zSpace's Strategic Shift to Software-Driven Growth: A Path to Long-Term Value Amid Economic Uncertainty?

In an era of economic volatility and shifting market demands, zSpace Inc. (NASDAQ:ZSPC) has embarked on a bold strategic pivot from hardware-centric operations to a software-driven business model. This transition, marked by a significant increase in software and services revenue, has sparked both optimism and skepticism among investors. As the company navigates declining overall revenue and fluctuating customer retention metrics, the question remains: Can zSpace's software-centric strategy deliver sustainable long-term value?

A Revenue Mix Transformation

zSpace's Q3 2025 earnings report underscored a pivotal shift in its revenue composition. Total revenue for the quarter fell 38% year-over-year to $8.8 million, driven by reduced hardware sales. However, software and services now account for 57% of total revenue, up from 46% in Q3 2024. This shift has directly contributed to a 51% gross margin in Q3 2025, a 640-basis-point improvement compared to the prior year. Analysts attribute this margin expansion to the higher profitability of software solutions, which require lower ongoing costs than hardware production.

The company's focus on software has also enabled international expansion, including partnerships with GEMS Education in Dubai and the launch of the Career Explorer application according to the latest financial report. These initiatives highlight zSpace's attempt to diversify revenue streams and reduce reliance on cyclical hardware markets.

Sustainability Under Scrutiny

While the software pivot has improved margins, questions linger about its scalability. zSpace's Net Dollar Revenue Retention (NDRR) for larger accounts (ACV > $50,000) plummeted from 131% in Q2 2025 to 77% in Q3 2025 according to financial filings. This decline suggests customer churn or contraction among key clients, potentially undermining recurring revenue stability. Additionally, the Annualized Contract Value (ACV) of renewable software dropped 10% year-over-year to $10.2 million in Q3 2025, signaling challenges in maintaining long-term contractual commitments.

Despite these headwinds, zSpace has demonstrated resilience in customer renewals, particularly in the Career and Technical Education (CTE) segment. The introduction of AI-powered tools like Career Coach AI™ and strategic geographic expansion into New York and California indicate a commitment to innovation. However, macroeconomic pressures, including education funding uncertainties, remain a wildcard for future growth.

The Road Ahead

zSpace's 2025 full-year revenue projection of $31.84 million-down from earlier estimates of $38.88 million-reflects ongoing market skepticism. While the company's gross margin improvements and software focus are commendable, the path to profitability remains fraught. Analysts have set a 12-month price target of $3.67, implying a 402% upside from current levels, but such optimism hinges on zSpace's ability to stabilize its customer base and scale its software offerings.

For investors, the key will be monitoring zSpace's capacity to convert its high-margin software strategy into consistent revenue growth. If the company can reverse its NDRR decline and expand its international footprint, the pivot may yet prove transformative. However, without addressing underlying challenges in customer retention and ACV, the long-term value proposition remains uncertain.