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ZI

zSpace, Inc. (ZSPC)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 revenue of $6.759M beat prior guidance (“slightly above $5M”) and consensus, while gross margin expanded 1,290 bps YoY to 47.4%; EPS missed consensus due to persistent funding/tariff uncertainty and higher OpEx ex-SBC .
  • Mix shift toward software and services (+10 ppt YoY) and Inspire 2 hardware cost improvements drove margin expansion despite a 14% YoY revenue decline .
  • Management refrained from formal financial guidance given “deep volatility” in K‑12 funding and evolving tariff policies; they expect to pass through ~20% Q2 tariffs and highlighted ongoing cost tailwinds from Inspire 2 and new tracking systems .
  • Strategic acquisitions (BlocksCAD, Second Avenue) and Russell 2000/3000 additions enhance content breadth and investor visibility; ACV grew 10% YoY to $11.6M and NDRR was 97% for >$50k ACV customers .

What Went Well and What Went Wrong

What Went Well

  • Continued shift to higher-margin software/services; gross margin improved to 47.4% from 34.5% YoY on mix, hardware profitability, and more zSpace-owned content: “a greater proportion of sales of zSpace-owned software content versus 3rd party licensing” .
  • Operational execution and late-quarter shipments drove revenue above guidance (vs “slightly above $5M” provided in late Q4 call); backlog remained healthy at $9.7M .
  • Strategic progress: fully transitioned to Inspire 2; acquired BlocksCAD and Second Avenue; joined Russell 2000/3000. CEO: “These developments should strengthen our platform… and position us for long-term growth” .

What Went Wrong

  • Revenue down 14% YoY on K‑12 funding uncertainty and delays of committed orders; bookings down 6% YoY, with international ex‑China down 78% YoY despite modest U.S. growth .
  • Sales cycles lengthened (K‑12 from ~60–75 days to ~75–90), reducing linearity and forecastability; management described the backdrop as “deep volatility” .
  • EPS missed consensus; management will pass through ~20% Q2 tariffs, which complicates pricing/quote updates and demand visibility (though Inspire 2 BOM helps hardware margins) .

Financial Results

Core P&L vs Prior Year and Prior Quarter

MetricQ1 2024Q4 2024Q1 2025
Revenue ($USD Millions)$7.841 $8.535 $6.759
Gross Margin (%)34.5% 40.7% 47.4%
Net Loss ($USD Millions)$(12.247) $(3.626) $(5.832)
Cash & Equivalents ($USD Millions)$1.188 (as of 3/31/24) $4.864 (as of 12/31/24) $1.129 (as of 3/31/25)
Total Liabilities ($USD Millions)$37.601 (as of 3/31/24) $28.220 (as of 12/31/24) $29.468 (as of 3/31/25)

Actual vs Consensus (Q1 2025)

MetricActual Q1 2025Consensus Q1 2025# of EstimatesResult
Revenue ($USD Millions)$6.759 $5.027*3*Beat
EPS ($USD)$(0.26)*$(0.17)*1*Miss

Values retrieved from S&P Global*

Operating Mix, Bookings, and KPIs

MetricQ1 2024Q4 2024Q1 2025
Software/Services Mix Shift (ppt vs prior year)—+5 ppt FY commentary +10 ppt
Bookings ($USD Millions)—$5.3 (Q4) $8.3 (Q1)
U.S. Bookings Growth (YoY, ex-China)—+21% (Q4) +3% (press release) ; +4% (CFO call)
International ex-China Bookings (YoY)—−92% (Q4) −78% (Q1)
ACV Renewable Software ($USD Millions)$10.6 $11.3 (12/31/24) $11.6 (3/31/25)
NDRR (> $50k ACV cohort)—92% (12/31/24) 97% (3/31/25)
Backlog ($USD Millions)—$9.2 (12/31/24) $9.7 (3/31/25)

Note: Minor discrepancy between press release (+3% U.S. bookings YoY ex‑China) and CFO remarks (+4%) in Q1 .

