University of Illinois at Urbana-Champaign
Applied Portfolio Management
Analysts:
Amey Dargude Cindy Anggraini Jiaqi (Tommy) Jiang
Siwei (Lerrisa) Li
Xuan (Lucy) Liang
November 19, 2015
Amey Dargude
dargude2@illinois.edu
Cindy Anggraini
ANALYSTS
anggrai2@illinois.edu
Lerrisa Li
siweili2@illinois.edu
Lucy Liang
xliang28@illinois.edu
Tommy Jiang
jjiang39@illinois.edu
AGENDA
Company Overview
Industry Overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Current Holding
• Purchased 2000 shares at $2.89 on 4/17/2012
• Weight of portfolio ( Market value): 2.5%
• Current price: $5.54
• Capital Gain: 88.24%
Company Overview
Industry Overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Company Overview
• Company History
1999
•Incorporated in
Texas
•Entered into email
encryption business
1989
•Acquired
PocketSript, LLC,
expanded into
electronic
prescribing business
2010
•Exited electronic
prescribing
marketplace after
10-year loss
2003
2013
• Company Service
Email
Encryption
Email Data Loss
Prevention
•Expanded business
into email data loss
prevention and
bring-you-owndevice solutions
Bring-YourOwn-Devices
Zix’s Unique Email Encryption Service
ZixGateway and ZixDirectory enable the customers to send encrypted emails
transparently, which forms Zix’s competitive advantage in the industry
Source: ZixCorp Website
Company Overview-Business Model
• Revenue: per user subcription fee
• Contract: 2.5-year long in average
• Distribution channels:
New First Year Orders as per Q315
Direct
Sales
Telesales
ValueAdded
Resellers
Original
Equipment
Manufactur
e (OEM)
Source: ZixCorp Website
Distribution Channels (Cont.)
Zix heavily relies on third party distribution channels:
Original equipment manufacturing (OEM), resellers, and referral leaders
Company Overview-Industry Focus
Revenue as per Q315
Source: ZixCorp Website
New First Year Orders as per Q315
SWOT Analysis
• No Debt
• Strong Alliance
• BYOD solution
• Strengthening Govt
Regulation
• Cloud-based service
• Heavily rely on
Third Party
Distribution
Channels
S
W
O
T
• Rapid Change in
Technology
• Industry Consolidation
• Expansion Limitation
by Govt Regulation
Business Risks
• Litigation risk
• Fail to retain key empolyees
• Infrustrcure Outage
• Industry consolidation risk
• Heavily relay on third party distribution chaneel
• Rapid changing technology
Porter’s Five Analysis
Threats of
substitutes:
Medium
Bargaining
power of
suppliers:
Very High
Competitive
rivalry:
High
Bargaining
power of
buyers:
Medium
Threat of
new
entrants:
High
Buiness Overview
Industry overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Industry Overview
Application
Software
•
Communication
Data
Security
Email
Encryption
•
•
Email encryption business
is a small fraction of the
overall software industry
Large companies provide
services across different
functions in the industry
High occurrence in
business consolidation
Buiness Overview
Industry overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Macroeconomic Overview
• Regulations on Data Security
• Number of Email Exchange
• Number of Mobile Internet Connection
• Number of Broadband Connection
• Total Health Expenditure
WorldwideEmail Users
Number of Email Sent/Received per day
Number of Business Email Sent/Received per day
Increase in number email exchange predicts strong demand for email encryption service
Source: Statista
Internet Industry Development
Number of Mobile Internet Connections
Number of Broadband Connections
Futures Increase in the number of mobile internet connection predicts a stronger demand for BYOD solution
Source: Ibis World
Healthcare Industry
Total Health Expenditure
Source: Ibis World
Incerasing growth
rate of total health
expenditures
perdicts a growth in
the healthcare
industry, which will
increase the
demand for email
encrytion service
Buiness Overview
Industry Overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Financial Analysis
• Financial Highlights
• Revenue & Cost
• Tax benefit impact
• Profitability
• Liquidity & Capital Structure
• Asset Management Efficiency & Greenblatt
• Dupont Ratio
