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Zix Corporation Delivers Continued Growth and Profit for Third Quarter 2013

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Company generated $6.2 million in cash from operations

DALLAS--(BUSINESS WIRE)--Oct. 22, 2013-- Zix Corporation (ZixCorp), (Nasdaq: ZIXI), a leader in email data protection, today announced financial results for the third quarter ended Sept. 30, 2013.

Third Quarter 2013 Financial Highlights

  • Third quarter new first year orders of $2.2 million for a year-to-date total of $6.7 million
  • Third quarter revenue of $12.2 million, an increase of 10.9% year-over-year, the Company’s 19th consecutive quarterly record in revenue
  • Third quarter GAAP net income of $0.05 per share, an increase of 59.3% year-over-year (1)
  • Third quarter Non-GAAP net income of $0.06 per share, an increase of 34.5% year-over-year (1)
  • The Company generated approximately $6.2 million in cash flow from operations, an increase of $1.6 million year-over-year
  • Total cash and cash equivalents of $32.9 million at Sept. 30, 2013

“Our continued investments in innovation are enabling us to build upon our leadership position in email data protection, expand our relationships with existing customers and create significant new opportunities by substantially increasing our addressable markets,” said Rick Spurr, ZixCorp’s Chairman and Chief Executive Officer. “ZixOne, our simple and innovative approach to Bring-Your-Own-Device or BYOD security, was launched into the market during the quarter, and in less than 50 days, we are excited to report positive feedback from the deployment of our first customers and great interest by those enterprises that are in the market for a BYOD solution. ZixOne provides companies with an easy solution for managing mobile data security on personal devices. By streaming corporate email, calendar and contacts, ZixOne provides high-speed, full-function email access without ever allowing corporate email to reside on the device, maximizing security and end-user acceptance.”

Third Quarter 2013 Corporate Financial Summary and Other Operational Metrics

$ in Millions, except per share and % data     Q3 2013     Q3 2012     % or $

Change (1)

Revenue     $12.2     $11.0     10.9%
GAAP Gross Profit     $10.3     $9.1     13.0%
GAAP Net Income     $3.2     $1.9     63.4%
GAAP Net Income Per Share – Diluted     $0.05     $0.03     59.3%

Non-GAAP Adjusted Gross Profit (2)

    $10.4     $9.2     13.0%
Non-GAAP Adjusted Net Income (2)     $3.7     $2.7     38.0%
Non-GAAP Adjusted Net Income Per Share-Diluted (2)     $0.06     $0.04     34.5%

Adjusted EBITDA (2) (3)

    $4.2     $3.1     34.7%

Adjusted EBITDA Margin (2) (3)

    34.2%     28.2%     6.0pt
New First Year Orders     $2.2     $2.6     (15.7)%(4)
Total Orders     $13.0     $12.7     2.6%
Bookings Backlog (5)     $64.2     $57.0     12.6%
           

(1) Changes are based on actuals versus numbers shown in the columns which may reflect rounding

(2) A reconciliation of GAAP to Non-GAAP adjusted results is attached to this press release and is available on our investor relations Web site at http://investor.zixcorp.com

(3) Adjusted earnings before interest, taxes, depreciation and amortization

(4) In Q3 2012, new first year orders included a one-time $417,000 OEM order catch-up; excluding that catch-up item, Q3 2013 new first year orders were essentially flat when compared to Q3 2012

(5) Service contract commitments that represent future revenue to be recognized as the services are provided

Business Highlights

  • ZixCorp announced commercial availability of ZixOneTM, a unique mobile email app that solves the key IT challenge created by the Bring-Your-Own-Device (BYOD) trend. ZixOne manages access to corporate email while never allowing that data to reside on the device where it is vulnerable to loss or theft. ZixOne is priced per employee (instead of per device) for use across iOS and Android OS devices. It can be deployed with Microsoft Exchange in less than an hour, and the app can be downloaded to the user’s device in less than a minute.

Outlook

For the fourth quarter 2013, the Company forecasts revenue to be between $11.9 million and $12.3 million and fully diluted adjusted earnings per share to be between $0.05 and $0.06. Based on that fourth quarter guidance, the Company expects to be at or near the lower end of the Company’s previous revenue guidance of $48 million to $50 million for the full year 2013. The Company now expects Non-GAAP adjusted earnings per share of $0.19 for the full year.

