Earnings call transcript: zSpace reports Q4 2024 revenue decline, stock rises

zSpace Inc. (ZSPC) reported a challenging fourth quarter for 2024, with revenue declining by 29% year-on-year to $8.54 million. Despite reporting a loss per share of $1.36, the company’s stock rose 6.08% in premarket trading, reflecting investor optimism about its strategic initiatives and product launches. According to InvestingPro data, the company currently maintains a market capitalization of $239.3 million, with analysts anticipating continued sales challenges in the current year. InvestingPro analysis suggests the stock is currently trading above its Fair Value, with 12 additional exclusive insights available to subscribers.

Key Takeaways

• zSpace launched two new products, Inspire Two and Imagine, to strengthen its market position.
• The company acquired BlocksCAD, expanding its offerings in the EdTech space.
• Despite a revenue decline, gross margins improved by 240 basis points to 40.9%.
• Full-year revenue decreased by 13% to $38 million, while bookings slightly increased by 1%.
• Investor sentiment appears positive, with the stock up 6.08% in premarket trading.

Company Performance

zSpace’s overall performance in 2024 showed mixed results, with a full-year revenue decline of 13% to $38 million. However, the company managed to increase its bookings by 1% to $41.5 million, suggesting potential future revenue growth. The improvement in gross margins by 240 basis points to 40.9% indicates enhanced operational efficiency.

Financial Highlights

• Full-Year Revenue: $38 million, down 13% year-on-year
• Q4 Revenue: $8.54 million, down 29% year-on-year
• Gross Margins: 40.9%, up 240 basis points
• Bookings: $41.5 million, up 1% year-on-year
• Net Dollar Revenue Retention: 92%

Market Reaction

Despite the reported losses, zSpace’s stock price increased by 6.08% in premarket trading, reaching $10.81. This positive market reaction may reflect investor confidence in the company’s strategic direction and product innovations, as well as its improved gross margins. However, InvestingPro data reveals the stock has experienced significant volatility, with a 53.68% decline over the past year. Analyst price targets range from $18 to $20, suggesting potential upside despite current market challenges. For deeper insights into zSpace’s valuation and growth prospects, access the full Pro Research Report on InvestingPro.

Outlook & Guidance

Looking ahead, zSpace projects Q1 2025 revenue slightly above $5 million. The company plans to focus on increasing its penetration in the K-12 and CTE markets, expanding internationally, and investing in R&D. zSpace also anticipates longer sales cycles in the K-12 segment, ranging from 75 to 90 days.

Executive Commentary

CEO Paul Kellenberger emphasized the company’s commitment to innovation, stating, "We are redefining the classroom experience." He also expressed confidence in market demand, noting, "We see the demand there. So we feel good about that."

Risks and Challenges

• Potential impacts from market uncertainty in education funding.
• Tariff challenges could affect product availability and cost.
• The lengthening of sales cycles in the K-12 market may delay revenue recognition.
• Broader macroeconomic pressures could impact future growth.

Q&A

During the earnings call, analysts inquired about the impact of the IPO on product availability and potential tariff challenges. The company addressed these concerns, highlighting its focus on revenue recognition and retention metrics, while acknowledging market uncertainties.

Full transcript - zSpace Inc (ZSPC) Q4 2024:

Conference Call Operator: Good morning, everyone, and thank you for participating in today’s conference call to discuss DS Space’s financial results for the fourth quarter and full year ended 12/31/2024. Joining us today are ZSpace CEO, Paul Kellenberger CFO, Eric de Oliveira and Greg Robles from Investor Relations. Following their remarks, we’ll open the call for analyst questions. Before we go 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.

Greg Robles, Investor Relations, zSpace: Thanks, operator. Good morning, and thanks for joining our conference call to discuss our fourth quarter and full year twenty twenty four 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. These risks and uncertainties are described in our most recent annual report on Form 10 ks filed with the Securities and Exchange Commission.

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 Kellemberger. Paul?

Paul Kellenberger, CEO, zSpace: Thank you, Greg, and good morning, everyone. Happy Friday, by the way. Thank you for joining us for zSpace’s first public earnings call. First, I would like to start with introduction. I am Paul Kallenberger, CEO of zSpace and with me here today is Eric De Lavera, excuse me, our CFO.

