zSpace Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 14, 2025

There are 7 speakers on the call.

Operator

Good day, everyone. Thank you for participating in today's conference call to discuss zSpace's financial results for the first quarter ending 03/31/2025. Joining us today are zSpace CEO, Paul Kellenberger CFO, Eric de Oliveira and Greg Robbles from Investor Relations. Following their remarks, we'll open the call for analyst questions. Before we go further, I would like to turn the call over to Mr.

Operator

Rawls as he reads the company's safe harbor statements.

Speaker 1

Thanks, operator. Good afternoon, and thank you for joining our conference call to discuss our first quarter twenty twenty five financial results. Before we begin, I'd like to remind everyone that certain statements made on this call may be considered forward looking statements. These statements are based on our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially. Additionally, we may discuss certain key business metrics, which are non GAAP financial measures.

Speaker 1

A description of these non GAAP measures and any comparison to the most directly comparable GAAP measures can be found in our earnings release on the Investor Relations section of our Web site. Now, I would like to turn the call over to the CEO of zSpace, Paul Kellenberger. Paul?

Speaker 2

Thank you and good afternoon everyone. Thank you for joining us for our first quarter earnings call. I am Paul Kalemburger, CEO of zSpace, and with me is Eric De Lavera, our Chief Financial Officer. We're both excited to be here with you to discuss zSpace, our Q1 performance and our plan to drive growth. We are pleased with our first quarter results, which came in ahead of our expectations despite continued turbulence in the broader education market.

Speaker 2

Revenue for the quarter was $6,800,000 down 14 compared to a year ago. As many of you know, school districts are still navigating funding challenges and delays, which impacted the timing of committed orders and hardware deliveries during the quarter. Despite the year over year decline, we are encouraged by the continued growth in our higher margin software and services business, which increased 11% year over year. This is a critical part of our strategy as we scale our platform with recurring, stickier revenue streams. Eric will walk you through the full financials in more detail shortly.

Speaker 2

On the product front, and consistent with what we previously communicated, we've now fully transitioned into shipping our Inspire two laptop, which replaces the original Inspire one. Inspire two delivers the same high impact zStace experience, while driving cost efficiencies for us, helping to protect gross margins even as hardware volumes fluctuate. We also made meaningful progress on expanding our software capabilities through two strategic acquisitions we made in recent months. In March, we announced the completion of our acquisition of BlocksCAD, a cutting edge platform specializing in three d design and modeling for STEM education. BlocksCAD empowers students to engage with math, coding and engineering concepts through browser based three d modeling.

Speaker 2

The platform has strong alignment with our mission to promote hands on project based learning and is already generating meaningful interest across CTE and workforce development programs. By integrating BlocksCAD into our immersive ecosystem, we're creating more dynamic tools that bring abstract concepts to life and spark creativity in the classroom. Also in April, we announced our acquisition of Second Avenue Learning, a Rochester based EdTech innovator known for its custom software development and interactive learning experiences. Second Avenue expands our content capability and brings deep expertise in curriculum aligned digital tools for K-twelve and higher education. Importantly, their founder and CEO, Tori Van Houras has joined ZSpace as our Senior Vice President of Product Strategy.

Speaker 2

Tori and her team share our commitment to meaningful education outcomes, and their approach to user centered design will help accelerate our roadmap for immersive and standards aligned software experiences. Together, these acquisitions reflect our continued focus on enhancing our digital platform, an important long term growth and profitability lever for the business. In summary, we had a solid quarter amidst a challenging macro backdrop. The first quarter was marked by elevated uncertainty, particularly around federal and state funding programs, as well as ongoing volatility tied to tariffs and policy decisions. While we are starting to see some stabilization as we move through Q2, the environment remains dynamic and we're staying close to our partners to mitigate any potential disruptions.

Speaker 2

Despite these challenges, we remain confident in the opportunity ahead and our solutions continue to gain traction, both in The US and internationally. With that, I'll turn the call over to Eric to walk us through our financial results in more detail. Eric?