Conference Call Information:

The Company will discuss its financial results and outlook on a conference call on Tuesday, Oct. 22, 2013, at 5 p.m. ET. A live webcast of the conference call will be available on our investor relations Web site at http://investor.zixcorp.com. Alternatively, participants can access the conference call by dialing 1-877-415-3180 (U.S. toll-free) or 1-857-244-7323 (international) at least 15 minutes before the call and entering access code 20971909. An audio replay of the conference will be available until Oct. 30, 2013, by dialing 1-888-286-8010 (U.S. toll-free) or 1-617-801-6888 (international) and entering the access code 97320806. An archive for the webcast will also be available on the ZixCorp investor relations Web site.

About Zix Corporation

ZixCorp is a leader in email data protection. ZixCorp offers industry-leading email encryption, a unique email DLP solution and an innovative email BYOD solution to meet your company’s data protection and compliance needs. ZixCorp is trusted by the nation’s most influential institutions in healthcare, finance and government for easy to use secure email solutions. ZixCorp is publicly traded on the Nasdaq Global Market under the symbol ZIXI, and its headquarters are in Dallas, Texas. For more information, visit www.zixcorp.com.

Statements in this release that are not purely historical facts or that necessarily depend upon future events, including statements about forecasts of revenue, earnings or new products or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to ZixCorp on the date this release was issued. ZixCorp undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to how privacy and data security law mandates may affect demand for email encryption, ZixCorp’s ability to obtain and retain customers and grow revenues. ZixCorp may not succeed in addressing these and other risks. Further information regarding factors that could affect ZixCorp financial and other results can be found in the risk factors section of ZixCorp’s most recent filing on Form 10-K with the Securities and Exchange Commission.

 
ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
       
September 30,
2013 December 31,
(unaudited) 2012
ASSETS
Current assets:
Cash and cash equivalents $ 32,876,000 $ 22,988,000
Receivables, net 2,765,000 967,000
Prepaid and other current assets 1,755,000 1,697,000
Deferred tax assets   1,654,000   1,600,000
Total current assets 39,050,000 27,252,000
Property and equipment, net 2,548,000 2,384,000
Goodwill 2,161,000 2,161,000
Deferred tax assets   50,909,000   51,052,000
Total assets $ 94,668,000 $ 82,849,000
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,603,000 $ 3,156,000
Deferred revenue   19,546,000   17,470,000
Total current liabilities 22,149,000 20,626,000
Long-term liabilities:
Deferred revenue 1,346,000 902,000
Deferred rent   1,643,000   76,000
Total long-term liabilities   2,989,000   978,000
Total liabilities 25,138,000 21,604,000
Total stockholders’ equity   69,530,000   61,245,000
Total liabilities and stockholders’ equity $ 94,668,000 $ 82,849,000
 
 
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                 
Three Months Ended September 30, Nine Months Ended September 30,
2013 2012 2013 2012
Revenue $ 12,225,000 $ 11,023,000 $ 35,827,000 $ 31,667,000
 
Cost of revenue   1,904,000     1,887,000     5,743,000     5,554,000  
Gross profit 10,321,000 9,136,000 30,084,000 26,113,000
Operating expenses:
Research and development 2,345,000 2,046,000 7,444,000 4,988,000
Selling, general and administrative   4,659,000     5,020,000     16,807,000     13,720,000  
Total operating expenses   7,004,000     7,066,000     24,251,000     18,708,000  
 
Operating income 3,317,000 2,070,000 5,833,000 7,405,000
Operating margin 27 % 19 % 16 % 23 %
 
Other income, net 17,000 6,000 141,000 16,000
 
Income before income taxes 3,334,000 2,076,000 5,974,000 7,421,000
Income tax expense   (159,000 )   (133,000 )   (361,000 )   (409,000 )
Net income $ 3,175,000   $ 1,943,000   $ 5,613,000   $ 7,012,000  
 
Basic income per common share: $ 0.05   $ 0.03   $ 0.09   $ 0.11  
 
 
Diluted income per common share: $ 0.05   $ 0.03   $ 0.09   $ 0.11  
 
Shares used in per share calculation - basic   61,378,131     60,896,042     61,172,708     61,671,214  
 
Shares used in per share calculation - diluted   63,065,762     61,472,352     62,517,989     62,316,809  
 
 
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
       
Nine Months Ended September 30,
2013 2012
Operating activities:
Net income $ 5,613,000 $ 7,012,000
Non-cash items in net income 2,465,000 1,874,000
Changes in operating assets and liabilities   1,698,000     3,206,000  
Net cash provided by operating activities 9,776,000 12,092,000
 
Investing activities:
Purchases of property and equipment   (1,262,000 )   (1,049,000 )
Net cash used in investing activities (1,262,000 ) (1,049,000 )
 