We are both excited to be with you here today to discuss zSpace, our performance and our plan to drive growth. As many of you probably know, I have been with zSpace since inception and we have something that is very unique and special. For those of you who have been in it who have seen and experienced zSpace firsthand, you understand what I mean. And we always tell the people that see videos on our website and the videos that are in our public domain that they do not do zSpace justice. As you know, we completed our IPO in December of twenty twenty four, raising over $10,000,000 in gross proceeds and began trading on the NASDAQ under the ticker symbol ZSPC.

This milestone marks a significant step for our company, enabling us to accelerate our growth strategy. The proceeds will support our product commitments and software development, both through acquisitions and partnerships, as well as with third party developers, as well as continuing to invest in our sales, marketing, working capital requirements, and other general corporate purposes. For those of you who are new to our story, zSpace is a leading provider of augmented reality and virtual reality education technology solutions. Our vision for the company is to transform learning that empowers people to reach their full potential. Education happens to be the first market we decided to focus on.

Today, we primarily serve K-twelve schools and the career and technical education market or the CTE market as it’s known in The U. S. Outside The U. S, the CTE market is referred to more broadly as workforce development. ZSpace offers a unique hands on learning by doing approach that has been shown and proven to enhance student engagement and improve test scores.

We also partner outside The U. S. With reseller partners to expand our reach into over 50 countries worldwide. Before we discuss our 2024 highlights, I’d like to provide an overview of ZSpace’s market presence and growth potential that positions us for long term success. Together, the K-twelve education and CTE markets exceed $69,000,000,000 globally.

The global EdTech market is valued at over 142,000,000,000 in 2023 and is projected to grow at 13.6% CAGR through 02/1930. Now, the ARVR Education segment is expected to reach $14,200,000,000 by 2028, growing at a 30% CAGR and both of these factors reinforce our confidence in ZSpace’s long term growth potential. Specifically to The U. S. Market, our platform today is currently implemented in more than 3,500 of the approximately 13,000 public school districts, including were installed in over 80% of the largest 100 school districts.

As another opportunity, we see strong cross sell between our two markets enabling further expansion. And to date, 73% of our existing K-twelve customers have adopted our CTE solutions demonstrating the success of the cross sell. Our flagship product Inspire along with our recently introduced Imagine product offer key advantages. They feature proprietary hardware and software designed to create an immersive and interactive learning experience without the need for headsets or glasses, which can be impractical in an education and learning setting. We believe zSpace is redefining the classroom experience, enabling students to explore concepts that would otherwise be too dangerous, expensive, or impossible to replicate in a traditional learning environment.

From STEM education to hands on technical career training, we provide a scalable and repeatable learning solution that equips students with the skills needed to succeed in the workforce. Looking at the business side, 2024 has been a pivotal year for zSpace as we continue to drive growth and expand our reach in the education sector. A few highlights of note, our largest customer win to date was with St. Louis Public Schools, where we secured a roughly $5,000,000 deal to provide a complete K-twelve STEM solution. This win is a great example of how we’re making a real impact on education at scale.

We also made significant strides in expanding our content offerings, particularly with the launch of our career readiness solution. This includes a unique feature, a personalized AI career coach, which has been met with a lot of excitement from our customers and it shows how there’s a growing demand for solutions that help bridge students gap that help students bridge the gap between education and the workforce. We were also very proud to receive the best of show award at ISTE Live twenty four, which is the largest annual K-twelve education conference globally from Tech and Learning for our career readiness solution. This recognition is a testament to the value we’re delivering to our customers and reinforces our leadership in the education technology space. In addition, zSpace has built a very robust IP portfolio.

We have over 80 issued patents, many of which are particularly unique given our display based augmented reality solution with InterXion. Now before turning the call over to Eric, I’d like to cover briefly four near term initiatives that we believe will drive further expansion of the business. Number one, we will continue to focus on increasing our penetration within the existing K-twelve STEM and CTE markets, capitalizing on the growing demand for immersive learning solutions. Today, we’re in over 80% of the top 100 school districts. However, we have an incredible growth opportunity just within this existing customer base.

Second, through our network of over 25 resellers reaching more than 50 countries worldwide, we are actively expanding our international presence. Third, we have always been focused on R and D and remain committed to investing in R and D to enhance our overall platform, ensuring we stay ahead of emerging trends and continuing to meet the needs of our customers. Lastly, and as part of our growth strategy, we’re focused on acquiring complementary software solutions to accelerate the growth of our software revenue. Notably, we acquired BlocksCAD in Q1 of twenty twenty five, which strengthens our immersive learning solutions with their three d design platform for STEM education. Looking ahead, we remain open to opportunities that accelerate our strategy and drive value for shareholders.

