zSpace, Inc. (ZSPC) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for participating in today's conference call to discuss zSpace's Financial Results for the fourth quarter and full year ended December 31, 2024. Joining us today are zSpace CEO, Paul Kellenberger; CFO, Erick DeOliveira 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'll read the company's safe harbor statement. Greg, please go ahead.

Thanks, operator. Good morning, and thanks for joining our conference call to discuss our fourth quarter and full year 2024 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-K 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 Kellenberger. Paul?

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 Kellenberger, CEO of zSpace. And with me here today is Erick DeOliveira, our CFO. We are both excited to be with you here today to discuss zSpace, our performance and our plans to drive growth. As many of you probably know, I've been with zSpace since inception, and we have something that is very unique and special. For those of you who have been -- who have seen and experienced zSpace first hand, you understand what I mean. And we always tell the people that see videos on our website and the videos that are in the public domain that they do not do zSpace justice. As you know, we completed our IPO in December of 2024, raising over $10 million 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-12 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 a 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-12 education and CTE markets exceed $69 billion globally. The global EdTech market is valued at over $142 billion in 2023 and is projected to grow at 13.6% CAGR through 2030. Now the AR/VR Education segment is expected to reach $14.2 billion 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 we're installed in over 80% of the largest 100 school districts. As another opportunity, we see strong cross-sell between our 2 markets, enabling further expansion. And to date, 73% of our existing K-12 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 design 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 million deal to provide a complete K-12 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 offering, 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 helps students bridge the gap between education and the workforce. We were also very proud to receive the Best of Show Award at ISTELive 24, which is the largest annual K-12 education conference globally from Tech & 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 interaction. Now before turning the call over to Erick, I'd like to cover briefly 4 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-12 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&D and remain committed to investing in R&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 2025, which strengthens our immersive learning solutions with their 3D 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 Erick DeOliveira, our CFO. Over to you, Erick.

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 AR/VR 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 multiyear terms. Under our agreements, we generally account for the entirety of the license value in period upon shipment of associated hardware or issuance of a license renewal regardless of term life. Only a small portion of our software revenue was recognized rapidly. 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 2 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 12-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 AR/VR 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 12-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 12-month period. Customers with at least $50,000 represents slightly more than half of our total renewable software ACV. I'd now like to discuss full year 2024 results as well as our fourth quarter performance. 2024 revenues were $38 million, 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 $9.2 million of unfulfilled orders stranded in backlog. As of September 31, 2024, the annualized contract value of renewable software revenue was $11.3 million, up 6% compared with 12 months ago. The net dollar revenue retention as of December 31, 2024, for customers with at least $50,000 of ACV as of December 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 pursue capital. Bookings for the year were $41.5 million, up 1% year-on-year. Excluding China, where we have made a deliberate decision to deemphasize. U.S. and Rest of World bookings were $39.9 million, 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 240 basis points. Approximately 3/4 of this margin expansion is attributable to a mix shift of 5 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 $33.2 million compared to $25.5 million, an increase of $7.7 million 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 $8.5 million, 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 first week of December left insufficient time to pull product through our supply chain and fulfill the backlog. As previously noted, we concluded the year with $9.2 million of unfulfilled orders. Bookings for the fourth quarter, which, along with the first quarter is our seasonally slow period were $5.3 million, down 3% year-on-year. Excluding China, U.S. and Rest of World bookings were $5.3 million, 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 reflect 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 597 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 fact as previously discussed. Although we began shipping Inspire 2 units in the fourth quarter, we do not expect the margin benefits to appear in our P&L until early 2025 when our fulfillment volume is exclusively made from the stocks of the newest model. Operating expenses for the quarter were $6.2 million, compared with $6.1 million in the comparable quarter of the prior year, an increase of $0.1 million or 2%. Guidance for Q1 '25. The first quarter of 2025 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-12 and AR/VR classroom solutions, others have accelerated their purchases to walk in pricing and availability for Q2 and the coming school year. The net impact on our business remains somewhat unclear at this time, but may materialize as a lengthening of K-12 sales cycles. At the same time, CTE solutions are finding favor, driven by large funding announcements at the state level, such as California's $470 million 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 million. 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-12 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 onetime true-up of employee equity. This year, we anticipate keeping operating expense growth constrained 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 stocking at 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&A.

[Operator Instructions] Our first question comes from Nehal Chokshi with Northland Capital Markets.

I got a few here. Help us understand why bookings is impacted by the timing of the IPO because it would appear that demand should be largely uncoupled to supply. I think it would be really helpful to get that explanation out there?

Nehal, thank you for being with us today. I appreciate the question. A key driver of bookings was the anticipated release of 2 new products that we unveiled earlier. The second generation of our flagship Inspire 2 product, which was unveiled in Q4 of 2024, and our Imagine solution, the smaller 14-inch 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 your availability for sales launches and customer demos.

And when did you actually have the inventory on hand to start getting the sales demos done?

So inventory for Inspire 2 became available late in Q4, inventory for Imagine is now available in Q1 of this year. We recorded bookings for the new Imagine product in Q4 in advance of that launch and are continuing to accelerate that now in Q1.

Okay. Great. And then given the $5 million revenue guidance for the March quarter, 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 quarter is indeed being impacted negatively. Looking at the segmentation that you provided for the December quarter, specifically, it looks like you had weak European bookings. Is that the continued trend that you expect into March quarter? Or is there some other mix shift going on that's driving was likely some weak bookings activity that you're seeing?

