Earnings call transcript: zSpace Q2 2025 reports revenue decline, stock dips

zSpace Inc. (ZSPC) reported its second-quarter 2025 earnings on August 14, revealing a decrease in revenue and a subsequent dip in stock prices. The company announced an earnings per share (EPS) of -$0.16, missing expectations, as revenue fell short of forecasts at $7.46 million versus the anticipated $9.38 million. Following the announcement, zSpace’s stock declined by 3.79% in after-hours trading. According to InvestingPro data, the stock has experienced significant volatility, falling 88.45% over the past year, with current trading at $2.54 representing just 8% of its 52-week high of $32.69.

Key Takeaways

• zSpace’s Q2 revenue remained flat year-over-year at $7.5 million.
• The company reported a gross profit increase of 11% year-over-year.
• Stock prices fell 3.79% in after-hours trading following the earnings announcement.
• zSpace launched a new Career Explorer application and is developing an AI assistant.
• No formal financial guidance was provided due to market uncertainties.

Company Performance

Despite a challenging market environment, zSpace maintained flat revenue growth year-over-year at $7.5 million for Q2. The company’s gross profit improved by 11%, driven by higher gross margins, which rose to 44.9%. However, the decline in hardware revenues by 13% and a 34% decrease in bookings over the first half of the year highlighted the company’s ongoing challenges. InvestingPro analysis reveals the company operates with a moderate level of debt and maintains a current ratio of 0.49, indicating potential liquidity concerns. Subscribers to InvestingPro can access 12 additional key insights about ZSPC’s financial health and market position.

Financial Highlights

• Revenue: $7.5 million, flat year-over-year
• Earnings per share: -$0.16, missing forecasts
• Gross profit: $6.4 million, up 11% year-over-year
• Gross margins: 44.9%, up 7.5 percentage points

Earnings vs. Forecast

zSpace’s actual revenue of $7.46 million fell short of the forecasted $9.38 million, representing a 20.47% negative surprise. This miss is significant compared to previous quarters, suggesting potential challenges in meeting market expectations. The EPS of -$0.16 also missed projections, indicating continuing financial pressures.

Market Reaction

Following the earnings release, zSpace’s stock price dropped by 3.79% in after-hours trading, settling at $2.54. This decline reflects investor concerns over the company’s ability to meet revenue expectations and navigate market uncertainties. The stock’s performance is notably below its 52-week high of $32.69, highlighting significant volatility. InvestingPro’s Financial Health Score of 1.86 (rated as ’FAIR’) suggests moderate financial stability, while the company’s Price Momentum Score of 0.58 reflects recent market challenges. For comprehensive analysis of ZSPC and 1,400+ other stocks, including detailed Fair Value assessments and expert insights, consider accessing InvestingPro’s Research Reports.

Outlook & Guidance

zSpace refrained from providing formal financial guidance for future quarters, citing ongoing market uncertainties. The company remains cautiously optimistic about potential federal funding releases and continues to invest in AI and software solutions, aiming to improve gross margins further.

Executive Commentary

CEO Paul Kellenberger emphasized the company’s focus on leveraging machine learning in its next-generation stylus and expanding its product offerings. "Our vision is really to empower learners with immersive AI experiences to unlock their potential," he stated. CFO Eric Dialla Vera added, "We continue to control spending strictly," highlighting the company’s efforts to manage costs effectively.

Risks and Challenges

• Market uncertainties in the K-12 education sector could impact revenue.
• Hardware revenue decline poses a challenge for growth.
• Shifts in federal education funding to state-level decision-making may affect sales.
• Tariff costs and manufacturing location shifts could impact profitability.
• Competition in immersive learning technologies remains strong.

Q&A

During the earnings call, analysts inquired about the net dollar revenue retention rate, which stands at 131%. Questions also focused on the company’s capital raise of $20 million through a convertible offering and the impact of tariffs on manufacturing. The company’s strategic focus on AI and software solutions was a key point of interest.