With that, I would like to turn the call over to Eric De Lavera, our CFO. Over to you, Eric. Thank you, Paul. Excited to be with you today. Before diving into our results, it’s important to communicate how we recognize revenue.

Our revenue consists of hardware revenue, software applications revenue and services revenue. The latter and approximately equal mix of product warranties and pedagogical training to support educators’ efforts to integrate zSpace ARVR content with their classroom curriculum. Hardware revenue is derived from the initial upfront deployment of platforms to classrooms. Hardware revenue is generally recognized upon shipment to the customer. Software content is predominantly device based licensed software for annual and multi year terms.

Under our agreements, we generally account for the entirety of the license value in period upon shipment with associated hardware or issuance of a license renewal regardless of term length. Only a small portion of our software revenue is recognized ratably. As a result of this accounting treatment, our revenue may exhibit quarter to quarter variability due to factors such as the underlying seasonality of customer budgeting cycles from which we derive our bookings. These patterns have occasionally been exaggerated when the company has lacked working capital to fulfill backlog quickly, which pushed fulfillment and revenue into later periods. Growth rates measured in future periods can be significantly affected by these comparisons.

In the long run, we expect the business to match seasonally stronger sales periods in the second and third calendar quarters of the year and seasonally weaker sales periods in the first and fourth quarters of the year. Given these dynamics and in order to provide a normalized view of our software ecosystem, we present two key operating metrics annualized contract value or ACV and net dollar revenue retention or NDRR. Both metrics will be provided quarterly and will be measured using trailing twelve month data. ACV of renewable software is calculated as the total value of the software license divided by its term length, summed over all renewable license agreements currently active with customers. We believe that the long term health of our business is correlated with the growth of this metric.

Our measure of the stickiness of our ARVR solutions in the classroom is the NDRR of our software ACV at the customer level. NDRR is calculated for customers present at the start of a twelve month period with at least $50,000 in renewable software ACV and compared to the ACV for that same group of customers at the end of that same twelve month period. Customers with at least $50,000 represent slightly more than half of our total renewable software ACV. I’d now like to discuss full year ’20 ’20 ’4 results as well as our fourth quarter performance. 2024 revenues were $38,000,000 down 13% year on year as capital constraints prior to our IPO limited our ability to fulfill orders from backlog.

We concluded the year with $9,200,000 of unfulfilled orders stranded in backlog. As of 09/31/2024, the annualized contract value of renewable software revenue was $11,300,000 up 6% compared with twelve months ago. The net dollar revenue retention as of 12/31/2024, for customers with at least $50,000 of ACV as of 12/31/2023, was 92%. A reminder that each of these metrics require that we have fulfilled the underlying software licenses and in the course of our accounting in each period, revenue was recognized at the time of fulfillment. 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 despite the headwinds we incurred this year as we pursued capital.

Bookings for the year were $41,500,000 up 1% year on year. Excluding China, where we have made a deliberate decision to deemphasize, U. S. And rest of world bookings were $39,900,000 up 7% year on year. This reflects growth of 4% in the core U.

S. Market and 37 growth in international geographies other than China. Gross margins for the year were 40.9% compared with 38.5% in the prior year, an improvement of two forty basis points. Approximately three quarters of this margin expansion is attributable to a mix shift of five percentage points of revenue out of hardware and into software and services. We credit the responsiveness of our direct quota carrying sales team to a new incentive plan prioritizing software content and strong customer renewals for driving this mix shift in our 2024 bookings and revenue composition, which was particularly evident in the second half of the year.

The remainder of our gross margin improvement was rate based and linked to the abolition of certain incentives for term length that were deemed to have insufficient correlation with sales success, as well as some modest software content acquisitions in verticals where we previously sold third party content and incurred a revenue share. Operating expenses for the year were $33,200,000 compared to $25,500,000 an increase of $7,700,000 or 30%. After normalizing for stock based compensation expense in the first quarter of the year, operating expenses were flat year on year. Now moving to the fourth quarter. Revenues in the fourth quarter were $8,500,000 down 29% year on year as capital constraints prior to our IPO limited our ability to fulfill orders from backlog.

And the timing of receipt of IPO proceeds in the December left insufficient time to pull product through our supply chain and fulfill the backlog. As previously noted, we concluded the year with $9,200,000 of unfulfilled orders. Bookings for the fourth quarter, which along with the first quarter is our seasonally slow period, were $5,300,000 down 3% year on year. Excluding China, U. S.

