ZIX CORPORATION
OCTOBER 15, 2013
Dan Ballantine, Alexander Johansson & Ye Liang
Agenda








Introduction
Holding Information
Macroeconomic Outlook
Industry Overview
Company Overview
Financial Analysis
Valuation
Recommendation
Zix Corporation

Leading Provider of Email Encryption
 Designed
for Regulatory Compliance and Protecting
Sensitive Communication
 1 in Every 5 U.S. Bank and Hospital

Products & Services:
 ZixGateway
/ ZixMail – Sender Service
 ZixAccess – Receiver Service
 ZixDirectory
 World’s
 Zix
Largest Shared Email Encryption Community
Research Center
Source: MarketLine, Zix 2012 10-K
Current Holding


April 17, 2012
 Acquired 2,000 shares @ $2.89/share
 Cost basis = $5,780
October 15, 2013
 Current holdings 2,000 shares @ $4.85/share
 Market value = $9,700
 Annualized HPR = 41.22%
Source: Yahoo Finance
Macroeconomic Overview

Unemployment Rate
US Unemployment Rate 2013 YTD
8.0%
7.8%
7.6%
7.4%
7.2%
7.0%
Jan

Feb
Mar
Apr
May
Jun
Jul
Aug
BYOD Catalyst
4
Out of 5 Employees Use Their Own Devices At Work
 Sensitive
Information Concerns
Source: Bureau of Labor Statistics, Ribbit
Macroeconomic Overview

HIPAA Compliance
 Health
Insurance Portability and Accountability Act
 Covered entities: health plan, health providers, health
care clearinghouses
 Also
applies to business associates of covered entities
 Requirements:
privacy, security, and transaction
standards regarding health care patient information
 Deadline for compliance was September 23, 2013
 Continued need for protection as more patient data is
stored and transmitted electronically
Source: Lorman, American Physical Therapy Association, US HHS
Stock Market
Source: Google Finance
Industry Overview

What is Software Industry?
 Components
 System



Software
Operating Systems
Network and database management
Other
 Application



Software
General business productivity and home use application
Cross-industry and vertical market applications
Other
Source: MarketLine Industry Profile
Industry Overview
United States software market category segmentation: % share, by value,
2011
4%
9%
24%
Network and database management
General Business productivity & home
applications
19%
Cross-industry and vertical application
23%
21%
Operating System software
Other system software
Other application software
Source: MarketLine
Industry Growth
United States software market value: $billion, 2007-2011
110
108.7
104.1
105
15%
10%
6.82%
8.37%
100
5%
100.3
99.4
4.73%
95
0%
93.9
-5%
90
-10%
-9.80%
85
-15%
2007
2008
2009
$ billion
2010
% Growth
Source: MarketLine
2011
Industry Life Cycle
Steady growth in sales as product acceptance widens
Source: UIUC BADM 449
Industry Forces Analysis
Bargaining Power of
Suppliers
5
4
3
Rivalry Among Existing
Competitors
2
Threat of New entrants
1
0
Threat of Substitute Products
or Services
Bargaining Power of Buyers
Source: MarketLine
Industry Forces Analysis

Buyer Power: MEDIUM
 High
switching cost, open source substitutes available,
large population of customers

Supplier Power: MEDIUM
 Highly
differentiated inputs, low threat of forward
integration

Rivalry Among Existing Competitors: MEDIUM
 Differentiated
products, fast industry growth, many
competitors
Source: MarketLine
Industry Forces Analysis

Threat of New Entrants: MEDIUM
 Low
capital intensive, high labor intensive, trusts in
certain sub-markets

Threat of Substitutes: MEDIUM
 Cheap
or free open source alternatives that update
more frequently and quickly, capability issue with the
alternatives
Conclusion: Moderately attractive industry
Source: MarketLine
Company Overview

Products and Services:

New to the Family in 2013
ZixONE;
byod
Source: Zix Corporation Website
Company Overview

Strategy: Differentiation
 Highly
specialized in data protection
 Software-as-a-Service (SaaS)