Financing activities:
Proceeds from exercise of stock options 1,494,000 308,000
Purchase of Treasury Stock   (120,000 )   (9,000,000 )
Net cash used in financing activities   1,374,000     (8,692,000 )
 
Increase (Decrease) in cash and cash equivalents 9,888,000 2,351,000
Cash and cash equivalents, beginning of period   22,988,000     20,680,000  
Cash and cash equivalents, end of period $ 32,876,000   $ 23,031,000  
 
 
ZIX CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Unaudited)
                 
Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
Revenue:
GAAP revenue $ 12,225,000   $ 11,023,000   $ 35,827,000   $ 31,667,000  
Cost of revenue
GAAP cost of revenue $ 1,904,000 $ 1,887,000 $ 5,743,000 $ 5,554,000
Stock-based compensation charges (1) (A)   (46,000 )   (38,000 )   (133,000 )   (94,000 )
Non-GAAP adjusted cost of revenue $ 1,858,000   $ 1,849,000   $ 5,610,000   $ 5,460,000  
Gross profit:
GAAP gross profit $ 10,321,000 $ 9,136,000 $ 30,084,000 $ 26,113,000
Stock-based compensation charges (1) (A)   46,000     38,000     133,000     94,000  
Non-GAAP adjusted gross profit $ 10,367,000   $ 9,174,000   $ 30,217,000   $ 26,207,000  
Research and development expense
GAAP research and development expense $ 2,345,000 $ 2,046,000 $ 7,444,000 $ 4,988,000
Stock-based compensation charges (1) (A)   (56,000 )   (44,000 )   (162,000 )   (91,000 )
Non-GAAP adjusted research and development expense $ 2,289,000   $ 2,002,000   $ 7,282,000   $ 4,897,000  
Selling and marketing expense
GAAP selling and marketing expense $ 3,088,000 $ 2,958,000 $ 10,338,000 $ 8,010,000
Stock-based compensation charges (1) (A)   (134,000 )   (105,000 )   (386,000 )   (246,000 )
Non-GAAP adjusted selling and marketing expense $ 2,954,000   $ 2,853,000   $ 9,952,000   $ 7,764,000  
General and administrative expense
GAAP general and administrative expense $ 1,571,000 $ 2,062,000 $ 6,469,000 $ 5,710,000
Stock-based compensation charges (1) (A) (216,000 ) (153,000 ) (618,000 ) (374,000 )
Non-recurring litigation costs (2) (B)   (33,000 )   (362,000 )   (1,286,000 )   (698,000 )
Non-GAAP adjusted general and administrative expense $ 1,322,000   $ 1,547,000   $ 4,565,000   $ 4,638,000  
Operating income:
GAAP operating income $ 3,317,000 $ 2,070,000 $ 5,833,000 $ 7,405,000
Stock-based compensation charges (1) (A) 452,000 340,000 1,299,000 805,000
Non-recurring litigation costs (2) (B)   33,000     362,000     1,286,000     698,000  
Non-GAAP adjusted operating income $ 3,802,000   $ 2,772,000   $ 8,418,000   $ 8,908,000  
$ -
Adjusted Operating Margin 31.1 % 25.1 % 23.5 % 28.1 %
 
Net income:
GAAP net income $ 3,175,000 $ 1,943,000 $ 5,613,000 $ 7,012,000
Stock-based compensation charges (1) (A) 452,000 340,000 1,299,000 805,000
Non-recurring litigation costs (2) (B) 33,000 362,000 1,286,000 698,000
Income tax impact (C)   29,000     28,000     88,000     82,000  
Non-GAAP adjusted net income $ 3,689,000   $ 2,673,000   $ 8,286,000   $ 8,597,000  
 
Diluted net income per common share:
GAAP net income $ 0.05 $ 0.03 $ 0.09 $ 0.11
Adjustments per share (A-C) $ 0.01   $ 0.01   $ 0.04   $ 0.03  
Non-GAAP adjusted net income $ 0.06   $ 0.04   $ 0.13   $ 0.14  
Shares used to compute Non-GAAP adjusted net income per share - diluted   63,065,762     61,472,352     62,517,989     62,316,809  
Reconciliation of Net income to EBITDA and Adjusted EBITDA: (D)
Net income $ 3,175,000 $ 1,943,000 $ 5,613,000 $ 7,012,000
Income tax provision 159,000 133,000 361,000 409,000
Interest expense - - - 1,000
Depreciation expense   367,000     329,000     1,078,000     988,000  
EBITDA 3,701,000 2,405,000 7,052,000 8,410,000
 