And rest of world bookings were $5,300,000 up 5% year on year. This reflects growth of 21% in the core U. S. Market and a decline of 92% growth in international geographies other than China. The fourth quarter decline in international geographies outside of China reflects similar patterns of seasonality and should be read in the context of 37 year on year growth international ex China for the entire year.

Gross margins for the quarter were 40.7% compared with 34.7% in the comparable quarter of the prior year, an improvement of five ninety seven basis points. Although revenue composition improved modestly in the quarter compared with prior year, almost all of the improvement is attributable to the write down of excess and obsolete inventory in the prior year quarter, creating a favorable comparison. Some benefit was noted from margin improvements related to software content from the factors previously discussed. Although we began shipping Inspire two units in the fourth quarter, we do not expect the margin benefits to appear in our P and L until early twenty twenty five when our fulfillment volume is exclusively made from stocks of the newest model. Operating expenses for the quarter were $6,200,000 compared with $6,100,000 in the comparable quarter of the prior year, an increase of $100,000 or 2%.

Guidance for Q1 twenty twenty five. The first quarter of twenty twenty five has brought significant uncertainty in our markets, but with countervailing themes. Although some education customers have demonstrated a mixture of hesitancy in their decision making, which is being driven by uncertainty of funding sources for zSpace’s K-twelve and ARVR classroom solutions. Others have accelerated their purchases to lock in pricing and availability for Q2 and the coming school year. The net impact in our business remains somewhat unclear at this time, but may materialize as a lengthening of K-twelve sales cycles.

At the same time, CTE solutions are finding favor, driven by large funding announcements at the state level, such as California’s four seventy million dollars allocation for workforce development and similar announcements in states such as Texas, Florida, Pennsylvania, New York and others. Given this landscape along with the fact that our first quarter is nearly closed, we would like to provide insight into Q1 revenues. We see realized revenues for the quarter slightly above $5,000,000 The uncertainty for the current quarter reflects timing of deal closing in our end markets given broader turbulence in the education market. Although uncertainty is likely to persist for the remainder of the year, we remain comfortable in our ability to capture and renew business across the K-twelve and CTE content segments, even though performance may not be linear and of delivering growth on the full year. Regarding our capital allocation and management of operating expenses in particular, we continue to control spending strictly.

As noted, last year we managed OpEx flat on a year on year basis after normalizing for a one time true up of employee equity. This year, we anticipate keeping operating expense growth constrained to less than half the rate of revenue growth on the full year. This excludes the impact of restricted stock unit grants to employees. 2025 restricted stock unit grants measured by the count of RSUs issued this year, 2025, as a percent of shares issued and outstanding are expected to be below a burn rate of 7%. Now I will turn the time back to the operator for Q and A.

Thank

Conference Call Operator: you, sir. Our first question comes from Nehal Chokshi with Northland Capital Markets. Your line is open.

Nehal Chokshi, Analyst, Northland Capital Markets: All right. Hey, thank you. Thank you for the question. Got a few here. Help us understand why bookings is impacted by timing of the IPO because it would appear that demand should be largely uncoupled on supply.

I think it would be really helpful to get that explanation out there.

Paul Kellenberger, CEO, zSpace: Anil Hall, thank you for being with us today. I appreciate the question. A key driver of bookings was the anticipated release of two new products that we unveiled earlier. The second generation of our flagship Inspire two product, which was unveiled in Q4 of twenty twenty four and our Imagine solution, the smaller 14 inches form factor designed for the larger elementary school market. Both of those products required capital to deploy and have available in quantity to launch bookings.

While we had previously anticipated releasing those products much earlier in 2024, delay in capital pushed us to unveil those at a later point in the school year and impacting their availability for sales launches and customer demos.

Nehal Chokshi, Analyst, Northland Capital Markets: And when did you actually have the inventory on hand to start doing the sales demos then?

Paul Kellenberger, CEO, zSpace: So inventory for Inspire two became available late in Q4. Inventory for Imagine is now available in Q1 of this year. We recorded bookings for the new Imagen product in Q4 in advance of that launch and are continuing to accelerate that now in Q1.

Nehal Chokshi, Analyst, Northland Capital Markets: Okay, great. And then given the $5,000,000 revenue guidance for the March, with now having the supply in hand, obviously there’s a lot of external factors that are impacting demand now, but it does seem like your bookings for the March is indeed being impacted negatively. Looking at the segmentation that you provided for the December, specifically, it looks like you had weak European bookings. Is that the continued trend that you expect into March? Or is there some other mix shift going on that’s driving what is likely some weak bookings activity that you’re seeing?