Nehal, let me break that follow-up into 2 parts: one, around geographic mix and the other around the uncertainty here. Internationally, we've seen significant strength in the last 2 years with growth rates in the mid-30s. 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. And 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-12 educational space. But the turbulence that we're seeing in the market challenges our end users to identify which part of money will be used to fund the solutions. Now because there is so much interest in CTE solutions, we feel pretty confident in capturing that demand because our content library is fairly broad. But we see this as potentially accelerating -- sorry, not accelerating, extending 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 reidentify which funding source will be used to cover the zSpace purchases. Is that helpful?

Yes, absolutely. Very, very helpful.

Our next question comes from Rohit Kulkarni with ROTH Capital Partners.

And I have a few questions here. In terms of just the overall kind of breakdown of the 2 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 90 days from the 2 new products? And where do you feel more optimistic about that reception in terms of which pockets or which use cases or any cohorts of the broader market as such?

Let me take that one, Rohit. 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 a 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 a real positive impact and positive reception. So I think 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.

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-12 schools, can you compare this to any prior period that you have seen when 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 ahead -- so just was wondering where would you compare this current period of uncertainty to?

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 buildup of the company over the last 8 or 9 years in terms of the business itself. So I don't have a comparison, but I could say to you, we've seen this before. Again, I think right now, there's no question that the uncertainty is particularly more so on the K-12 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 you could -- in the third quarter, as you know, in that 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 giving into specific deals, that gives us pretty strong confidence that the people are going to move things ahead regardless of how much uncertainty there is in the broader market.

Okay. Great. And maybe a quick one for Erick 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?

Thanks, Rohit. Yes, we're particularly pleased with the success of driving increased software and services content. And we saw that in 3 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&L revenue compared to hardware. And the result of that is the 240 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 AR/VR solutions is 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 2 and the Imagine solutions, while not only providing a path or additional revenue acquisition as we provide a form factor for Imagine that better suits the elementary school segment, which is 7 to 8x larger than the high school segment in K-12. Those new laptop platforms come at a favorable bond cost relative to their predecessor versions. And that should be a source of hardware-driven margin expansion that would essentially contribute a onetime 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 4 to 7 percentage points of gross margin as that hardware rolls out.

Our next question comes from Alex Paris with Barrington Research.

I got a couple, and I'll start top down. First of all, you -- with regard to the length -- the potential lengthening of the sales cycle within K-12 due to uncertainty, which definitely makes sense. K-12 education is largely funded on a state and local basis, 85% plus. The federal money which could cause some concern given those and its effect on the Department of Education is really in Title 1 in IDEA, Individuals with Disabilities. I'm wondering if you could kind of go over the typical funding sources for your product in K-12?

Yes, sure. Alex. You are correct in everything you said. And the reality is most of the funding that goes towards zSpace, whether it be in K-12 or CTE is not connected to the DOE. And the other big one out there is Perkins. And albeit the -- 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 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.

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?

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 piece of it.

So when ESSER ran out, your customers found other buckets of money to pay for the product for your 2024 revenue?

Correct.

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 a K-12 average sales cycle and what is it looking like today?

Yes. I would have said we would have traditionally said 60 to 75 days in the K-12 world and I think we'd now probably say 75 to 90 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. Now 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.

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.

Let me give you a high level and Erick 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 Erick add his comments to this, including our own interactions [indiscernible].

Yes, Paul, I don't have a lot to add there. I guess the 2 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&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 the majority of tariff expenses will be passed through to customers. And the fact that we saw this behavior in 2018 leads us to believe that the business is well poised 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?

Absolutely. It's about as much as we can know at this point. 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, increased quota-carrying reps and support staff. And then M&A, and you did announce an acquisition in the first quarter here on March 11th, BlocksCAD. So just a little maybe color on what you've done within the sales force so far? And then maybe some color around the recent acquisition, particularly because this seems more like a technology or infrastructure acquisition rather than a software acquisition? I might be wrong. Please give me a little additional color there.

Yes. I mean, speaking specific to BlocksCAD, 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 BlocksCAD acquisition is really the first one for us to really start to move things ahead. And again, our field team was already selling BlocksCAD 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.

Great. Then on sales force, the actions you've taken since the IPO?

Yes, Alex. This is Erick. 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 2 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 acqui-hirers, there are 2 predominant avenues to content acquisition we would proceed through M&A. One is very obviously incremental software titles to unlock access to new verticals and drive revenue capture to 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 catalog 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.

[Operator Instructions] Our next question is a follow-up from Nehal Chokshi with Northland Capital Markets.

So Erick, 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 for the December quarter. 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?

Yes. No, absolutely. So that was a discussion of our Q4 or full year comments that you were asking about, Nehal?

Both actually, please.

Okay. So in Q4, that was a discussion of the geographic disaggregation. So bookings for the fourth quarter were $5.3 million, 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 the 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?

Yes. Yes. And then, Paul, you talked about your 4 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&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 video just does not do justice. And so help us understand where is future innovation going to be focused on because it does seem like you guys are far ahead?

Yes. I think without getting too specific and too much looking for, 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&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 the zSpace and the augmented reality display-based solution is the interaction. So that's where the R&D focus is going to continue to remain.

Got it. Okay. And then yes, a couple of more questions real quickly here. Erick, you did note that your net dollar revenue retention rate is -- was at 92% for the December quarter, that is an 8-quarter low. Do you 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 was your NDRR have been then?

So that's a good question, and I don't want to speculate on like a pro forma 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 those 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 impairs or would engage our outlook for continued retention there.

Okay. All right. And then finally, last question. What were the reasons behind the recent debt instruments that you guys took on and just repeat what the terms are on that instrument?

I think you're referring to an 8-K disclosure we made around a $2 million debt line that we took on in Q1 -- and the -- yes, so the terms for that were comparable to similar terms that when you've 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. And with that, I'll turn that back over to the 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.

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.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.