Full transcript - zSpace Inc (ZSPC) Q2 2025:

Conference Call Operator: Good afternoon, everyone, and thank you for participating in today’s conference call to discuss zSpace financial results for the second quarter ended 06/30/2025. Joining us today are zSpace CEO, Paul Kellenberger, CFO, Eric Dialla Vera and Greg Robles from Investor Relations. Following their remarks, we’ll open the call for analyst questions. Before we go any further, I would like to turn the call over to Mr. Robles as he reads the company’s safe harbor statement.

Greg, please go ahead, sir.

Greg Robles, Investor Relations, zSpace: Thanks, operator. Good afternoon, and thank you for joining our conference call to discuss our second quarter twenty twenty five financial results. Before we begin, I’d like to remind everyone that certain statements made on this call may be considered forward looking statements. These statements are based on our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially. Additionally, we may discuss certain key business metrics, which are non GAAP financial measures.

A description of these non GAAP measures and any comparison to the most directly comparable GAAP measures can be found in our earnings release on the Investor Relations section of our website. Now I would like to turn the call over to the CEO of zSpace, Paul Kellenberger. Paul?

Paul Kellenberger, CEO, zSpace: Thank you, and good afternoon, everyone. Thank you for joining us for our second quarter earnings call. I am Paul Kellemurder, CEO of zSpace, and with me is Eric de labera, our Chief Financial Officer. We’re both excited to be here with you to discuss zSpace, our Q2 performance and our plan to drive growth. To begin, we’re operating in a challenging and evolving macroeconomic environment.

Global trade dynamics remain unpredictable, and ongoing changes in U. S. Education policy continues to cause funding uncertainty and delays for our school district customers, a trend that began in Q1. Despite these headwinds, ZSpace remains well positioned to navigate and capitalize on the shifting landscape. We’re particularly focused on four key policy trends that directly impact our business.

Number one, decentralization of federal funding. The continued redirection of education dollars from the federal to state level is creating a more localized decision making environment, opening doors for ZSpace to align with state specific priorities and build deeper partnerships. Number two, expansion of school choice. The increased emphasis on charter schools and voucher programs is accelerating demand for flexible, high impact instructional solutions across a growing diversity of educational models. Number three, focus on flexibility and innovation.

States now have greater autonomy to invest in emerging technologies and instructional approaches. ZSpace’s immersive learning platform is well suited to meet this call for innovation. And the fourth item, implementation of block grants. A central feature of the Department of Education’s current approach, block grants consolidate categorical programs into broader funding pools, giving states greater freedom to allocate resources. We believe this shift will become a significant growth catalyst for ZSpace, particularly as funding becomes more predictable and is directed towards workforce development, PTE, and STEM education.

While we continue to closely monitor these external policy developments, we’ve also made meaningful internal progress across product integration and innovation. Most notably, this past quarter, we successfully completed the integration of our Second Avenue acquisition, culminating in the launch of our Career Explorer application, which is now in the market. We believe this product will drive meaningful growth in our software business and strengthen our leadership in career exploration and CTE. In parallel, we’ve accelerated investment in the zSpace AI assistance, which is central to our long term vision of improving student outcomes through intelligent, personalized learning. This strategic focus positions zSpace at the forefront of AI driven education, delivering real time support and guidance to learners while empowering educators with actionable insights to enhance instruction.

In the areas of industry recognition and customer momentum, I would like to illustrate our momentum and success with a few examples. In June, ZSpace was honored with the Tech and Learning Award at ISTE, the largest annual K-twelve education conference in The U. S, further validating our innovation and impact. We also achieved several key strategic customer wins across both new and existing markets, reinforcing our value proposition in the competitive and rapidly evolving education sector. The first example is Northwell School of Health Sciences, which is a collaboration with New York City Public School District funded by the Bloomberg Philanthropies Organization.

As part of a flagship health sciences campus launch in New York City, Northwell School of Health Sciences selected zSpace as a cornerstone technology in its state of the art simulation labs. This deployment included zSpace Inspire systems across multiple labs with a broad spectrum of health care applications. The second example I would like to highlight is the Mendota Unified School District here in California. They implemented zSpace Imagine systems at three elementary schools as part of an early STEM and career exploration initiative, marking a major investment in immersive learning at the K-five level. Overall, we remain confident in the long term potential growth of zSpace and our ability to deliver on our vision.