Paul Kellenberger, CEO, zSpace: Nehal, let me break that follow-up into two parts, one around geographic mix and the other around the uncertainty here. Internationally, we’ve seen significant strength in the last two years with growth rates in the mid-thirty. That’s after excluding China where we’ve made a deliberate decision to deemphasize growth. And we anticipate continued strength on that trend line for international ex China. In our U.

S. Markets, we continue to see very strong interest in the solution.

Nehal Chokshi, Analyst, Northland Capital Markets: And

Paul Kellenberger, CEO, zSpace: our business is probably best characterized by a comment I’ve heard recently where we don’t see a demand problem for our zSpace solutions in The U. S, particularly in the K through 12 educational space. But the turbulence that we’re seeing in the market challenges our end users to identify which pot of money will be used to fund the solutions. Now, because there’s so much interest in CTE solutions, we feel pretty confident in capturing that demand because our content library is very broad. But we see this as potentially accelerate or sorry, not accelerating, expanding the duration of sales cycles as individual schools and school districts make a decision to move ahead with zSpace, but now need to reapportion or re identify which funding source will be used to cover their ZSpace purchases.

Is that helpful?

Nehal Chokshi, Analyst, Northland Capital Markets: Yes, absolutely. Very, very helpful. All right, I’ll cede the floor. I’ll get back into the queue here. Thank you.

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

Rohit Kulkarni, Analyst, ROTH Capital Partners: Hey, thank you. Thank you guys. And a few questions here. In terms of just the overall kind of breakdown of the two new products that you’ve launched, perhaps talk about the biggest kind of learnings from the sales force in terms of what has been the reception in the last ninety days from the two new products? And where do you feel more optimistic about that perception in terms of which pockets or which use cases or any cohorts of the broader market as such?

Paul Kellenberger, CEO, zSpace: Let me take that one. Rohit, good morning, it’s Paul. I think right now and by the way, the word that we certainly hear used a lot is uncertainty given what’s going on in the market in general. I would say over the course of the last couple of months in this first quarter in particular, clearly there’s the CTE workforce development focus continues very strongly and we continue to see very strong demand there in this uncertain market and all the things that are going on. I think the other thing that we’re very bullish on right now is our relatively recently launched Imagine Elementary solution.

And I think we’ve seen already that it’s had real positive impact and positive reception. So I think, you know, amidst all of the uncertainty going on in the market in general, I mean, those are a couple of things that I would point to. And again, I still we see the demand there. So we feel good about that.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Okay. And then just in terms of the kind of outlook and what you’re seeing with regards to the uncertainty. Is there the lengthening of sales cycles in the school K-twelve schools? Can you compare this to any prior periods that you have seen? You’ve operated this company for quite some time, but as a private one with regards to how such conversations tend to evolve to give more comfort around how perhaps as we get into your peak kind of seasonally strong seasons of buying in Q2 and Q3, you hope those cycles come to a head.

So just was wondering where would you compare this current year of uncertainty to?

Paul Kellenberger, CEO, zSpace: Rohit, I have to tell you, I don’t have a comparison. I think and part of it has to do with the timing of the build up of the company over the last eight or nine years in terms of the business itself. So I don’t have a comparison where I could say to you, hey, we’ve seen this before. Again, I think right now there’s no question that the uncertainty is particularly more so on the K-twelve side than on the CTE side of it. It’s lengthening the sales cycle a little bit because people are hesitant to move forward.

I think on the other side of it, the other thing that we’re hearing pretty strongly is people still have funds. And the second quarter here and the third quarter as you know in our business tend to be the really strong quarters. People are talking about making sure they spend their money in the second quarter. So I think there’s a positive component to that. And without getting into specific deals, that gives us pretty strong confidence that people are going to move things ahead regardless of how much uncertainty there is in the broader market.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Okay, great. And maybe a quick one for Eric is around the gross margin trend. How should we think about the gross margin that you saw in 4Q? And you made comments around some of the potential uplift from the new hardware mix is still yet to come. Maybe just help frame how what we saw for 4Q gross margins and how should we think about the gross margins coming forward?

Paul Kellenberger, CEO, zSpace: Thanks Rohit. Yes, we’re particularly pleased with our success of driving increased software and services content. We saw that in three different ways in our 2024 results. The 5% mix shift out of hardware into software and services compared to full year 2023. You see it in the relative performance of software and services P and L revenue compared to hardware.