Speaker 3

Thank you, Paul. As you consider our results, a reminder that our revenues are substantially recognized upon shipment of laptop units or fulfillment of software license keys. This includes recognizing the full value of multi year software licenses in the period in which they are fulfilled. Only a small portion of our revenue is rapidly recognized. As a result of this revenue recognition treatment, our financial results can exhibit quarter to quarter variability that exaggerates the underlying seasonality of the business.

Speaker 3

And now diving into our Q1 performance. As Paul mentioned, first quarter revenues were $6,800,000 down 14% year on year. This was driven by hardware revenues down 26%, as customers in our K-twelve end markets experienced turbulence in their funding sources and delayed delivery of committed orders. However, this was offset by 11% year on year growth in our software and services revenues, which drove significant improvements in gross profit and margins. As we continue to scale our platform organically and through M and A, we widened this recurring revenue stream, and this quarter's results are illustrative of the benefits.

Speaker 3

Bookings for the quarter were $8,300,000 down 6% year on year. Excluding China, US and rest of world bookings were $6,700,000 down 8% year on year. This reflects growth of 4% in The US market and 78% decline in international geographies other than China relative to the comparable prior year period. We concluded the quarter with $9,700,000 of unfulfilled orders in the backlog as end users reacted to changes in their funding sources. Gross profit for the quarter was $3,200,000 up 19% year on year, despite revenue headwinds and reflecting improvements in the quality of revenue across the board.

Speaker 3

Gross margins for the quarter were 47.4, up 13 percentage points compared to 34.5% in the comparable quarter of the prior year. Despite the headwinds constraining business volume, strong execution across a number of fronts was behind this improvement in profitability, and we are pleased that efforts reaching back several quarters are now bearing fruit. Firstly, a 9% mix shift of revenue out of hardware and into software and services was responsible for approximately three percentage points of this margin expansion. And strong retention of renewable software was a contributing factor here, of which our NDRR and ACV metrics are evidence. More on that shortly.

Speaker 3

Secondly, the new INSPIRE II model, which began shipping in Q4 and made up 100% of Q1 shipments, improved hardware margins as we'd hoped. In the second half of this year, release of the new ORB tracking systems will be expected to improve the user experience and further reduce costs in the peripheral hardware ecosystem. Thirdly, delivering against our intention to own more software content, we brought more applications in house through the BlocksCAD acquisition and purchase and development of other apps. This protected revenue while reducing third party revenue share, which we recognize as COGS. The recently announced acquisition of Second Avenue further strengthens our ability to develop and efficiently deliver and maintain content for our users.

Speaker 3

All of the above factors are structural aspects of our business strategy and are expected to persist and expand in impact in coming quarters. As previously discussed, our P and L reflects multi year software license revenue in period. To help better characterize the run rate health of the business, we offer two software operating metrics. As of 03/31/2025, the annualized contract value of renewable software was $11,600,000 up 10% compared with twelve months ago. Also, as of 03/31/2025, the net dollar revenue retention of customers with at least $50,000 of ACV was 97% for those customers present as of 03/31/2024.

Speaker 3

We're very pleased that our efforts to focus on the importance of our software content in driving student outcomes has generated continued growth in the ACV metric and high retention rates amid such a challenging environment for our end users. Operating expenses, excluding stock based compensation for the quarter, were $7,600,000 compared with $6,800,000 in the comparable prior year period, an increase of 11%. In the first quarter, we recorded stock based compensation of $1,000,000 and issued grants for 1,300,000 restricted stock units to employees and non employee directors. Twenty twenty five restricted stock units granted year to date correspond to a year to date burn rate of 5.9% relative to the 22,800,000.0 shares issued and outstanding at the start of the year. We continue to target an overall burn rate of less than 7% for the full year.

Speaker 3

Now turning to some recent developments. Subsequent to the quarter, we closed a $20,000,000 convertible financing facility, of which $13,000,000 was funded. We used approximately $6,000,000 to pay down debt, with $7,000,000 in dry powder for acquisitions and general corporate purposes. The note carries a variable conversion price, and we may issue an additional $7,000,000 of gross proceeds at a later date. Now moving on to our outlook for the rest of the year.

