zSpace, Inc. Q3 FY2025 earnings call

• Software and services revenue was over 50% of total revenue in Q3, driving gross margin expansion. • Revenue grew 18% sequentially, driven by strong customer renewals and software adoption. • Completed integration of Second Avenue Learning, launching career exploration application. • Leveraging AI to eliminate language barriers across platform, expanding global reach. • Deployed solutions with GEMS Education in Dubai and secured deployments in Italy, Bulgaria, Poland, and Middle East. • Achieved customer wins in Bulgaria, Florida, and Alabama. • Software and services revenues making up a significant portion in Q3 results, showing customer value.

During the third quarter, software and services revenue comprised over 50% of total revenue, contributing to gross margin expansion of over 640 basis points. Year-to-date, software and services revenues make up 48% of the revenue portfolio versus 42% for the first 9 months of the prior year, an increase of 6 percentage points. In Q3, software and services represented 57% of total revenues. Year-to-date revenues were $23 million, down 22% year-over-year. Q3 revenues were $8.8 million, down 38% year-on-year but up 18% sequentially. Gross profit for the 9-month period was $10.9 million, down 10% year-over-year, but gross margins were 47.3%, up 6.4 percentage points. Q3 gross profit was $4.5 million with gross margins at 51.2%, up 6.4 percentage points versus Q3 last year.

• 2025's final quarter has familiar obstacles including government shutdown, making it difficult to project business volume. • Refrained from issuing formal financial guidance due to uncertainty in the U.S. education sector and current circumstances. • Cautiously optimistic about long-term growth potential but cannot credibly project business volume at this time.

• Macroeconomic and funding uncertainties. • Tariff impacts and margin compression from treating tariffs as pass-through. • Uncertainty around education funding in the U.S., leading to unpredictable purchasing patterns and delays in school districts.

Q: How does the government shutdown impact zSpace directly?

A: The shutdown is a headwind similar to others faced throughout the year, causing delays in purchasing and funding decisions for customers. Funding on the CTE side (Perkins) is flowing, but speed varies by state. On the K-12 STEM side, 10% of funding is federal via various title programs, but most funding is state and local.

Q: Can you provide more color on the net dollar revenue retention of 77%?

A: It's due to 2 large customers who expanded their footprint last year but couldn't fully renew. One large customer went from a 7-figure software renewal account to mid-6-figure, but preserved their presence with zSpace devices. Normalizing for these customers, ACV would have been flat year-over-year and NDRR would have been 94%.

Q: Walk us through recent developments in the Workforce and CTE segment?

A: The Career Explorer application launched, which was part of the acquisition of Second Avenue Learning. It's well-received, using AI, and will have more details after the ACTE conference in December. Also, a new stylus hardware is coming out next week, which is game-changing for user interaction.

Q: Talk about manufacturing shift from China to Thailand and new hardware impact on margins?

A: Manufacturing shift to Thailand is underway. The new stylus hardware will simplify user interaction. Margin expansion is driven by mix of software and hardware, structural factors in software and hardware revenues. New hardware like the stylus will bring step-change improvements in user experience, logistics, and cost, leading to sustained margin improvements.