Revenue method: Annual service subscription fee
 Pricing
is fixed per sender each year
 75% of deals are 3-yr contracts with an average of
2.5 years
 Cash generally collected annually upfront
 Retention of 90%+ of revenue
Source: ZixCorp Investor Relations
Company Overview
Source: Zix Corporation Investor Relations
Product Life Cycle
Steady growth in sales as
product acceptance widens:
•Demand increases as
business related online
communication expanding
•Products reach out to wider
range of audience
Source: UIUC BADM 449
Business Risk Analysis







Changing regulations on internet privacy
Main customers subject to political factors
Rapidly growing technologies bring uncertainty
Dependent on strong human capital
Existing and potential big players
End user preference
Hacker population brings challenges
SWOT Analysis
Strengths
Weaknesses
-
-
No long-term debt
Strong cash position
Growing product base
Subscription business model
-
Operating losses in past 5
years
Forced to exit business
segments in the past few years
Opportunities
Threats
- Healthcare compliance (HIPAA)
- Increased emphasis on security
of data and communication
- BYOD trend in the workplace
- Big data trends
- NSA security threats
- Increased hacker issues
- Rapid technological change
Management Outlook




Optimistic about subscription business model
coupled with over $60 million backlog
Enthusiastic about September release of ZixOne to
address the BYOD segment
Concerns over increased SG&A expenses in 2013
due to increased sales force
Recognized increased competition from companies
such as McAfee and Cisco Systems
Source: Zix Corporation Q2 Earnings Call
Recent Financial Information
Source: Zix 2012 10-K, Zix 2010 10-K
Recent Financial Information
Source: Zix 2012 10-K, Zix 2010 10-K
Current Stock Information
Metric
Value
Current
Stock Price
$4.85
Trailing P/E
36.62
Forward P/E
20.70
Market Cap
($ millions)
$297.00
Source: Capital IQ, Yahoo Finance
Financial Analysis
Current Ratio
Quick Ratio
Cash Ratio
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
Debt/Assets
Debt/Equity
Interest Coverage
Liquidity Ratios
2008
2009
0.83
0.82
0.77
0.76
0.74
0.72
2010
1.54
1.42
1.34
2011
1.29
1.13
1.10
2012
1.32
1.16
1.11
Profitability Ratios
2008
2009
-21.42%
-14.88%
-19.41%
-14.47%
-28.03%
-22.68%
683.67%
269.44%
2010
15.56%
125.45%
95.80%
184.78%
2011
27.73%
59.13%
31.24%
43.11%
2012
20.63%
25.38%
13.72%
18.49%
Solvency Ratios
2008
2009
0.92
0.89
NM
NM
NM
NM
2010
0.25
0.36
233.91
2011
0.23
0.30
1,511.00
2012
0.22
0.30
8,943.00
Financial Analysis
A/R Turnover
Days Sales Outstanding
A/P Turnover
Days Payable Outstanding
Fixed Asset Turnover
Total Asset Turnover
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
Activity Ratios
2008
2009
35.15
49.60
10.38
7.36
26.51
12.24
13.77
29.81
12.37
14.02
1.44
1.57
2010
31.43
11.61
7.52
48.53
15.22
0.76
2011
37.25
9.80
13.17
27.71
17.19
0.53
2012
51.89
7.03
16.97
21.51
18.80
0.54
DuPont Analysis
2008
2009
100.78%
101.53%
89.91%
95.77%
-21.42%
-14.88%
144.39%
156.76%
(24.39)
(11.88)
683.67%
269.44%
2010
794.67%
101.44%
15.56%
76.36%
1.93
184.78%
2011
211.48%
100.83%
27.73%
52.83%
1.38
43.11%
2012
121.53%
101.24%
20.63%
54.06%
1.35
18.49%
Comparable Companies
Company
Tucows Inc.
Axway Software S.A.
Fortinet Inc.