Speaker 3

2025 continues to bring significant uncertainty in our markets, as we see some education customers taking longer to identify funding sources for ZSpace's K-twelve AR and VR classroom solutions, while others accelerate their purchases to lock in pricing and availability for Q2 and the coming school year. The overall impact for Z space remains unclear at this time. At the same time, workforce development and CTE solutions continue to be in favor. Specifically for our second quarter, the uncertainty stems from the timing of deals closing in our end markets, given the broader turbulence in the education market. As discussed last quarter, uncertainty is likely to persist for the remainder of the year.

Speaker 3

We remain comfortable in our ability to improve the quality of both our hardware and software revenues and renew business across the K-twelve and CTE content segments, but cannot credibly project business volume under current circumstances. Given this landscape, we are going to refrain from formal financial guidance. Regarding our capital allocation and the management of operating expenses in particular, we continue to control spending strictly. On an ongoing basis, we will evaluate levels of spend, in particular regarding sales and marketing. You can see that we constrained OpEx growth this quarter to a rate below that of gross profit growth, excluding stock based comp.

Speaker 3

Now I will turn the time back to the operator for Q and A.

Operator

At this time, we do the Q and A. One moment for our first question. Our first question will come from the line of Alex Paris from Barrington Research. Your line is open.

Speaker 4

Hi, guys. Thanks for taking my questions. Revenues, while down 14% year over year, were ahead of your expectations and ahead of consensus expectations. So congrats on that. Just wanted to talk a little bit about this uncertainty both on the funding side and then global trade side, I.

Speaker 4

E. Tariffs. I think last quarter on the conference call, in speaking about sales cycle, I think you said that the sales cycle had expanded from sixty to seventy five days in K-twelve to something more along the lines of seventy five to 90. And you also said that there was no significant difference in CTE, maybe a couple of weeks. So wondering if we can get an update there and what has been the trend in that so far in Q2 as well.

Speaker 3

Hello?

Speaker 2

Hi, Alex. Sorry. Sorry. Alex, my apologies there. This is Paul.

Speaker 2

Let me take that one. I was muted there talking to myself. It was afternoon. It was me who gave the sales cycle increasing from the 60 to 75 previously to 75 to 90 in the last call and no significant changes in CT and workforce. I would say that continues.

Speaker 2

And I'm gonna give you a specific example without being specific to the state. I was meeting with one of the largest states in the last three weeks. And I would say, the uncertainty remains high in the K-twelve side of things vis a vis sales cycle, and ultimately people spending money. I think that remains consistent. I would say as it relates to CTE, and again, there's a whole pool of different funds, including Perkins, which is one of the bigger ones, and workforce development that tends to be a little more focused at the state level, those dollars are flowing.

Speaker 2

So I would say nothing has changed vis a vis our business on the sales cycle side of it. So I'd say a consistent message. Somebody I was speaking to use the phrase deep volatility. Now that was a week ago, two weeks ago, seems every week or every couple of days, something different happens in the macro world. But I think it's gonna take a little longer here for things to really settle in.

Speaker 2

But the trends we discussed on the last call, I would say are remaining pretty consistent. But we're I want to say we're cautiously optimistic here about where things are headed.

Speaker 4

That's good to hear.

Speaker 2

Eric, do you want to add anything to that?

Speaker 3

Maybe just one illustrative point. So to Paul's discussion of the deep volatility here, this group will recall that in our last earnings call, we gave guidance on Q1 in the waning days of the quarter. And we were characterizing one aspect of the volatility as being the trade off between two opposing forces. Customers looking to accelerate their receipt of shipments while they had visibility into funding. And another group of customers who were delaying taking receipt of orders and placing new orders, also because of uncertainty in their funding.

