zSpace (NASDAQ:ZSPC) reported first-quarter 2026 revenue of $5.3 million, down 22% from a year earlier, while management said the business showed early signs of stabilization after a difficult 2025 marked by uncertainty in federal education policy and school district purchasing.
Chief Executive Officer Paul Kellenberger said on the company’s earnings call that the broader K-12 and workforce education funding environment remains uneven, but customer activity improved during the quarter.
Board Begins Strategic Alternatives Review
Kellenberger also said zSpace’s board of directors has initiated a formal review of strategic alternatives, citing the board’s view that the company’s market valuation does not fully reflect the value of the business or its progress.
The review may include “strategic partnerships, business combinations, or other transactions,” Kellenberger said. He cautioned that there is no assurance the process will result in a specific transaction, and said the company does not plan to comment further unless the board approves a definitive course of action or determines that more disclosure is warranted.
Software Mix Rises as Hardware Declines
First-quarter software and services revenue declined 15% year over year, outperforming hardware revenue, according to the company’s prepared financial remarks. Software and services accounted for 47% of total revenue, up from 43% in the same quarter last year.
Total revenue increased 8% sequentially from the fourth quarter, which management said had been affected by a prolonged federal government shutdown that weighed on bookings and shipments of previously placed orders.
Bookings for the three months ended March 31 were $6.1 million, down 8% from a year earlier but up 81% sequentially.
The company said order pacing in the first quarter supported “tempered confidence” in market stabilization. Management said zSpace saw meaningful growth in January and February before a slowdown in March, when orders from Qatar and Dubai were delayed amid the Iran war and one order was returned from the Bahrain airport because of delivery impracticalities for the customer.
Through the early part of the second quarter, management said activity tentatively suggests the rest of the year may more closely resemble the performance seen in the first two months of the first quarter.
Margins Improve After Cost Cuts
Gross profit was $2.8 million in the first quarter, down 13% year over year. Gross margin was 53%, up 5.6 percentage points from the prior-year quarter and up 3.9 percentage points from the fourth quarter.
Management attributed the margin improvement to revenue mix and rate-based gains in both software and hardware. The company said hardware margins benefited in part from the rollout of zStylus One, which eliminates the need for an additional tracking peripheral, as well as reduced tariff factors compared with the year-earlier period.
Operating expenses, excluding stock-based compensation, were $4.9 million, down 35% year over year. People-related costs, which made up 54% of first-quarter operating expenses, declined 43% year over year on the same basis.
The company said the current spending level is consistent with its post-restructuring cost base following reductions made in December and indicates an annual operating expense run rate of about $19 million, excluding stock-based compensation.
As of March 31, zSpace had approximately $2.9 million in cash equivalents and restricted cash, compared with $1.1 million as of March 31, 2025.
Recurring Software Metrics Remain Pressured
zSpace also provided two non-GAAP software operating metrics to help characterize the run-rate health of the business, noting that its revenue recognition can create quarter-to-quarter and year-over-year variability because revenue is substantially recognized when laptop units ship or software license keys are fulfilled.
- Annualized contract value of renewable software was $10.1 million as of March 31, down 13% from 12 months earlier.
- Net dollar revenue retention for customers with at least $50,000 of annualized contract value was 65% for customers present as of March 31, 2025.
Management said the weaker performance in those metrics was tied to two large customers that expanded their zSpace footprint in 2024 but did not fully renew their expanded commitments because of macro factors. Excluding those two customers, annualized contract value would have been $11.2 million, down 4%, and net dollar revenue retention would have been 82%, according to the company.
Sequentially, annualized contract value increased 2% from the fourth quarter, which management said suggests recovery in the company’s recurring, high-margin AR/VR software ecosystem.
Product Launches and Customer Deployments Highlight Quarter
Kellenberger said zSpace began shipping zStylus One, its next-generation stylus with embedded sensors and machine learning algorithms designed to replace external tracking modules and display markers used in prior generations. The stylus is required for Inspire V2 and Inspire V2 Pro and is also supported on Inspire and Inspire Pro platforms. Kellenberger said the product has received a U.S. patent, with additional patents pending.
The company also released a new version of zSpace Studio, its 3D modeling and creation application for Inspire devices. The update includes expanded curriculum-aligned model libraries for science and career and technical education pathways, enhanced modeling tools and streamlined workflows for educators and students.
Kellenberger pointed to several deployments as evidence that customers and workforce partners are continuing to scale with zSpace. Danbury Public Schools expanded from a pilot to a full classroom set of 30 devices per school and extended access into alternative programs. Kansas WorkforceONE is expanding immersive career exploration and workforce development across nearly all 96 counties in Kansas. In Colorado, zSpace launched a mobile learning lab with Colorado River BOCES and Briggs & Stratton focused on career exploration in mechanics, power equipment, agriculture and industrial technologies.
zSpace did not issue formal guidance. Management said a scenario in which demand repeats last year’s approximately $30 million top line, combined with modest sequential gross margin expansion and the current operating expense base, could put the company on a path close to EBITDA breakeven through year-end. However, executives emphasized that demand remains volatile and that customer supply chains and order fulfillment processes can be vulnerable to unexpected disruptions.
About zSpace (NASDAQ:ZSPC)
zSpace, Inc is a technology company that develops augmented and virtual reality solutions designed to deliver immersive learning experiences. Headquartered in Pleasanton, California, the company focuses on integrating advanced 3D visualization hardware and interactive software to support science, technology, engineering and mathematics (STEM) education, as well as professional training applications.
The company’s flagship offering, the zSpace AR/VR system, combines a stereoscopic display, stylus-based interaction and head-tracking technology to enable users to manipulate and explore three-dimensional models.
