zSpace Q3 2025 Earnings Call: Contradictions Emerge on Government Shutdown Impact, Revenue Seasonality, AI Integration, and Tariff Effects

Date of Call: None provided

Financials Results

• Revenue: $8.8M (Q3), down 38% YOY, up 18% sequentially; YTD revenue $23.0M, down 22% YOY
• Gross Margin: 51.2% (Q3), up 6.4 percentage points YOY; YTD gross margin 47.3%, up 6.4 percentage points YOY; Q3 normalized margin w/o $0.1M tariffs would be 52.3%

Business Commentary:

* **Revenue Growth and Software Focus: - zSpace reported software and services revenue contributed over 50% of total revenue in Q3 2025, with a gross margin expansion of 640 basis points. - This growth was driven by strong customer renewals and the adoption of software offerings, aligning with zSpace's strategic focus on advancing their software strategy.

• **International Expansion:
• zSpace is expanding its global presence, with recent deployments in Italy, Bulgaria, Poland, and the Middle East, including a partnership with GEMS Education.
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• This expansion is supported by AI-enabled translation tools, which eliminate language barriers and broaden zSpace's global reach.

• **Tariff Impact and Profitability Improvement:

• Although tariffs contributed to a 1 percentage point impact on gross margins, zSpace achieved a gross margin improvement of 6.4 percentage points year-to-date.

• This improvement was driven by favorable revenue mix, better price performance in hardware, and increased zSpace-owned software content.

• **Educational Funding and Market Uncertainty:

• zSpace experienced a 38% year-on-year decline in Q3 revenue due to uncertainty in funding and purchasing patterns, particularly in the U.S. K-12 market.
• Despite the challenges, customer interest and demand for zSpace solutions remain strong, with ongoing engagement and recent wins in international markets.<
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Management emphasized margin expansion and product-led progress ("software and services comprised over 50% of total revenue"; "gross margin expansion of over 640 basis points"), while repeatedly noting near-term uncertainty and inability to provide formal guidance due to tariff impacts and U.S. education funding timing ("cautiously optimistic"; refrain from issuing formal financial guidance).
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Q&A:

• Question from Alexander Paris (Barrington Research): How does the government shutdown impact zSpace directly — is it a direct impact or another point of uncertainty influencing decision-making?
  Response: Shutdown primarily delayed federal funds flowing to districts, causing timing delays in shipments and purchase-order conclusions rather than changing underlying demand.

• Question from Alexander Paris (Barrington Research): Which buckets of federal money do schools access for your products versus state/local funding — does federal funding still flow?
  Response: CTE/Perkins funding is flowing; K‑12 STEM has a smaller federal share (~10%) with most funding state/local, so funding speed varies by state but overall the company is 'cautiously optimistic.'

• Question from Alexander Paris (Barrington Research): For the Danbury district deployment, is it limited to 1 high school and 3 middle schools or will it expand?
  Response: Deployment is at the beginning, focused on middle and high schools (Career Explorer), covering ~12,000 students today with the intent and opportunity to expand district-wide and add devices/applications.

• Question from Alexander Paris (Barrington Research): Can you provide more color on the 77% net dollar retention and the two large customers that materially affected that metric?
  Response: Two large customers, especially one with ~700–800 devices across six schools, reduced software renewal from seven-figure to mid-six-figure due to budgets but preserved device footprints, and normalized NDRR would be ~94% with ACV flat excluding them.

• Question from Alexander Paris (Barrington Research): Seasonally, revenue usually increases from Q3 to Q4 — do you expect that pattern to persist or is there a risk of lower sequential revenue?
  Response: Historically Q4 is stronger, but the government shutdown makes shipment timing uncertain today, so they cannot predict whether the seasonal increase will occur.

• Question from Jared Osteen (ROTH Capital Partners): Can you walk through the recent developments in the Workforce and CTE segment and how CTE traction is trending?
  Response: Career Explorer (from Second Avenue Learning) launched quickly with strong reception and low‑six‑figure bookings; CTE demand is solid (especially workforce/community-college side), though some K‑12 CTE deals slowed by district-level approvals.

• Question from Jared Osteen (ROTH Capital Partners): With global availability of the Inspired laptop, how is international contributing and are there remaining tariff or supply-chain challenges?
  Response: International demand/pipeline is growing (partners in Italy, Bulgaria, Poland and GEMS in Dubai); tariffs have modest gross-margin impact (~1 ppt) treated largely as pass-through, supply chain not materially dislocated, while funding/timing remains the bigger constraint.