Speaker 3

In our Q1 results here, you can see that where we guided to $5,000,000 again in the waning days of the quarter, we delivered considerably more than that. And so in that period, we saw a significant surge in late orders go out the door. The uncertainty and the volatility really combine to create a picture that's difficult to forecast, but still preserves the view that the zSpace product is in high demand in schools and our end customers are really just trying to figure out what the timing and the specific funding sources that will apply to zSpace will be. Does that help Alex?

Speaker 4

Absolutely. And I would just ask a follow on question to that point then. The surge late in the quarter versus the point at which you gave guidance, which explains the outperformance in revenue. Did that continue into April or is it sort of an end of the quarter phenomenon?

Speaker 3

I wouldn't say it's necessarily end of quarter. And I don't want to characterize any performance quarter to date so far only because the ebbs and flows don't seem to exist in a straight line. We do absolutely see some significant deadline driven decision making both in Q2 and in Q3. June thirtieth, September thirtieth are significant dates in the funding, the fiscal year for our K-twelve segments in particular. And so as we approach sixthirty, we do expect to see a lot of fish or cut bait behavior as those LUMERS forcing functions.

Speaker 4

Great. That's helpful. And then I wanted to follow-up, ask a similar question that I did last quarter about tariffs. You referred to them in the press release and in the prepared comments as adding to uncertainty. But I was curious about specifics, the impact on your BOM costs.

Speaker 4

There's been a lot of changes in the tariffs since April 2. The Chinese tariffs hit a high of 145% at least proposed. And this past weekend we've had some changes there. What are your thoughts with regard to the China tariffs, at least what we know now given that your hardware primarily comes out of China?

Speaker 3

Paul, Larry. Okay, go ahead. You want go ahead? Go ahead, Paul.

Speaker 2

Well, I was just going to say, so what we know today, and I'm going to stress today, Alex, because it's never used to be changing a lot is our products are subject to 20% tariffs. And quite frankly, just as we did back in 2018, our plans are to pass those tariffs through to our customers. That said, we think that's what it's gonna be for this quarter. There's another now there's a ninety day hiatus out there. And by the way, we were fortunate to fall under the exemption that was put in place for laptops and other products back whenever that was two or three weeks ago.

Speaker 2

So the tariffs for this quarter, we're expecting to be 20%. There are plans being made by our OEM partners to move production to other locations in the event and the location they're planning to move to has a 10% tariff today. So that is well in motion. Eric, do you want to provide any of the color on numbers?

Speaker 3

No, I think that's it on numbers. As far as the time horizon, Paul called out the role that we're in here under the ninety day hiatus. That creates a little bit of an eye of the storm calm in that we have a stable tariff, not necessarily a favorable scenario, but a stable tariff scenario for a short time window. The longer term view still leaves open what ultimate tariffs will be and how long it will take to find that. For as long as we have a tariff rate of approximately this level, we anticipate passing that through.

Speaker 3

And a consequence of that is the underlying product, the new INSPIRE two, has a sufficiently lower BOM cost than its predecessor. And so in this kind of a stable tariff regime, you will notice improvements to hardware profitability that reflect the improvement in the underlying product we're shipping.

Speaker 4

Got you. And then just to be clear, there was essentially no impact from tariffs in the first quarter and you're expecting a 20% impact from tariffs in the second quarter?

Speaker 3

Roughly correct, at least as far as costs. So the impact in the first quarter overwhelmingly was felt as a demand signal as the end users in K-twelve in particular were reacting to a range of factors buffeting them both. Our pricing as it shows up on quotes and just churn in updating sales collateral to keep track of changes in tariffs. But also our K-twelve customers are reflecting or reacting to impacts and uncertainty in the sources of funding, particularly at the federal, but also the state levels.

Speaker 4

Great. I appreciate the additional color, and I'll turn it over to the other staff questions and get back in the queue. Thank you.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Rohit Kulkarni from Roth Capital Partners. Your line is open.

Speaker 5

Hi, Paul. Hi, Eric. This is Jared Osteen on for Rohit. A few questions, if I may. So in March, you acquired Blocks CAD in April second Avenue.

