zSpace: Stabilizing in a Storm — But the Board Wants Out
zSpace, the education AR/VR hardware company, has had a turbulent ride since its IPO in late 2024. The stock that peaked at $599 in February 2025 has fallen over 99% by August 2026, reflecting a year of federal education funding chaos, tariff shocks, and a government shutdown that sapped school district purchasing. But the first quarter of 2026 offered a glimmer of hope. CEO Paul Kellenberger opened the call with a cautiously upbeat tone: “Q1 2026 showed early signs of stabilization for zSpace following a very challenging 2025.” — Paul Kellenberger, Chief Executive Officer · 2026-05-14
The Long Road Back
Revenues of $5.3 million were down 22% year-over-year, but up 8% sequentially. More importantly, gross margin expanded to 53.1%, up 5.6 percentage points, driven by software mix and the new zStylus One which eliminates a tracking peripheral. CFO Erick DeOliveira highlighted the improvement: “Gross margins were 53%, up 5.6 percentage points versus Q1 2025.” — Erick DeOliveira, Chief Financial Officer · 2026-05-14 The company also reported that “Bookings for the 3-month period ending March 31 were $6.1 million, down 8% year-on-year. Importantly, this performance was up 81% on a sequential basis.” — Erick DeOliveira, Chief Financial Officer · 2026-05-14 These numbers suggest that the company is beginning to climb out of the chasm created by last year's headwinds.
Product Innovation and Cost Discipline
The launch of zStylus One and the updated zSpace Studio are key strategic moves. The stylus, which embeds sensors and machine learning, reduces hardware costs per seat and improves the user experience. It ships as the required stylus for the Inspire V2 models. The company also released a new version of its 3D modeling software. These moves align with the broader funding environment for K-12 which remains uneven, but zSpace is positioning itself as a more cost-effective solution. The company has also executed significant cost reductions. Operating expenses excluding stock-based compensation fell 35% year-over-year, with a run rate around $19 million. This discipline, combined with gross margin expansion, is designed to bring the company closer to EBITDA breakeven even if revenues stay flat at ~$30 million. As Erick explained: “Coupling with additional modest sequential expansion of gross margins... we believe our path is consistent with breakeven through year-end on current levels of operating expenses.” — Erick DeOliveira, Chief Financial Officer · 2026-05-14
The Strategic Review and the Iran War
Perhaps the most significant news was the announcement that the Board has initiated a formal review of strategic alternatives. Paul stated:
This is a clear signal that the board is not content to wait for a slow organic recovery. The stock's collapse—down 92.7% from its April 2026 peak—makes this review urgent. Meanwhile, external headwinds persist. The company cited the Iranian war as a factor delaying orders from Qatar and Dubai, and one order from Bahrain Airport was returned. This adds to the volatility that has plagued the business. In the prior quarter's call, Paul had noted: “So you're correct with the 10% number. However, was, I would say, the ramifications and implications to our specific buyers... made them really hesitant.” — Paul Kellenberger, Chief Executive Officer · 2026-03-30 That uncertainty continues. CFO Erick DeOliveira added on a previous call: “The tariffs were most disruptive to the sales motion in Q1 and early Q2 when they were moving around so much and remained unsettled.” — Erick DeOliveira, Chief Financial Officer · 2025-11-13The Board of Directors believes that the company's current market valuation does not fully reflect the value of our business or the progress we have made. Accordingly, the Board has initiated a formal review of strategic alternatives.
What to Watch
The ACV of renewable software stands at $10.1 million, down 13% year-over-year but up 2% sequentially. Normalized for two large customers, ACV would be down only 4%. This suggests the core recurring revenue base is stabilizing. The company also highlighted expansions with Kansas WorkforceONE and Danbury Public Schools, indicating that demand is still present. However, the strategic review could lead to a sale or merger, which would fundamentally change the investment case. The company's balance sheet is thin, with only $2.9 million in cash, but the cost structure is lean.
Total revenue in Q1 2026 was $5.3 million, down 22% YoY but up 8% sequentially, with the company pointing to improved demand in January and February before March's Middle East disruptions. Gross margin reached 53.1% in Q1 2026, up from 47% a year earlier, driven by software mix and the new stylus that reduces hardware costs.The combination of a potential strategic transaction, an improving product cycle, and a bleeding stock price makes zSpace a name to watch closely. The next quarter will be telling.