And the result of that is the two forty basis points of margin expansion this year over last year. And I’d note that that is an acceleration of margin expansion if you go back to 2023 and compare that to 2022 results. That margin expansion has been driven by the software ecosystem in at least a couple of ways. Firstly, as we add new clients and renew older clients, we see increasing layers of software in the ecosystem being renewed and that’s where we look at our net dollar revenue retention and we’re very pleased at the extent we’re able to hang on to existing business once we acquire it. That trend we see continuing and that’s just a testimony of the extent to which educators, district superintendents and principals see our ARVR solutions as not a shiny bell and whistle in a classroom, but a very real tool to drive student outcomes.

On top of that, the launch of Inspire two and the Imagine solutions, while not only providing a path for additional revenue acquisition as we provide a form factor through Imagine that better suits the elementary school segment, which is seven to eight times larger than the high school segment in K-twelve. Those new laptop platforms come at a favorable BOM cost relative to their predecessor versions and that should be a source of hardware driven margin expansion that would essentially contribute a one time step function improvement. With additional benefits coming from innovations in our tracking and interaction devices, both the stylus and the tracker, we anticipate that that could provide a tailwind of an additional four to seven percentage points of gross margin as that hardware rolls out.

Rohit Kulkarni, Analyst, ROTH Capital Partners: Okay, okay. Thanks, Eric. Yes, again, I’ll go back into the queue and thanks for all the color.

Paul Kellenberger, CEO, zSpace: Thank you.

Conference Call Operator: Our next question comes from Alex Paris with Barrington Research. Your line is open.

Alex Paris, Analyst, Barrington Research: Hi guys. Thanks for taking my question. I got a couple and I’ll start top down. First of all, with regard to the length the potential lengthening of the sales cycle within K-twelve due to uncertainty, which definitely makes sense. K-twelve education is largely funded on a state and local basis, 85% plus.

The federal money, which could cause some concern given DOGE and its effect on the Department of Education is really in Title I in IDEA individuals with disabilities. I’m wondering if you could kind of go over the typical funding sources for your product in K-twelve.

Paul Kellenberger, CEO, zSpace: Yes, sure. Good morning, Alex. You are correct in everything you said. And the reality is most of the funding that goes towards these space, whether it be in K-twelve or CTE is not connected to the DOE. And the other big one out there is Perkins.

And albeit even though the money and the 85% is state and local, I think what we see is the hesitancy, which is causing some of the uncertainty. So even though the funding is there and available, I think it’s just the uncertainty that goes around all the things going on. And I think the nervousness on the part of a lot of senior leaders within the education within our market system and with what they see in the headlines. So to your point, the money is there, the funding is there, it’s the then the decision to go ahead and actually spend it.

Alex Paris, Analyst, Barrington Research: Got you. That makes sense. And then here’s another question for you. To what extent did you benefit from ESSER funding before that program was sunsetted last September?

Paul Kellenberger, CEO, zSpace: Yes. That’s a really good question. The statistic I think we had for 2023 was that roughly a little over 10%, I think it was under 11% of our 2023 revenue was ESSER related. So we didn’t have the big run up like a lot of other education companies that really benefited from ESSER. And consequently, we didn’t have a really big fall off either relative to the ESSER fund piece of it.

Alex Paris, Analyst, Barrington Research: So when ESSER ran out, your customers found other buckets of money to pay for the product for your 2024

Paul Kellenberger, CEO, zSpace: revenue? Correct.

Alex Paris, Analyst, Barrington Research: Okay, great. And then lastly on that topic, you said the sales cycle is lengthening a little bit. Can you give us like an order of magnitude, what was K through 12 average sales cycle and what is it looking like today?

Paul Kellenberger, CEO, zSpace: Yes, I would have said, we would have traditionally said sixty to seventy five days in the K-twelve world and I think we’ve now probably say seventy five to ninety days. So, it’s not too extreme, but it certainly is a little bit longer. I don’t think it’s changed radically in the CTE side and I would probably say it hasn’t changed markedly, but you could add a couple of weeks is probably the right way to think about it.

Alex Paris, Analyst, Barrington Research: Makes sense. And then I’ll move on from the education sector and move on to other Doge issues, primarily tariffs. You get your hardware primarily from China to PC OEMs relationships today. And then I think your stylus is also produced in China. What are your thoughts there?

I know we don’t know all the details yet, but how are you viewing tariffs? And how would that be dealt with? Would it be a pass through of cost, which could have an impact on revenue growth? Anyway, just any thoughts or color there, I’d appreciate it.