Adjustments:
Share-based compensation expense (A) 452,000 340,000 1,299,000 805,000
Non-recurring litigation costs (B)   33,000     362,000     1,286,000     698,000  
Adjusted EBITDA $ 4,186,000   $ 3,107,000   $ 9,637,000   $ 9,913,000  
Adjusted EBITDA margin 34.2 % 28.2 % 26.9 % 31.3 %
 
(1) Stock-based compensation charges are included as follows:
Cost of revenues $ 46,000 $ 38,000 $ 133,000 $ 94,000
Research and development 56,000 44,000 162,000 91,000
Selling and marketing 134,000 105,000 386,000 246,000
General and administrative   216,000     153,000     618,000     374,000  
$ 452,000   $ 340,000   $ 1,299,000   $ 805,000  
(2) Non-recurring litigation costs are included as follows:
General and administrative   33,000     362,000     1,286,000     698,000  
$ 33,000   $ 362,000   $ 1,286,000   $ 698,000  
 

This presentation includes Non-GAAP measures. Our Non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see items (A) through (D) on the next page.

 

ZIX CORPORATION
NOTES TO RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

USE OF NON-GAAP FINANCIAL INFORMATION

The Company occasionally utilizes financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) in order to provide investors with an alternative method for assessing our operating results in a manner that enables investors to more thoroughly evaluate our current performance as compared to past performance. We also believe these Non-GAAP measures provide investors with a more informed baseline for modeling the Company’s future financial performance. Management uses these Non-GAAP financial measures to make operational and investment decisions, to evaluate the Company's performance, to forecast and to determine compensation. Further, management utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. We believe that our investors should have access to, and that we are obligated to provide, the same set of tools that we use in analyzing our results. These Non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We have provided definitions below for certain Non-GAAP financial measures, together with an explanation of why management uses these measures and why management believes that these Non-GAAP financial measures are useful to investors. In addition, in our earnings release we have provided tables to reconcile the Non-GAAP financial measures utilized to GAAP financial measures.

ADJUSTED NON-GAAP MEASURES

Our Non-GAAP measures adjust GAAP Cost of revenue, Gross profit, Research and development expense, Selling and marketing expense, General and administrative expense, Operating income, Net income, Net income per share - diluted, and EBITDA for non-cash stock-based compensation expense, and non-recurring litigation expense to derive Non-GAAP adjusted Cost of revenue, adjusted Gross profit, adjusted Research and development expense, adjusted Selling and marketing expense, adjusted General and administrative expense, adjusted Operating income, adjusted Net income, adjusted Net income per share - diluted and adjusted EBITDA. We provide a reconciliation of these adjusted Non-GAAP measures to GAAP Gross profit, Operating income, Net income, Net income per share - diluted and EBITDA.

We do not provide a reconciliation of forward-looking adjusted Non-GAAP earnings per share to GAAP earnings per share. Our forward-looking adjusted Non-GAAP earnings per share information consistently excludes non-cash stock-based compensation expense. Additionally, the adjusted Non-GAAP earnings per share will consistently exclude non-recurring items that impact our ongoing business. See items (A) through (C) below for further information on the current quarter's reconciling items.

Items (A) through (D) on the "Reconciliation of GAAP to Non-GAAP Financial Measures" table are listed to the right of certain categories under "Gross profit," "Operating income," "Net income," "Net income per share - diluted" and "EBITDA" and correspond to the categories explained in further detail below under (A) through (D).

(A) Non-cash stock-based compensation charges relating to stock option grants, restricted stock, and restricted stock units awarded to and accounted for in accordance with Share-Based Payment accounting guidance. See (1) on previous page for breakdown of stock-based compensation. Because of varying valuation methodologies, subjective assumptions and varying award types, the Company believes that the exclusion of stock-based compensation charges provides for more accurate comparisons to our peer companies and for a more accurate comparison of our financial results to previous periods. Additionally, the Company believes it is useful to investors to understand the specific impact of non-cash stock-based compensation charges on our operating results.

(B) Non-recurring litigation costs. See item (2) on previous page for breakdown of non-recurring litigation costs. The Company’s management excludes these costs when evaluating the ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(C) The Non-GAAP adjustment to the tax provision represents the non-cash tax expense included in the GAAP tax provision, including the current period utilization of deferred tax assets created in previous periods. The remaining provision for income taxes represents expected cash taxes to be paid.

(D) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based compensation and non-recurring litigation expenses.

Source: Zix Corporation

ZixCorp
Investor Relations:
MKR Group
Todd Kehrli or Jim Byers, 323-468-2300
zixi@mkr-group.com
or
Public Relations:
Taylor Stansbury Johnson, 214-370-2134
tjohnson@zixcorp.com