That said, we are approaching the second half of the year with measured caution, given the continued uncertainty in the broader macroeconomic and education funding environment. Importantly, this caution is not a reflection of customer demand. In fact, as evidenced by recent wins and ongoing engagement, both existing customers and prospects continue to express interest in our solutions and a desire to expand usage. The challenge lies not in demand, but in the persistent delays and constraints around funding. We believe that as the federal education policy continues to take shape and funding mechanisms become more predictable, the longer term outlook for ZSpace will strengthen.

With that, I will turn the call over to Eric to walk through our financial results in more detail. Eric? Thank you, Paul.

Eric Dialla Vera, CFO, zSpace: As you consider our results, a reminder that our revenues are substantially recognized upon shipment of laptop units or fulfillment of software license keys. This includes recognizing the full value of multiyear software licenses in the period in which they are fulfilled. Only a small portion of our revenue is ratably recognized. As a result of this revenue recognition treatment, our financial results can exhibit quarter to quarter variability that exaggerates the underlying seasonality of the business. And now diving into our first half performance.

First half revenues were $14,200,000 down 7% year on year. As noted in our Q1 results, we’ve been enjoying outperformance in software and services, which were up 2% versus the comparable six month period of the prior year. Hardware revenues for the same six month period were down 13%. This dynamic continues to be an important driver of gross margin expansion. As previously discussed, our P and L reflects multiyear software license revenue in period.

To help better characterize the run rate health of the business, we offer two non GAAP software operating metrics. As of 06/30/2025, the annualized contract value of renewable software was $10,900,000 up 11% compared with twelve months ago. Also as of 06/30/2025, the net dollar revenue retention of customers with at least $50,000 of ACV was 131% for those customers present as of 06/30/2024. We’re very pleased that our efforts to focus on the importance of our software content in driving student outcomes has generated continued growth in the ACV metric and high retention rates amid such a challenging environment for our end users. Bookings for the six month period ending June 30 were $15,500,000 down 34% year on year.

Excluding the unusual $5,000,000 deal closed in the prior period, bookings performance would have been down 16% year on year. This normalized performance reflects a 21% decline in The U. S. And rest of world markets outside of China and an 88% increase in bookings from China. K-twelve customers accounted for 68% of bookings value, down from 70% in the prior year comparable period.

DTE customers drove 32% of value, up from 30% in the prior year. Gross profit was $6,400,000 up 11% year on year against the same period last year. This includes a one time charge in the second quarter for discontinued software license inventory, which is related to our continued efforts to bring previously resold third party titles in house through both acquisition of applications and internal development. Gross profit was also affected by applicable tariffs and duties. Although we have largely treated these as pass through on a dollar basis, we incur some margin compression from doing so.

Gross margins for the six month period were 44.9%, up 7.5 points versus the prior year period. Improvements in profitability continue to be driven by the same three factors identified earlier in the year: favorable revenue mix of hardware versus software and services new hardware products with better pricing performance profiles and an increased amount of zSpace owned software content. Operating expenses, excluding stock based compensation, were up 11% for the first half. People related costs, which make up the bulk of our expenses, were up 2% year on year for the same comparable period. And now for the second quarter.

Q2 revenues of $7,500,000 were flat year on year with hardware performance of 3% growth versus the prior year Q2, slightly ahead of software and services, which declined 5%. This difference in performance is attributable to turbulence in the educational market created by the combination of tariff policies and uncertainty in educational funding, which has resulted in unpredictable purchasing patterns in school districts across the country. Bookings for the three month period ending June 30 were $7,100,000 down 54% year on year. Excluding the unusual $5,000,000 deal closed in the prior year period, bookings performance would have been down 31 year on year. This normalized performance reflects a 31% decline in The U.

S. And rest of world markets outside China and a 100% decrease in bookings from China. K-twelve bookings accounted for 65% of bookings value in the quarter, down from 72% in the prior year comparable period. DTE customers drove 35% of bookings value, up from 28% in the prior year. Gross profit was $3,200,000 up 5% year on year against the same period last year and extending the margin expansion trend, which began in the second half of last year.