Paul Kellenberger, CEO, zSpace: Let me give you a high level and Eric can add to specifically. This is an area we have experience in given we went through the exact same thing in 2018. And at the time we were shipping our older product, the All in One, we really passed that through. And so in the first round of tariffs, we passed that through to our customers. Added another, I’ll just say, level of detail that went into the invoicing, but it didn’t we didn’t see it as a major negative impact.

But it does create more just like we see in the world with tariffs right now, whether it’s automotive industry, whatever it is today that’s in the news. So we don’t see it as a big negative impact. I’ll let Eric add his comments to this, including, you know, our own interactions. Now, Paul, I don’t have a lot to add there. I guess the two comments that I would offer are firstly that the extent to which tariffs affect deployment of hardware to classrooms, they do not affect our ability obviously to renew software.

And so when we’re looking at growth of our key annualized contract value of renewable software, that’s not impacted there. And so we anticipate just the continued strength on that line of the P and L. With respect to the actual pass through of tariffs to a large degree because we were already anticipating margin improvements coming from hardware and majority of tariff expenses will be passed through to customers. And the fact that we saw this behavior in 2018, we just believe that the business is well placed to manage that part of it, even though obviously on the back end it creates some challenge in churn just in our internal systems. Is that helpful, Alex?

Alex Paris, Analyst, Barrington Research: Absolutely. Thank you. That’s about as much as we can know at this point. So thank you for that color. And then I guess the last thing I would ask you about is related to the IPO and use of proceeds.

Among other things, a portion of the proceeds were used to within the sales force increase quota carrying reps and support staff. And then M and A and you did announce an acquisition in the first quarter here on March 11, BlocksCAD. So just a little maybe color on what you’ve done within the sales force so far. And then maybe some color on the recent acquisition, particularly because this seems more like a technology or infrastructure acquisition rather than a software acquisition. I might be wrong, but please give me a little additional color then.

Paul Kellenberger, CEO, zSpace: Yes. I mean, speaking specific to Blockscat, it really is something that we had already been selling. It’s not a major platform play if you will, but it’s got it’s something that is very much used within the classroom place. So it’s really now just integrating it into our core bundles. So that said, we have other things planned that we will that we think are going to take us in other directions.

But the Blockscat acquisition is really the first one for us to really start to move things ahead. And again, our field team was already selling Blockscat as a part of ZSpace, but now it’s tightly integrated into our own bundle. That’s what it allows the acquisition allows us to do.

Alex Paris, Analyst, Barrington Research: Great. Then on sales force, the actions you’ve taken since the IPO?

Paul Kellenberger, CEO, zSpace: Yes, Alex, this is Eric. So I’ll take that and I’ll come back with a commentary on acquisitions and software. On sales and marketing, we had said throughout the IPO process that two of our intentions for use of proceeds was to expand the quota carrying sales force in The U. S. We have done that predominantly through the fourth quarter and earlier in Q1 to add approximately a 50% increase in quota carrying heads in The U.

S. The uncertainty notwithstanding that we’ve talked about, we want to be well poised for driving growth here and more feet on the street, so to speak, has been a key part of that. We’ve also added to the quota carriers, the additional support on the account management side and some modest support to field marketing as well. Now, while we’ve also previously discussed a similar expansion in international to build out a direct sales force to supplement our reseller network, we have not yet pursued that, but remain interested in identifying key geographies to build out that kind of a presence. To add another comment to what Paul was sharing around our software acquisitions, Other than the kind of acquisitions that could be characterized as acquihires, there are two predominant avenues to content acquisition we would pursue through M and A.

One is very obviously incremental software titles to unlock access to new verticals and drive revenue capture through that means. The other is to acquire partners or applications in entirety that we may currently be reselling and incurring a rev share on. Those acquisitions are particularly attractive because we see them as the lowest risk with immediate accretiveness to gross margins. And those acquisitions do not figure into any forward looking guidance that we would provide, but they’re attractive because again to the extent that those titles are already in our libraries, in our sales catalogs and in some cases already deployed, we would incur an immediate pickup in gross margin and EBITDA as a result of those kinds of acquisitions.

Alex Paris, Analyst, Barrington Research: Great. Thank you very much. That answers my questions. Appreciate it.

Paul Kellenberger, CEO, zSpace: Thank you. Operator? Yes. Please go ahead, operator.

Conference Call Operator: Our next question is a follow-up from Nehal Chokshi with Northland Capital Markets. Your line is open.