Trend Micro Inc.
Proofpoint, Inc.
USA Technologies Inc.
Zix Corporation
Ticker (Exchange)
Market Cap ($millions)
TCX (AMEX)
$105.44
AXW (ENXTPA)
$594.36
FTNT (NASDAQ)
$3,446.84
4704 (TSE)
$5,029.95
PFPT (NASDAQ)
$1,039.23
USAT (NASDAQ)
$53.17
ZIXI (NASDAQ)
$291.49
Source: Capital IQ
Stock Performance
Source: Yahoo Finance
Comparable Company Analysis
Target Company
Zix Corporation
Ticker Symbol
(Exchange)
ZIXI (NASDAQ)
Comparable Companies
Tucows Inc.
Axway Software S.A.
Fortinet Inc.
Trend Micro Inc.
Proofpoint, Inc.
USA Technologies Inc.
TCX (AMEX)
AXW (ENXTPA)
FTNT (NASDAQ)
4704 (TSE)
PFPT (NASDAQ)
USAT (NASDAQ)
Comparable Statistics
High
Median
Low
Mean
Price/Book
Forward
Forward
Value
TEV/Sales
TEV/EBITDA Forward P/E
4.62x
5.14x
16.35x
20.70
4.75x
1.84x
6.07x
4.00x
27.50x
2.61x
0.78x
1.75x
4.60x
3.32x
6.71x
1.18x
10.47x
10.97x
20.97x
12.79x
NM
6.42x
15.00
18.54
37.20
23.82
NM
25.00
27.50x
4.37x
1.84x
7.79x
6.71x
2.54x
0.78x
2.62x
20.97x
10.97x
6.42x
13.80x
37.20
23.82
15.00
23.64
Source: Capital IQ
Comparable Company Analysis
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
ZIX Implied Stock Price
Low
$
$
$
$
1.89
0.29
1.35
3.45
Implied ZIX Share Price
Median
High
$
4.50 $
28.32
$
1.79 $
5.35
$
2.57 $
5.25
$
5.48 $
8.56
Weight
25%
25%
25%
25%
Mean
$
$
$
$
Implied ZIX
Stock Price
$
8.03
$
1.86
$
3.33
$
5.44
$
4.66
Source: Capital IQ
8.03
1.86
3.33
5.44
Discount Rate
CAPM
Risk-Free Rate
Market Risk Premium
5-Year Beta
2.64%
6.00%
0.41
CAPM Cost of Equity
5.12%
Annual Realized Returns
Year
1
2
3
4
5
Actual
2.23%
112.57%
-36.25%
16.94%
67.59%
Total Realized Return
171.51%
Arithmetic Annual Return
Geometric Annual Return
32.62%
22.11%
Source: Yahoo Finance
Discount Rate
Weighted Average Cost of Capital
Share Price
$
4.76
Shares Outstanding (thousands)
61,240.00
Market Value of Equity
$ 291,502.40
Debt
-
Percent Equity Weight
Percent Debt Weight
100.00%
0.00%
Cost of Debt
Cost of Equity
CAPM Cost of Equity
ZIX Realized Return
Cost of Equity
5.12%
22.11%
13.62%
Tax Rate
WACC
38.0%
13.62%
50.00%
50.00%
Cost of Equity
Weightings
DCF Analysis
Zix Corporation Discounted Cash Flow Analysis ($ thousands)
Net Income
Depreciation
Capital Expenditures
Changes in Net Working Capital
Less Increases in A/R
Less Increases in Inventories
Plus Increases in A/P
Free Cash Flow
Present Value
Discount Rate
2013E
12,615
1,430
(1,500)
2014E
14,794
1,472
(1,525)
2015E
18,002
1,504
(1,550)
2016E
21,460
1,532
(1,575)
2017E
25,309
1,558
(1,600)
(130)
247
12,662
11,145
(107)
227
14,860
11,512
(115)
278
18,119
12,354
(46)
340
21,710
13,029
(121)
361
25,507
13,473
Terminal
Value
247,484
130,725
13.62%
Calculation of Implied Share Price
Implied Enterprise Value
Less Debt
Plus Cash
Implied Market Cap
$192,238
$
$22,988
$215,226
Implied Share Price
$
3.51
Terminal Value
Terminal Growth Rate
3.00%
Decision Drivers

Strengths
 Strong
cash position and improving balance sheet
 Well positioned in health care segment
 Additional BYOD segment growth opportunities

Concerns
 Strong
recent stock performance
 Internet and data privacy threats
 Operating losses in the past
Recommendation

Valuation Summary
 Current
Stock Price: $4.85/share
 Comparable Companies Valuation: $4.66/share
 DCF Valuation: $3.51/share

Recommendation: HOLD
Questions?