This includes the one time write off for retired third party software licenses of $174,000 as we replaced third party content with our own. Gross margins for the quarter were 42.6, up 2.1 percentage points versus the prior year period. Normalizing for the impact of software license write offs and the impact of tariffs, gross margin would have been 46% or 6% of expansion compared with 2024. Operating expenses for the quarter, excluding stock based compensation, were up 10% year on year. People related costs, excluding stock based compensation, which make up the bulk of costs, were up 7% year on year for the same comparable period.

Our reported results include $1,900,000 in stock based compensation expense attributable to restricted stock units granted in Q1 as part of our employee equity incentive program. Relative to the 22,800,000.0 shares issued and outstanding at the start of the year, we continue to manage the issuance of RSUs as part of the employee equity incentive program to a target burn rate of less than 7% for the full year. Now moving on to our outlook for the rest of the year. We expect the uncertainty and turbulence present through the first six months of twenty twenty five to persist, particularly in the K-twelve segment in The U. S.

Education customers continue to take longer to identify funding sources for ZSpace’s K-twelve ARVR classroom solutions, even as some accelerate their purchases to lock in pricing and availability for the remainder of the year. The overall impact for ZSpace remains unclear at this time. As discussed in the past two quarters, we remain comfortable in our ability to improve the quality of both our hardware and software revenues and renew business across the K-twelve and CTE content segments, but cannot credibly project business volume under current circumstances. Given this landscape, we are going to refrain from formal financial guidance. Regarding our capital allocation and management of operating expenses in particular, we continue to control spending strictly.

On an ongoing basis, we will evaluate levels of spend in order to maintain business flexibility as well as to position the company for sustained profitability in the quarters to come. Now I will turn the time back to the operator for Q and A.

Conference Call Operator: Thank Our first question comes from the line of Rohit Kulkarni with ROTH Capital Partners. Your line is open.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Great. Thank you. I guess the first question is just any 3Q trends that you can highlight specifically since we have seen headlines around the funding federal funding, $6,000,000,000 or so being released at the federal level, perhaps maybe talk about how or if you’re seeing any changes in in behavior and how that has kind of impacted some of the 3Q early 3Q trends?

Paul Kellenberger, CEO, zSpace: I’ll take that one, Rohit. Thanks. This is Paul. As I discussed in my opening comments, I would say we’re cautiously optimistic. Clearly, the unfreezing, if you will, or the completion of the review in July that the administration put on the 6,800,000,000 unfreezing, it certainly helps.

And I think because it factors into the decision making that our customers make. I think it’s still a little bit early to say, and I’d say we’re cautiously optimistic. We’ll certainly have more to say in the next earnings release, and that’s really it.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Okay. Okay. I guess and then a couple of questions kind of related to the CTE and the AI driven education product offerings that you’ve had recently. Maybe talk through how you’re incorporating AI in these new offerings? And maybe what is the value prop in the Career Explorer application for CTE now that it’s out in the market?

Paul Kellenberger, CEO, zSpace: Yes. That’s a great question, Rohit. We announced our Career Explorer at Isti last month. And let me talk a little bit about AI. And by the way, we will have another announcement forthcoming.

But let me talk about it generally. And we are using machine learning, or ML, in our next generation stylus offering. And that is something that will improve the user experience and enhance our cost profile. But that’s more on the stylus and next generation that is coming. On the software side of it, our zSpace AI assistant, which, again, there will be something in the public domain in the next week or so here on this, along with and within our Career Explorer application, are really unique in that they combine zSpace’s immersive technology with our AI driven personalization, and this is something we’ve been working on for quite a while, that ultimately deliver educational experiences that are impossible via traditional methods or two d platforms.

And again, you’ll be seeing more about that in coming months. Our vision is really to empower learners, and whether it’s young students or adults in the CT world, with immersive AI experiences to unlock their potential and prepare them for future careers. So stay tuned. You will be seeing more and more about that or on that in the coming weeks and coming months.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Okay. And maybe one last quick one for Eric. In terms of the gross margins. And I guess the the question there is, what extent is the maybe if you can peel out the mix shift from hardware to software and within hardware as well as you do more of the new products, shift towards new products like Inspire two and Imagine. As in a more direct way to ask is what what part of this gross margin uplift you’re seeing is more or less permanent as you go through more software sales versus just the hardware cycle that we are seeing right now?