Nehal Chokshi, Analyst, Northland Capital Markets: Yes. Thank you guys. So, Eric, in your prepared remarks, you had said something about let me see if I can find it here. Okay, excluding China bookings were up 5% year over year, this is for the December and then core something was up 21% year over year. I’m sorry, I didn’t quite get exactly what you said.

Could you just repeat that?

Paul Kellenberger, CEO, zSpace: Yes. No, absolutely. So that was a discussion of our Q4 or full year comment that you were asking about now?

Nehal Chokshi, Analyst, Northland Capital Markets: In Q4 Yes, both actually, please.

Paul Kellenberger, CEO, zSpace: Okay. So in Q4, that was a discussion of the geographic disaggregation. So bookings for the fourth quarter were 5,300,000 down 3% year on year. But if you back out China, where we’ve made a deliberate decision to steer away from, U. S.

And rest of world bookings were up 5% year on year and the split there to get to the 5% was up 21 in The U. S. Market and down 92% in international. And international has the same quarter to quarter variability that we see in The U. S.

Market, but it’s much smaller. So, there’s a lot of small numbers there that create some volatility in the growth rates. On the full year, international was up 37%, but the contribution to Q4 was down 92. So you see the plus 21 in U. S, down 92 in international gives us up 5% year on year in bookings excluding China overall.

Is that the piece you’re after?

Nehal Chokshi, Analyst, Northland Capital Markets: Yes, thank you very much. And then Paul, you talked about your four near term initiatives. One of them really piques my interest. I’d like to get a little bit more color on that and that is the R and D enhancing the overall platform and stay ahead of emerging trends. I mean, I would agree with your opening statement that if you haven’t experienced the zSpace, what you see on the videos just does not do it justice.

And so help us understand where is the future innovation going to be focused on because it does seem like you guys are far ahead?

Paul Kellenberger, CEO, zSpace: Yes, I think without getting too specific and too much, excuse me, looking forward, Nehal, it really is in the interaction area that we continue to be super focused. Some of that has to do with some other gross margin improvements we want to go do and some of it has to do with just making it even simpler to use ZSpace, so to speak. So when I was referring to the R and D piece of it, mostly has to do with that interaction part. And again, to kind of repeat what I said, one of the real unique things about ZSpace and the augmented reality display based solution is the interaction. So that’s where the R and D focus is going to continue to remain.

Nehal Chokshi, Analyst, Northland Capital Markets: Got it. Okay. And then, yes, a couple more questions real quickly here. Eric, you did note that your net dollar revenue retention rate is was at 92% for the December. That is an eight quarter low.

I do think that you were trying to indicate that there was some impact from revenue being caught in backlog. So if you normalize for that, what would your NDRR have been then?

Paul Kellenberger, CEO, zSpace: So that’s a good question. And I don’t want to speculate on like a pro form a NDRR only because as I noted also for our NDRR measurement is a characterization of how much of our renewable software ACV from customers present a year ago remain with us today. And it requires that we have fulfilled and recognized as revenue the underlying software licenses. The revenue recognition there is to some degree tied to backlog and we’ve seen some quarter to quarter variability in that measure as well. If you look at the overall trend, particularly in growth of the underlying software ACV, it’s been very strong as we’ve been able to renew existing customers.

Some of those customers when they renew are actually moving up to the latest version of hardware. To the extent that those orders get caught in backlog, it cascades into NDRR ultimately, but not in a way that in pairs or would indict our outlook for continued retention there.

Nehal Chokshi, Analyst, Northland Capital Markets: Okay. All right. And then finally, last question. What were the reasons behind the recent debt instrument that you guys took on and just repeat what the terms are on that debt instrument?

Paul Kellenberger, CEO, zSpace: I think you’re referring to an eight ks disclosure we made around a $2,000,000 debt line that we took on in Q1. And the yes, so the terms for that were comparable to similar terms that we had taken on from that same lender previously disclosed in our earlier filings. And the main reason for that was simply just to take on some dry powder, given the market turbulence that we’re seeing.

Nehal Chokshi, Analyst, Northland Capital Markets: Understood. Thank you.

Paul Kellenberger, CEO, zSpace: And with that, I’ll turn that back over to the operator.

Conference Call Operator: Thank you. At this time, this concludes our question and answer session. I would like to turn the call back over to Mr. Kellenberger for closing remarks.

Paul Kellenberger, CEO, zSpace: Thank you, Sven. Thank you to everyone for listening to today’s call. We look forward to reporting Q1 results in May and we hope everybody has a great day. Thanks again.

Conference Call Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.