Speaker 5

How have those integrations gone? And how are you thinking about future M and A?

Speaker 2

Eric, do you want me to start on that? Please go ahead, Paul. Okay. So, BlocksCAD is fully integrated. In fact, I think, Jared, we in the previous call, were talking about, specifically them.

Speaker 2

We have been reselling their application. It's now part of our standard bundle. And that one was pretty straightforward. Second Avenue is a little bit different and very unique. We brought on board all of their key team members, including, as I mentioned in the earlier preamble, Tory Van Gurus was their CEO and she stepped in to help us lead our product strategy.

Speaker 2

There is some very specific work that the team is doing, and it's in the Career Explorer, which is really in the CTE workforce development focused area. It's not exclusively, it also rolls into the K-twelve side of it, but there's some very specific product work that's, I'll say, well underway. And we expect to see some early releases soon, and they'll be rolled out for back to school in the August timeframe, which we feel really positive about. I think in terms of the integration, I would say we're probably right in the middle. I think everybody feels really good about it.

Speaker 2

And that'd be a good question to ask in another ninety days ish. But I'd say right now things are looking extremely positive. Your last question there about go forward, I'm just gonna say, we continue to look at the landscape of potential companies to acquire. And there's a little bit of ingestation we're doing here with the two that we worked our way through. But we're continuing to move forward the other ones.

Speaker 2

Stay tuned on that.

Speaker 5

Great, thank you. And then on my second question, how has feedback been from elementary schools after you launched imagine earlier this year? And then maybe following that up within CTE, of back to your point before Paul, are there specific pockets or sectors where you're currently have greater adoption or elevated interest levels that you're seeing today?

Speaker 2

Yeah, so let me, those are two different questions. Imagine, which as you know, is really the bundle that we created was really focused on elementary schools, I would say has been extremely well received. We are shipping orders against shipping products against those orders today. I would say it's still probably early stages, given the timing of the difference, because the heavier usage tends to happen more in back to school. So I think timing wise, the real feedback is gonna come, but all the initial feedback has been, I'll say very positive.

Speaker 2

And we continue to refine our estimates and forecasts in terms of where that goes. And again, it's a different product in terms of the specifications, but the bundle we put together, we feel has really hit the mark for the elementary schools. On the CTE, right now I would say everywhere in what I would call the advanced application areas and everything from advanced manufacturing, advanced pneumatics, AI robotics, I would say we have a really good level of both interest and adoption. And, as I'm repeating what I said previously, it's both CTE in high schools, it's CTE in community colleges, and it's also CTE moving more and more into what I'll call workforce development. And that tends to be a little bit more even adult learning or worker retraining.

Speaker 2

So I would say the adopting continues to be very strong. As I mentioned earlier, when Alex asked the question about how things are going, if you will. The funding seems to be continuing to flow in that area pretty freely with I'll say without the same hesitation in the K-twelve K-twelve stem side of it. So it continues to look very positive.

Operator

Great, thank you. Thank you. Our next question will come from the line of Nehal Chokshi from Northland Capital Markets. Your line is open.

Speaker 6

Yeah. Thank you. So the bookings in the March was actually stronger than what our expectations were following the December report. So was the it sounds like you did have some pretty non linear bookings pattern as the March closed out. Is that correct?

Speaker 3

Can take that Paul.

Speaker 2

Yeah, ahead. So thanks for

Speaker 3

the question, Nehal. You're right. When you peel back the numbers, there are areas of strength that frankly were encouraging given how the quarter felt as we moved through it. In particular, we actually did see year on year growth in The US once you back out China, once you back out other international geographies. The key area of year on year decline that you saw here was in other international geographies where there was a significant decline.

Speaker 3

Now, in our last quarter, we noted how international over a full year basis has been a significant source of growth over the last several years. It is a small number, though. So plays an its volatility plays an outsized role in the quarter to quarter surges in bookings. We're very encouraged that both new orders and renewals propped up The US. And again, we're hopeful that as we move through the year, we'll see a resumption of volume to go along with the margin expansion that we enjoyed in Q1.