Eric Dialla Vera, CFO, zSpace: Yes, absolutely, Rohit. I think I heard both a retrospective question and then sort of a prospective question there. So let me take the retrospective and give you some color on the year to date gross margin improvement. For the first half, we saw 7.5 percentage points of margin expansion from 37.4% to 44.9 in our reported figures for the first six months of this year compared to the comparable period last year. The composition of that improvement of the 7.5 points was approximately 1.4 percentage points of favorability from revenue mix shift.

Software and services collectively made up four percentage points more of the revenue portfolio than in the comparable period last year. The rate factors, so this is more structural and internal execution, drove the remaining 6.1 percentage points of margin expansion. And that 6.1 points of margin expansion is in approximately equal measures driven by gains from the new hardware product launches. So Inspire two replacing its flagship predecessor Inspire and the new Imagine based 14 inches form factor. On the software side, the contributions there are being driven by improvements in adding more of our own content to software portfolio as opposed to third party sellers where we incur a rev share that we report as COGS.

What I would add to that is in the quarter just closed, those reported results include almost two percentage points of idiosyncratic adversity, about 1.2 percentage points tied to a onetime write off of software licenses that’s related to us no longer offering those third party titles in our library and approximately another zero five percentage point of unfavorable impact from tariffs and duties paid. Now those last those factors combining for six percentage points of margin improvement are structural. It’s the new hardware recently launched that replaces three year old hardware in our software catalogs. And the software that we are currently offering to first party, that is going to continue to be the case. So we see both of those as structural factors.

As we look to future expansion, we anticipate continued improvements in the hardware ecosystem that will, again, structurally and permanently improve the hardware margins once those are rolled out. And we also continue to evaluate opportunities to bring more first party content to market that zSpace owns and will not require us to pay rev share on those revenues. Is that helpful?

Rohit Kulkarni, Analyst, ROTH Capital Partners: Yeah, yeah. Very helpful. Thanks. Thanks, Eric. I’ll go back in the queue.

Thank you both.

Paul Kellenberger, CEO, zSpace: Okay. Thanks, Rohit.

Conference Call Operator: Please standby for our next question. Our next question comes from the line of Alex Paris with Barrington Research. Your line is open.

Alex Paris, Analyst, Barrington Research: Hi, guys. Thanks for taking my questions. I have a couple of questions here. First one, just off the top of my head since you kind of finished on it. The tariff impact was certainly less than I would have expected in the second quarter, and there was virtually no impact in the first quarter above $100,000 or so you said in the second quarter.

What are your thoughts regarding tariffs in the second half?

Eric Dialla Vera, CFO, zSpace: So the tariff picture continues to be volatile. And our intention is, for the most part, to pass through the cost of tariffs on a dollar basis. Now it’s both volatile and unpredictable in terms of the customer mix of shipments that we’ll be shipping to. And obviously, tariffs have a significant geographic impact or geographic component to their magnitudes. Going forward, our intention is to continue to pass through the cost of tariffs on a dollar basis to the extent that the market continues to support that.

When we do that on a dollar basis, we nonetheless see some percentage based compression of margins because we’re not marking up tariff costs with a profit margin on top of that to our customers.

Paul Kellenberger, CEO, zSpace: Alex, this is Paul. Maybe just to add to what you said. It certainly wasn’t as impactful as we worried about back in, say, March. But again, I think it’s 20% we’re roughly running right now, And there’s threats to go up to 30%, and that assumes that it’s coming out of China. So but as you well know, things are a bit of a moving target when it comes to tariffs.

Alex Paris, Analyst, Barrington Research: No doubt about it. But didn’t you say on the first quarter call that your OEM supplier is going to was looking to move some of their production out of China to another lower tariff market?

Paul Kellenberger, CEO, zSpace: Yes. In fact, we actually talked to them this week about it. The core product within ZSpace, Inspire, is actually now being manufactured in Thailand. And that actually manages our way through the tariff component of it. We’ll see that benefit probably later this quarter and next quarter.

Alex Paris, Analyst, Barrington Research: Okay. And then just

Greg Robles, Investor Relations, zSpace: a couple

Alex Paris, Analyst, Barrington Research: of others. You talked about bookings being down 54% year over year, macro uncertainty in The U. S. For sure, elongated sales cycles, that sort of thing. I didn’t hear you mention anything about the backlog, which I think stood at $9,700,000 at the end of the first quarter?

