zSpace, Inc. (ZSPC)·Q2 2025 Earnings Summary

Executive Summary

• Q2 revenue was $7.46M, essentially flat year over year (vs. $7.50M), with gross margin expanding 220 bps to 42.6% on better hardware cost profiles and more company-owned software content; net loss widened to ($6.10M) as OpEx rose with public company costs and stock comp .
• Versus S&P Global consensus, revenue modestly missed (~$7.59M est.) and EPS underperformed (actual ($0.27) vs. ($0.10) est.); management again refrained from formal guidance given funding/tariff uncertainty, which may pressure forward estimates in the near term* .
• Commercial momentum mixed: ACV grew 11% YoY to ~$10.9M and NDRR for $50K+ ACV customers rose to 131%, but bookings fell 54% YoY (normalizing to down 31% ex. a $5M prior-year deal); backlog declined to $7.3M from $9.7M in Q1, reflecting elongated K-12 funding cycles .
• Strategic levers in flight: Inspire 2 transition supports structurally higher hardware margin; Career Explorer and the zSpace AI Assistant advanced; tariff pass-through continues while OEM production for Inspire shifts to Thailand to mitigate China tariff exposure—potentially easing gross margin volatility into H2 .

What Went Well and What Went Wrong

• What Went Well

  • Mix/structural margin gains persisted: “Gross margins…up 2.1 ppts YoY,” with normalized GM ~46% excluding tariff and license write-off impacts; drivers include new hardware with better pricing/performance and greater first‑party software .
  • Sticky software base: ACV grew to ~$10.9M (+11% YoY) and NDRR hit 131% for $50K+ ACV customers, reflecting expansions among existing districts and content breadth .
  • Platform/product progress: management launched Career Explorer after integrating Second Avenue and accelerated the zSpace AI Assistant, citing “key milestones that strengthen our software platform” .

• What Went Wrong

  • Soft top-line momentum: Q2 bookings fell 54% YoY (down 31% ex. prior-year $5M deal), and backlog slipped to $7.3M from $9.7M in Q1, highlighting slower K‑12 decision cycles and funding delays .
  • EPS/EBITDA missed consensus: EPS of ($0.27) vs. ($0.10) est.; EBITDA below estimates as education funding/tariff uncertainty weighed on shipments and mix* .
  • OpEx creep: Adjusted OpEx (ex‑SBC) rose to $7.7M (from $6.5M YoY) as the company scaled go‑to‑market and public-company capabilities, widening the quarterly net loss to ($6.10M) .

Financial Results

Revenue/margins and loss trajectory across recent quarters:

Q2 2025 revenue mix and geography vs. prior year:

KPIs and liquidity:

Q2 2025 actuals vs. S&P Global consensus:

Values retrieved from S&P Global*

Notes and adjustments:

• Q2 included ~$0.1M in tariff-related logistics costs and a $0.2M write-off of third-party software licenses; normalized GM would have been ~46% vs. reported 42.6% .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO framing on macro/funding: “Shifting U.S. education funding policies…present challenges,” but zSpace aligns with “state-level autonomy, workforce development priorities” and sees “customer momentum…across K–12 and CTE” .
• Product/AI: “Successfully launched…Career Explorer…[and] accelerated development of our AI Assistant—key milestones that strengthen our software platform” .
• CFO on margins: Q2 GM +2.1 ppts YoY; normalized GM 46% after one-time license write-off ($0.174M) and tariff impact; structural drivers include Inspire 2 hardware and first-party software .
• Tariffs/mitigation: “Intention is…to pass through the cost of tariffs on a dollar basis,” with Inspire manufacturing now in Thailand to reduce China tariff impact .

Q&A Highlights

• Funding backdrop: Cautious optimism following July unfreeze of ~$6.8B in federal funds; too early to quantify impact .
• Backlog & bookings mix: Backlog at $7.3M (end-Q2); Q2 bookings down 54% YoY (down 31% excluding a prior-year $5M deal); CTE mix rose to 35% from 28% YoY in Q2 .
• NDRR spike driver: Expansions among existing >$50K ACV customers (upsells/additional licenses) pushed NDRR to 131% .
• China/ROW: China Q2 bookings fell; H1 China bookings up 88% YoY, driven by partner wins (zSpace not investing directly in China) .
• Sales capacity: Quota-carrying reps now 11 vs. 8 last year; supports pipeline build .
• Capital structure: Closed $20M convertible facility ($13M funded; ~half used to retire pricier debt); later entered a $30M ELOC in July (Q3 event) .

Estimates Context

• Q2 2025 results vs. S&P Global consensus: revenue miss (~$7.46M vs. ~$7.59M est.) and EPS miss (($(0.27)) vs. ($(0.10)) est.)* .
• With bookings lower, backlog down, continued K‑12 funding uncertainty, and no formal guidance, forward estimates may need to balance structural GM positives (Inspire 2, first-party software) against near-term volume visibility*.

Values retrieved from S&P Global*

Key Takeaways for Investors

• Near-term: Expect continued estimate sensitivity until K‑12 funding flows normalize; lack of formal guidance and lower backlog are near-term overhangs despite margin structure gains .
• Margin story is intact: Inspire 2 and first‑party software/less rev‑share support structurally higher gross margins (normalized ~46% this quarter), a key offset to revenue volatility .
• Software health: ACV +11% YoY and 131% NDRR for larger customers signal strong customer expansion potential even as hardware timing fluctuates .
• Tariff risk mitigation: Thailand manufacturing shift should reduce exposure to China tariff volatility over time; pass-through policy persists .
• Capital flexibility: April convertible (and subsequent ELOC in July) improve runway, but liquidity remains tight (Q2 cash ~$1.4M); execution on pipeline and working capital remains critical .
• CTE tailwinds: Rising CTE mix (35% of Q2 bookings) and Career Explorer/AI Assistant could support software growth and stickiness, enhancing LTV over time .
• Watch catalysts: Evidence of funding flow-through in H2, backlog rebuild, sustained GM >45% normalized, and software attach/renewal velocity are likely stock narrative drivers .