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ZI

zSpace, Inc. (ZSPC)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 revenue of $8.79M beat S&P Global consensus by ~12% and grew 18% sequentially, driven by a 57% software/services mix and 640 bps gross margin expansion to 51.2% amid continued funding delays; the company still posted a ($6.17M) net loss and refrained from formal guidance .
  • Mix shift, first‑party content, and hardware cost improvements drove structural margin gains; normalized Q3 gross margin would have been 52.3% excluding ~$0.1M tariff costs, which CFO says compressed GM by ~1 pt .
  • Software KPIs softened on macro/funding headwinds: ACV fell 10% YoY to $10.2M and NDRR was 77% (impacted by two large customer renewals), while bookings declined 37% YoY to $7.4M and backlog ended at $6.4M .
  • Strategic developments provide medium-term upside: AI rollouts (zKnow), Career Explorer launch from the Second Avenue team, international expansion via GEMS in Dubai, and a new “game‑changing” stylus expected to deliver experience and cost benefits; listing was transferred to Nasdaq Capital Market and compliance regained .

What Went Well and What Went Wrong

  • What Went Well

    • Gross margin expansion: GM rose to 51.2% (+642 bps YoY), powered by higher software mix (57% of revenue vs 46% LY), better hardware cost profile, and more company‑owned software content .
    • Sequential growth and mix quality: Revenue rose 18% vs Q2, and “software and services representing 57% of total revenues” supported profitability improvements (CEO/CFO) .
    • Strategic/AI momentum and international expansion: Began GEMS Education deployment in Dubai; launched zKnow AI assistant and started shipping Career Explorer from Second Avenue; Danbury Public Schools fully deployed Career Coach AI and STEM . Quote: “Our software and services revenue comprised over 50% of revenue…contributed to gross margin expansion of over 640 basis points” — CEO Paul Kellenberger .

  • What Went Wrong

    • Top-line pressure YoY: Revenue declined 38% YoY to $8.79M due to a large prior‑year order not repeating and funding delays; net loss widened to ($6.17M) vs ($0.20M) LY .
    • Software KPIs weakened: ACV down 10% YoY to $10.2M; NDRR at 77% for >$50k ACV cohort, driven by two large customers renewing at smaller footprints amid budget constraints (CFO) .
    • Uncertain outlook and no guidance: Management cited a six‑week government shutdown impact on funding flows, persistent K‑12 turbulence, and will not issue formal guidance (Q4 seasonality uncertain) .

Financial Results

Quarterly trends

MetricQ1 2025Q2 2025Q3 2025
Revenue ($USD)$6,759,000 $7,459,000 $8,793,000
Gross Margin (%)47.4% 42.6% 51.2%
Net Loss ($USD)($5,832,000) ($6,102,000) ($6,169,000)

Q3 results vs S&P Global consensus

MetricConsensus (Q3 2025)*Actual (Q3 2025)Surprise
Revenue ($USD)$7,878,000*$8,793,000 +$915,000 / +11.6%*
Primary EPS ($)-$0.18*-$0.1422*+$0.0378*

Values marked with * retrieved from S&P Global.

Additional Q3 detail

  • Adjusted EBITDA: ($2.0M) vs $0.4M LY .
  • Software/services mix: 57% vs 46% LY .
  • Operating expenses ex‑SBC: $6.6M vs $6.3M LY; SBC expense: $2.7M (Q3) .
  • Normalized GM excluding tariffs: 52.3% (tariffs were ~-$0.1M headwind) .

KPIs

KPI (Quarter-end or In-Period)Q1 2025Q2 2025Q3 2025
ACV of renewable software ($USD)$11.6M $10.9M $10.2M
NDRR (>$50k ACV cohort)97% 131% 77%
Bookings ($USD)$8.3M $7.2M $7.4M
Backlog ($USD)$9.7M $7.3M $6.4M
CTE share of bookings (%)—35% (Q2) 49% (Q3)
Cash, cash equiv. & restricted cash ($USD)$1.129M $1.390M $4.271M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ4 2025NoneNo formal guidance issued due to funding uncertainty and shutdown timing effects —
Gross MarginQ4 2025NoneNo formal guidance; normalized GM would benefit absent tariff headwind —
OpExFY/Q4 2025None“Tight stewardship” and measured investments; SBC $2.7M in Q3 —
Other (OI&E/Tax/Dividend)FY/Q4 2025NoneNot provided —