• Question from Jared Osteen (ROTH Capital Partners): Has shifting manufacturing from China to Thailand begun to help, and how should we expect margins to trend with hinted new hardware?
  Response: New interaction device (stylus) and manufacturing shifts should deliver a modest, structural step-up in hardware margins and logistics savings (fewer peripherals, lower shipping/handling), improving margin profile over time.

Contradiction Point 1

Government Shutdown Impact

It highlights the impact of the government shutdown on the company's operations and decision-making timelines, which could affect revenue and customer relationships.

How does the government shutdown directly impact zSpace, or is it merely a source of uncertainty affecting decision-making? - Alexander Paris (Barrington Research Associates, Inc., Research Division)

20251114-2025 Q3: The shutdown feels like another headwind, with obstacles in purchasing and funding decisions. The biggest obstacle is the inability to access funds from federal departments, causing delays in accepting shipments and determining purchase orders. - Erick DeOliveira(CFO)

Does the government shutdown directly impact zSpace, or is it an uncertainty affecting decision-making? - Alexander Paris (Barrington Research Associates, Inc., Research Division)

2025Q3: The government shutdown creates obstacles for end-users, particularly in accessing funds from federal departments. It delays acceptance of product shipments and the conclusion of purchase orders. It's similar to the challenges faced earlier in the year but affects decision-making timelines rather than the decisions themselves. - Erick DeOliveira(CFO)

Contradiction Point 2

Seasonality and Revenue Expectations

It involves differing expectations regarding the seasonal increase in revenues from Q3 to Q4, which could impact investor expectations and financial planning.

Do you expect seasonal revenue growth from Q3 to Q4 despite uncertainties? - Alexander Paris (Barrington Research Associates, Inc., Research Division)

20251114-2025 Q3: The government shutdown creates uncertainty regarding Q4 revenues. Typically, there's an increase from Q3 to Q4, but currently, it is unpredictable due to the shutdown's impact on order fulfillment. - Erick DeOliveira(CFO)

Will the seasonal revenue increase from Q3 to Q4 continue this year? - Jared Osteen (ROTH Capital Partners, LLC, Research Division)

2025Q3: We chose not to provide guidance because of the uncertainty in the marketplace, particularly around the federal government shutdown which began in late December. Historically, we have seen some seasonality with revenues being up seasonally in the fourth quarter, but due to the uncertainty, we did not provide guidance for the fourth quarter. - Erick DeOliveira(CFO)

Contradiction Point 3

AI Integration in Career Explorer

It highlights differing statements on the integration of AI into Career Explorer, which could impact the product's market positioning and competitive advantages.

Can you provide an update on recent developments in the Workforce and CTE segment and discuss CTE traction? - Jared Osteen (ROTH Capital Partners)

20251114-2025 Q3: We're using machine learning to enhance user experience and improve cost profiles. Our zSpace AI assistant combines immersive technology with personalization. - Paul Kellenberger(CEO)

How are you incorporating AI into new offerings, particularly in Career Explorer? - Rohit Kulkarni (ROTH Capital Partners)

2025Q2: We're using machine learning to enhance user experience and improve cost profiles. Our zSpace AI assistant combines immersive technology with personalization. The vision is to empower learners with AI experiences to unlock potential and prepare for future careers. - Paul Kellenberger(CEO)

Contradiction Point 4

Government Shutdown Impact on zSpace

It highlights differing perspectives on the impact of the government shutdown on zSpace's operations and customer decision-making processes, which could influence revenue and operational projections.

Does the government shutdown directly impact zSpace, or is it just a factor affecting decision-making? - Alexander Paris (Barrington Research)

20251114-2025 Q3: The shutdown feels like another headwind, with obstacles in purchasing and funding decisions. The biggest obstacle is the inability to access funds from federal departments, causing delays in accepting shipments and determining purchase orders. - Erick DeOliveira(CFO)

Were there any Q3 trends specifically related to federal funding news? - Rohit Kulkarni (ROTH Capital Partners)

2025Q2: We're cautiously optimistic. The administration has unfrozen $6.8 billion, which factors into customer decision-making. - Paul Kellenberger(CEO)

Contradiction Point 5

Tariff Impact on Gross Margins

It involves differing statements about the impact of tariffs on gross margins, which are critical financial metrics for investors.

How is the international segment contributing, and are there tariff or supply chain challenges? - Jared Osteen (ROTH Capital Partners)

20251114-2025 Q3: Tariffs have a modest 1% impact on gross margins. - Paul Kellenberger(CEO)

What are your thoughts on tariffs in the second half? - Alexander Paris (Barrington Research)

2025Q2: Tariffs remain volatile. We pass through costs to customers, but it causes margin compression, as we don't markup tariffs. - Erick DeOliveira(CFO)