Eric Dialla Vera, CFO, zSpace: Correct. So backlog at the end of Q2 was $7,300,000 for confirmed orders but not yet fulfilled.

Alex Paris, Analyst, Barrington Research: Got you. All these things kind of come together for us to try to make some estimates for the second half in the absence of formal guidance. And then I thought I’d ask you for some more and then you said those bookings were split between K12 and CTE. Forget what you said, seventythirty, something like that. Maybe, you can refresh my memory there.

And then while we’re on the topic, I just wanted to talk a little bit more about CTE. You know, I realize the new product from Second Avenue, Career Explorer, is in that CTE space, but that’s really Grade five twenty eight, I think, had said. But CTE is a much bigger potential market for you, largely community colleges today, I assume, but also potentially adult learning and worker retraining. Just a little color there.

Eric Dialla Vera, CFO, zSpace: Correct. And I think I’ll speak to your quantitative questions, and then I think Paul has some color commentary on CTE. But the tailwind from CTE can be seen in the mix. So in the three months ended sixthirty, we delivered $7,200,000 in bookings. You’ll recall the prior year comparable period had one anomalously large deal in there.

That drove the 54% year on year decline. If you’re looking at the the mix, though, the CTE content of bookings for the three months ended this past June was 35%. That is actually up seven percentage points over the prior year quarter. And the reason for that is the prior year quarter did include that very large deal that had a preponderance of K-12s.

Alex Paris, Analyst, Barrington Research: Got you. Okay. The So color

Eric Dialla Vera, CFO, zSpace: kind of like seeing an acceleration in the CTE content year over year.

Paul Kellenberger, CEO, zSpace: Hey, Charles. Let me give you a little more color on, CTE. So our CTE sales are both, in the k 12 environment, predominantly high schools as well as community colleges. The Career Explorer application, which, by the way, we traditionally sold, you know, harp hardware, software as a solution applications, we’ve got a pretty strong focus on four different areas with complete learning solutions, including our AI, these days AI assistant that you’ll hear more about in the coming weeks. The areas of focus are career exploration, which, by the way, starts as early as grades five and six.

We originally thought it was going to be kind of more high school, but it’s it the the demand has really started in grades five and six. So career exploration is one area. The other three are health care, and that’s the largest pathway, as you well know, manufacturing, and automotive. And we have solutions in those areas today, and I mean complete package solutions with our, AI assistant that goes along with it. We are we traditionally have worked with outside third parties on the certifications, groups like NOCTI.

And more and more, we’re working with others to go even further in the certifications area.

Alex Paris, Analyst, Barrington Research: And then community colleges, is in terms of revenue or bookings today, is that a majority of CTE or no?

Paul Kellenberger, CEO, zSpace: I’m going to give you the subjective answer off the top of Paul’s head, and Eric may come up with some other data that we can share with you at the right time. I would say today, the bulk of our CTE business is in K-twelve, as in within those high schools. I think we’re in something like 1,000 of the community colleges, which is a relatively low number. And a lot of that just has to do with scale and focus. But more and more, we are looking at continuing to expand in those community colleges.

Conference Call Operator: Great.

Alex Paris, Analyst, Barrington Research: That will do me for now. I’ll get back into the queue. Appreciate it.

Paul Kellenberger, CEO, zSpace: Okay. Thanks, Alex.

Conference Call Operator: Please stand by for our next question. Our next question comes from the line of Nehal Chokshi with Northland Capital Markets. Your line is open.

Paul Kellenberger, CEO, zSpace: Thank you.

Nehal Chokshi, Analyst, Northland Capital Markets: Few questions. First one is your net dollar revenue retention rate for the quarter is 131%. That’s a big jump up from the March of 97%. And I guess, in general, it’s been kind of a couple of questions with respect to NDRR. A, given the volatility of this metric, is it really a relevant metric?

And then B, provided that it is, what’s the driver of the significant improvement here?

