITDA is achievable in 2026 with continued margin expansion, cost reductions, and a revenue level similar to 2025.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer regarding the potential for expanding international sales through the Planet One investment, citing delays due to the war in Iran and offering no concrete timeline or details.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

ZSPC Transcript

zSpace, Inc. (ZSPC) Q4 2025 Earnings Call Transcript

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

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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

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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

zSpace, Inc. S-1

S-1

2025-07-25

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