Speaker 6

Okay. And how would you characterize linearity in the quarter in terms of bookings?

Speaker 3

In a normal year, we typically see booking seasonality that are light in Q1 and Q4, our shoulder periods. And you could think of those as maybe being 20% each of full year bookings, with Q2 and Q3 being larger bookings periods and having approximately 30% of the full year business in each. That's an average over many periods. And we've seen in some of our recent filings how all the timing of large deals in particular can skew that seasonality.

Speaker 6

Okay. And then sounds like you did have more left in backlog than anticipated when you had your December earnings call. Is given the margin accretion partially due to better than expected software, is your software backlog what's your software backlog relative to overall backlog? Is it lower than usual in terms of the mix?

Speaker 3

Yeah, I don't have a split on the mix in the backlog right here. However, your question actually gets to an interesting dynamic that's at play here in the quarter, which is we've demonstrated how we can actually grow gross profit despite declines in hardware revenues. So, what I'd say about the mix of our orders is the mix of hardware to software in a new deployment where Inspire laptops are going out the door with the software load. That has not changed dramatically. We're yeah, that has not changed dramatically, and where we see the pattern going, however, is increasing software growth from two sources and as a mix of revenue, potentially a third.

Speaker 3

So we continue to see prior customers renew without new hardware orders. That's the first factor, which is just the layer of renewals. The second is, as we ship new orders, we have been seeing improvements in the software load. We discussed that in the year end results, and we continue to see that in Q1 here. The third factor, and this is on the heels of the earlier question on this call regarding Imagine, is you can contemplate that as Imagine, which has a lower price point on the hardware, it is a smaller form factor, in many cases carries similar software loads.

Speaker 3

We can imagine a dynamic where the cost to the customer, meaning our hardware revenues decline while still bringing significant, if not more software loads. So a trade off here between the hardware platform on which the software runs and our ability to grow a renewing software business with higher margins. Is that helpful insight?

Speaker 6

Yep. Just to be clear, I'm concerned that while you had a backlog build, that's largely hardware backlog build as opposed to a commensurate software backlog build. So I'm just looking for verification that is whether or not that is or is not the case.

Speaker 3

No, that's not the case. In fact, the appetite for software continues to be strong and the mix in the backlog is representative of the health of the software offerings that we've seen in recent quarters. Put another way, if you look at the mix of hardware to software and services in our Q1 portfolio, We saw 10 percentage points of mix shift out of hardware and into software and services this past quarter. That continues a trend that we've seen for successive quarters. It's not reflective of any lack of health in the backlog.

Speaker 3

The backlog itself continues to be rich in terms of software content.

Speaker 6

Great. Thank you. And then as far as bookings mix, can you give the split between inspire versus imagine bookings and then also CTE versus K through 12 bookings?

Speaker 3

CTE through K-twelve bookings, we one moment here. So, for INSPIRE and Imagine, we're not going to make that. We're not going to read that out. On K12 versus CTE bookings, I believe we have a split reported that was 71% K12 and 29% CTE for the quarter just ended.

Speaker 2

Yeah, Eric, I'm gonna make a comment though. I'm not gonna answer the specific INSPIRE versus Imagine, but INSPIRE is a product that has been around for a few years from Inspire one, Inspire two, everybody knows that it's continuing to roll. Imagine continues to be that newer product as you know, we're targeting into elementary. And I think that question is going be more relevant to another, like another quarter or two.

Speaker 6

Okay, great. Thank you.

Operator

Thank you. At this time, this concludes our question and answer session. I would now like to turn the call back over to mister Kellenberger for closing remarks.

Speaker 2

Okay. Thank you, Victor. Just a quick thank you to everyone for listening to today's call. And we look forward to speaking you with again when we report our second quarter results. Thanks again for joining us.

Speaker 2

Have a great evening, everyone.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Everyone, have a great day.

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zSpace Q1 2025
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