Eric Dialla Vera, CFO, zSpace: Nehal, so excellent questions. The way I’d characterize this is you’ll recall that our net dollar revenue retention firstly requires that we have fulfilled the underlying renewable software in a given period. And because of that, it does carry many of the attributes of our recognized P and L revenue, which can exhibit a lot of variability quarter to quarter. Put another way, in a period in which we ship a significant volume of licenses, you’ll see that impact show up in both the ACV and the NVRR metrics at a particular point in time. So there is some there can be some artifacts where if a large order is completed right after or right before or right after a quarter end breakpoint, you’ll see that discovery show up in the metric.

Now for NDRR, we absolutely believe that this is an important measure of our ability to retain customers and expand their footprint. The driver in this case is a customer that had been with us prior to the prior year endpoint here, so prior to sixthirtytwenty twenty four, placed significant orders in the subsequent period. You’re now seeing that show up in this current year end current quarter end measurement point. So we had a couple of significant customers that were with us prior to sixthirtytwenty four in the last twelve months now showing up in this quarter’s comparison, you’re seeing the jump between their summer purchases from a year ago and purchases made between that period and this current summer.

Nehal Chokshi, Analyst, Northland Capital Markets: Okay. So if I may summarize, the driver of it was that a customer that hadn’t renewed on time eventually renewed, and that basically drove that retention rate up?

Eric Dialla Vera, CFO, zSpace: That is one dynamic. In this case, it was a customer that had relatively or actually a handful of customers that had relatively modest ACV footprint, still in excess of 50,000 of annual contract value, made significant subsequent investments to expand their footprint. So the NVRR metric starts with all of the software licenses that were active a year prior. And for that subset of customers, it’s looking at the net impact of any churn or attrition there, but also expansion in the footprint of those prior existing customers. So on a net basis, you’re seeing the decision of a number of customers to double, triple, quintuple down on their zSpace content and footprint, and that’s creating the significant step up in the net dollar revenue retention.

Nehal Chokshi, Analyst, Northland Capital Markets: Okay. And then you mentioned that excluding the large order from the year ago period, bookings were down 16% year over year. On that basis, can you divvy up the year over year bookings performance between CTE and K-twelve, just effective normalized basis?

Eric Dialla Vera, CFO, zSpace: Yes. So on a if we’re looking at the six month period ending sixthirty, bookings normalized for that $5,000,000 deal last year. In total, we’re down 16% year on year. The U. S, on that same normalized basis, we saw U.

S. Down 17% for the first six months of the year. Rest of the world, excluding China, down 75. And China for the first six months of the year, actually up 88% year on year.

Nehal Chokshi, Analyst, Northland Capital Markets: And within that U. S. Down 17%, can you split that up between the CTE and the K-twelve performance?

Eric Dialla Vera, CFO, zSpace: Yes. So I don’t have that for just U. S, but U. S. And rest of world together, K twelve, six percentage points of expansion from 62% last year to 68% this year.

CTE from 38% for six months of last year to 32% for six months of this year.

Nehal Chokshi, Analyst, Northland Capital Markets: K through 12 exposure up and CTE exposure down. Is that right?

Eric Dialla Vera, CFO, zSpace: On on the first six months. Yes.

Nehal Chokshi, Analyst, Northland Capital Markets: On the first six months. Okay. And do you find that surprising given what appears to be shift in spend towards CTE?

Eric Dialla Vera, CFO, zSpace: Not so much because, again, we see a certain amount of volatility in the makeup customers in any of the particular periods. And the question you’re asking really gets at that. If you look at the business inclusive of that large deal from last year, that was precisely the kind of deal that skews things heavily towards k 12 in the prior year period. And so when you pull that out, particularly on the three month period where that deal sat, you’re you then see the acceleration in CTE for the for the past three months.

Nehal Chokshi, Analyst, Northland Capital Markets: Okay. And I think you’ve done multiple different types of capital raises since the March close. Can you recap those capital raises and the impact on shares outstanding?

Eric Dialla Vera, CFO, zSpace: So the main capital raise that we concluded was in the second quarter, we closed on a convertible offering that was a $20,000,000 facility, of which we drew down $13,000,000 And those proceeds approximately half of those proceeds went to retire costlier venture debt that was retired in full and balances about $6,500,000 We subsequently made an announcement to close on an equity line of credit that will be part of Q3 reported results when we conclude the current quarter.