Segment/End-Market Composition (Q1 2025)

BreakdownQ1 2025
K‑12 vs CTE Bookings Split71% K‑12 / 29% CTE

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ1 2025“Slightly above $5M” (late Q4 call) Reported $6.759M Outperformed prior indication
Financial Guidance (overall)FY 2025Insight only for Q1; otherwise no formal guidance Refrained from formal guidance Maintained no formal guidance
Tariff TreatmentQ2 2025Discussed potential pass‑through Expect ~20% tariffs; pass‑through to customers Clarified magnitude and pass-through
RSU Burn RateFY 2025Target <7% burn rate YTD burn rate 5.9%; still targeting <7% Tracking toward target
OpEx DisciplineFY 2025OpEx growth <½ revenue growth Constrained OpEx growth; strict control; ex‑SBC Maintained discipline

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Current Period (Q1 2025)Trend
Funding uncertainty (K‑12) & sales cyclesLengthening K‑12 cycles; uncertainty persists “Deep volatility”; K‑12 75–90 days; deadline-driven decisions around 6/30, 9/30 Persisting headwind; timing volatility
TariffsPrepared to pass-through; past 2018 experience Expect ~20% Q2 tariffs; pass-through; Inspire 2 lowers BOM Clearer near-term magnitude; mitigated by BOM
Mix shift to software/services+5 ppt FY 2024; margin tailwinds +10 ppt YoY; gross margin 47.4% Accelerating structural mix improvement
Hardware platform transitionInspire 2 began shipping late Q4 Fully transitioned; 100% of Q1 shipments; tracking devices later H2 Positive for margins/costs
M&A/content expansionBlocksCAD acquired (Mar) BlocksCAD integrated; Second Avenue acquired (Apr) Active, accretive to content/gross margin
Geographic mixInternational ex‑China volatility; strong FY24 Q1: U.S modest growth; international ex‑China −78% YoY U.S resilience; international variability
Backlog/linearityFY24 backlog $9.2M Q1 backlog $9.7M; late surge shipments Healthy backlog; nonlinear fulfillment

Management Commentary

  • CEO: “We successfully transitioned to our next-generation Inspire 2 laptop, expanded our software capabilities through the acquisitions of BlocksCAD and Second Avenue… These developments should strengthen our platform… and position us for long-term growth.”
  • CFO: “Gross margins… 47.4%, up 13 percentage points… driven by a 10% shift in revenues from hardware into software and services… and a greater proportion of sales of zSpace-owned software content versus 3rd party licensing.”
  • CEO on tariffs: “Our products are subject to 20% tariffs… our plans are to pass those tariffs through to our customers… OEM partners [may] move production… has a 10% tariff today.”
  • CFO on outlook: “Given this landscape, we are going to refrain from formal financial guidance… we remain comfortable in our ability to improve the quality of both our hardware and software revenues.”

Q&A Highlights

  • Funding and sales cycles: K‑12 cycle lengthening to ~75–90 days; decision timing clustered around fiscal deadlines (6/30, 9/30), causing late-quarter surges and nonlinearity .
  • Tariffs: Expect ~20% tariffs in Q2; pass-through to customers; Inspire 2 BOM improvements offset hardware margin pressure .
  • Bookings/geo: U.S bookings ex‑China modestly up; international ex‑China down sharply; overall Q1 bookings −6% YoY; backlog $9.7M .
  • Mix/composition: Q1 bookings split 71% K‑12 / 29% CTE; Imagine (elementary) well received; expanding CTE/workforce solutions .
  • M&A/integration: BlocksCAD fully integrated into bundles; Second Avenue team leading product strategy with releases targeted for back‑to‑school (Aug/Sept) .

Estimates Context

  • Q1 2025 revenue beat consensus ($6.759M vs $5.027M*) while EPS missed (−$0.26* vs −$0.17*). Consensus counts were thin (Revenue: 3*, EPS: 1*), implying potential estimate dispersion going forward given lack of formal guidance and tariff/funding uncertainty .
    Values retrieved from S&P Global*

Key Takeaways for Investors

  • Structural gross margin improvement from software/services mix and owned content is intact; expect further hardware cost tailwinds from Inspire 2 and tracking devices later in 2025 .
  • Revenue nonlinearity persists with funding deadlines; late-quarter shipment surges can drive beats vs intra‑quarter indications despite limited visibility .
  • Near-term EPS risk from tariff pass-through and variable OpEx ex‑SBC; management is disciplined on spend and tracking RSU burn-rate below target .
  • U.S demand resilient; international ex‑China volatile; maintain focus on K‑12 and CTE/workforce where funding flows are more stable (e.g., Perkins/state programs) .
  • M&A contributes accretive content and margin; BlocksCAD and Second Avenue broaden STEM/CTE software offerings and reduce third‑party rev share .
  • Without formal guidance, consensus may remain sparse/variable; monitor Q2 tariff impacts and back‑to‑school season as key catalysts for bookings and margin trajectory .
  • Index inclusion (Russell 2000/3000) and improved balance sheet via $20M convertible facility enhance visibility and strategic flexibility .