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2025)Current Period (Q3 2025)Trend
AI/technology initiativesTransition to Inspire 2; BlocksCAD and Second Avenue acquisitions; roadmap to embed AI; AI assistant plans Launched zKnow (AI assistant); began shipping Career Explorer built by Second Avenue; continued AI embedding across apps Accelerating productization of AI and content
Supply chain & tariffsPassing through ~20% China tariffs; OEM shift of production to Thailand to mitigate; limited Q1 P&L impact Tariffs modestly compressed GM (~1 pt); ~$0.1M Q3 impact; supply chain stable Headwind modest but persistent; mitigations ongoing
Product performanceGM up 13 pts in Q1; structural gains from mix, new HW, first‑party content GM 51.2% (+642 bps YoY) with mix shift (57% S&S) and cost improvements Sustained, structural GM expansion
Regional/internationalEarly interest; Imagine targeting elementary; mixed ex‑US bookings GEMS Education deployment in Dubai; pipeline across Middle East/Europe International expansion underway
Funding/macro & seasonalityFunding delays; backlog $9.7M; no formal guidance; Q2 seasonality volatile Shutdown delayed funding flows; no guidance; Q4 seasonality uncertain Elevated uncertainty; cautious stance
R&D execution / new hardwareInspire 2 launched; upcoming tracking/peripheral updates New stylus “game‑changing” UX and cost/logistics benefits forthcoming Hardware roadmap supports margins

Management Commentary

  • Strategy and mix: “Our software and services revenue comprised over 50% of revenue. This contributed to gross margin expansion of over 640 basis points…” — CEO Paul Kellenberger .
  • Sequential improvement: “Q3 revenues…represent an 18% sequential improvement over Q2…software and services representing 57% of total revenues” — CFO Erick DeOliveira .
  • Outlook posture: “We remain confident…[but] cannot credibly project business volume under current circumstances…we will continue to refrain from issuing formal financial guidance.” — CFO Erick DeOliveira .
  • International & AI: GEMS Education deployment in Dubai; Danbury Public Schools fully deployed Career Coach AI; launched zKnow and shipped Career Explorer (Second Avenue) .
  • Listing/compliance: Transferred to Nasdaq Capital Market; regained compliance with Nasdaq continued listing standards .

Q&A Highlights

  • Government shutdown impact: Funding access delays at federal-to-state cascade level slowed PO finalization and shipment timing; seen as timing, not demand destruction .
  • Seasonality and Q4: Typical Q3→Q4 uplift uncertain this year due to shutdown timing and shipment-based revenue recognition; no formal guidance .
  • Tariffs: Treated largely as dollar pass-through; ~1 pt GM compression; supply chain stable; prior manufacturing move to Thailand is a mitigation .
  • New hardware: Upcoming stylus reduces peripherals and logistics complexity while improving UX; expected to create a structural step‑up in hardware cost profile .
  • CTE traction: CTE drove 49% of Q3 bookings value; Career Explorer seeing early bookings (low six figures) and strong demand signals .

Estimates Context

  • Q3 2025 vs consensus: Revenue $8.79M vs $7.88M consensus (beat ~12%); Primary EPS -$0.1422 vs -$0.18 consensus (beat ~$0.04). Coverage: 3 revenue estimates, 1 EPS estimate (low coverage) ; S&P Global consensus values marked with * above.
  • Q4 2025 consensus snapshot: Revenue $6.20M*; EPS -$0.13* (both based on limited coverage of 3 revenue and 1 EPS estimates). Values retrieved from S&P Global.

Key Takeaways for Investors

  • Quality over quantity: Software/services at 57% and first‑party content are driving structural margin gains; normalized GM was 52.3% excluding tariff headwinds .
  • Print was better than feared: Revenue and EPS both beat consensus in a tough macro/funding backdrop; sequential acceleration provides a near‑term positive datapoint .
  • KPI softness to watch: ACV down 10% YoY and NDRR 77% (two large customers) suggest renewals/upsell pace is sensitive to budgets; monitor re‑acceleration as conditions normalize .
  • Pipeline and product catalysts: AI assistant (zKnow), Career Explorer uptake, international (GEMS), and forthcoming stylus could support mix and margin tailwinds into 2026 .
  • Risk skew: Funding timing (incl. shutdown effects), tariff policy, and small‑cap capital structure (convertible note amendments) remain key sources of volatility .
  • Stock setup: Beats without guidance plus tangible AI/product/international catalysts frame a “prove‑it” trajectory; estimate revisions may bias modestly upward on revenue/GM, but low coverage limits visibility (S&P Global). Values retrieved from S&P Global.

Citations:

  • Q3 2025 8-K/Press release and financial tables:
  • Q3 2025 earnings call transcript:
  • Q2 2025 8-K/Press release and call:
  • Q1 2025 8-K/Press release and call:
  • Listing transfer/compliance and note amendment:

S&P Global disclaimer: All values marked with an asterisk (*) are retrieved from S&P Global (Capital IQ) consensus/actuals.