Nehal Chokshi, Analyst, Northland Capital Markets: What’s the capacity of the equity line of credit?

Eric Dialla Vera, CFO, zSpace: ELOC has a contemplated maximum capacity of $30,000,000

Nehal Chokshi, Analyst, Northland Capital Markets: Okay.

Alex Paris, Analyst, Barrington Research: All right.

Eric Dialla Vera, CFO, zSpace: Should say $30,000,000 Yes. The were 6,500,000.0 shares registered as part of that offering.

Nehal Chokshi, Analyst, Northland Capital Markets: Okay. Great. Thank you for taking my questions.

Eric Dialla Vera, CFO, zSpace: Thank you, Nehal.

Conference Call Operator: We have a follow-up question from the line of Rohit Kulkarni with Roth Capital. Just

Rohit Kulkarni, Analyst, ROTH Capital Partners: on this discussion on NDRR. This maybe the why behind this jump in terms of our existing customers buying more units, or are they buying that’s leading to more software, or is that existing units, existing classrooms, and they’re going in new kind of categories of content. That’s first. And then just maybe the why on China and what is going on over there. Would love to understand kind of if there is if there is something proactive change in go to market or new salespeople or anything in China and just rest of the world?

So

Eric Dialla Vera, CFO, zSpace: yes, on NDRR, we can see the extension there happening either because an individual customer elects to add new software licenses to their existing footprint. When that customer decides to expand their actual, you know, table footprint, seat footprint, how many laptops they have, We only count the addition of renewable software licenses on their expanded footprint. So if they decide to kit out a second or third classroom, the impact of renewable software in those extra classrooms rolls into NDRR through the annualized contract value that, that customer has expanded. Does that math make sense?

Rohit Kulkarni, Analyst, ROTH Capital Partners: Yeah. So just to clarify that, Eric, so if I had just one classroom with 20 laptops and instead of adding a module of biology, I go and add one more module of another category of content, would that show up in NDRR, or would that not?

Eric Dialla Vera, CFO, zSpace: Yes. Only if and and this only applies for customers who have at least $50,000 in Okay. ACV in the prior period.

Rohit Kulkarni, Analyst, ROTH Capital Partners: And then just the overall go to market and sales hiring and specifically like resellers in China, rest of the world?

Paul Kellenberger, CEO, zSpace: Yes. Let me answer your China question first, Rohit. I think your question came about because we have been previously communicating and, quite frankly, in all of our filings that we were not investing in China. That case that remains the situation. What has happened and the reason for the uptick is more because some of the business, which, again, it’s government business, has long sales cycles with RFPs that have to be responded to.

Our partner over there has, quite frankly, been winning some business. So we haven’t been investing as in ZSpace, but our partner has. So that’s the reason for the China uptick, if you will. I think there’s a second part to your go to market question relative to The U. S.

We have made and did make in the latter part of last year significant investments in The U. S, both in terms of additional salespeople, focus, products. And as you know, both of the BlocksCAD and Second Avenue acquisitions. Like every company in the kind of April, May, June time frame, we’ve made a few tweaks here and there. But we have that team intact.

And that team is continuing to build our pipeline. And as I said at the outset, we’re cautiously optimistic here, particularly with funds starting to flow to kind of go back to whatever the new normal is, to use that phrase.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Okay. One last thing. Any color on how many quota carrying reps you had in 2024? And how many do you have today? Like if you are willing to disclose that?

Paul Kellenberger, CEO, zSpace: I think it was it’s 11 sorry, it’s 11 today, and it was eight last year.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Cool. That’s

Paul Kellenberger, CEO, zSpace: doesn’t include anybody who’s supporting any of our reseller partners. That is literally quota carrying salespeople.

Conference Call Operator: Ladies and gentlemen, I’m showing no further questions in the queue. I would now like to turn the call back over to Paul for closing remarks.

Paul Kellenberger, CEO, zSpace: Thanks, Wanda. I’d like to thank everybody again for listening in today and for the folks that asked the questions. Much appreciated. Look forward to doing this again in a few months, and, we’ll go from there. Have a great evening.

Conference Call Operator: Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect.

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