Financial Highlights
• No Debt
• No Dividend Payment
• Deferred Tax Assets
• By the end of 2014, Zix U.S. Net operating loss carry forward of $254M which
begin to expire in year 2020
• Zix realized tax benefit of $1.0M, $1.9M, $11.9M, and $35.5M in year 2013, 2012,
2011, and 2010 resulted from the decrease in deferred tax assts valuation
allowance
• Zix did not recognize tax benefit and paid income tax in year 2014 and 2015
Revenue & Costs
Revenues (y/y)
Costs (% of Revenue)
Tax Benefit Impact on Net Income
Tax Benefit Impact (% of Revenue)
Profitability
Return on Assets and Equity (exc. Tax Benefit)
Profitability Ratios
Liquidity and Capital Structure Ratio
Current Ratio
Equity Ratio (%)
Asset Management Efficiency
Greenblatt Ratio
Asset Management Efficiency Ratio
Greenblatt Ratio
Dupont Model
Dupont Model
ROE is declining
due to the
decreasing profit
margin. The high tax
burden in 2010 was
because of the high
tax benefit that was
reflected on
bottomline
Buiness Overview
Industry Overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Projection & Valuation
• Projection Assumption
• Income Statement Projection
• Valuation
• Comparable Valuation
• DCF Valuation
Projection Assumptions
• Revenue
• Backlog: urealized revenue
• Recognized revenue of new orders
Revenue prjected by forecasting the value of total orders based on the
historical performance
• Tax
The company’s tax benefit realizaion policy is not predicted. We consider two
scenarios:
• Tax benefit will be realized to offset income tax expense
• No tax benefit will not be realized
• R&D/SG&A
Chang with revenue, no significant expenditure is projected
Revenue Assumption
Income Statement
ASSUMPTION
Total Orders (2)
% Growth
Backlog (1)
% of Backlog
Realized Backlog
Changed Backlog
Increase in Backlog
% of Total Orders
New first year order (3)
% Growth
Revenue (4)
% Growth
Residual from revenue
% Growth
Research and development expenses
% Growth
Selling, general, and administrative expenses
% of Revenue
Unit
$ million
%
$ million
%
$ million
$ million
$ million
%
$ million
%
$ million
%
$ million
%
$ Thousands
%
$ Thousands
%
2010A
40.8
49.9
8.7
33.1
5,089
16,363
49.5%
2011A
42.3
3.7
53.7
55.0
27.4
22.5
31.2
73.9
7.1
-18.3
38.1
15.4
10.7
5,229
2.8%
15,128
39.7%
2012A
48.2
13.9
57.7
57.0
30.6
23.1
34.6
71.8
9.0
27.0
43.4
13.7
12.7
19.1
7,419
41.9%
19,385
44.7%
2013A
56.6
17.4
65.7
57.0
32.9
24.8
40.9
72.2
9.0
0.3
48.1
11.0
15.2
19.6
9,563
28.9%
21,646
45.0%
2014A
55.4
-2.1
69.3
54.0
35.5
30.2
39.1
70.5
8.5
-5.9
50.3
4.6
14.9
-2.5
9,051
-5.4%
26,222
52.1%
2015F
64.3
16.0
77.4
57.0
39.5
29.8
47.6
74.0
9.1
7.1
59.6
18.4
20.1
13.0
8,566
-5.4%
27,530
46.2%
2016F
74.5
16.0
87.7
57.0
44.1
33.3
54.4
73.0
9.7
7.1
67.8
13.7
23.7
11.0
11,136
30.0%
31,634
46.7%
2017F
86.5
16.0
100.0
57.0
50.0
37.7
62.3
72.0
10.0
2.2
78.0
15.1
28.0
7.2
12,807
15.0%
36,786
47.2%
2018F
100.3
16.0
115.2
57.0
57.0
43.0
72.2
72.0
10.2
2.2
89.2
14.5
32.3
7.2
14,087
10.0%
41,942
47.0%
2019F
116.4
16.0
133.3
57.0
65.7
49.5
83.8
72.0
10.4
2.5
103.0
15.4
37.3
7.2
15,214
8.0%
48,259
46.9%
2020F
135.0
16.0
154.5
57.0
76.0
57.3
97.2
72.0
10.9
4.2
119.3
15.8
43.3
7.2
15,975
5.0%
55,876
46.9%
Income Statement Projection
INCOME STATEMENT
Revenues
% Growth
Cost of Revenue
% Growth
Gross Profit
Research and development expenses
% Growth
Selling, general, and administrative expenses
% Growth
Opearating income
Other income (expenses):
Investment and other income
Interest expenses
Total other income
Income before income taxes
Income tax (expense) benefit
Net income from continuing operations
Income from discontinued operations before income taxes
Income tax expense from discontinued opeations
Income from discontinued operations
Net income
Special event adjustment
Net income exc. income tax (expense) benefit
Unit
$ thousands
%
$ thousands
%
$ thousands
$ thousands
%
$ thousands
%
$ thousands
2010A
33,066
5,146
2011A
38,145
15.4
7,211
11.5
30,934
5,229
2.8
15,128
(7.5)
10,577
2012A
43,356
13.7
7,609
5.5
35,747
7,419
41.9
19,385
28.1
8,943
2013A
48,138
11.0
7,614
0.1
40,524
9,563
28.9
21,646
11.7
9,315
2014A
50,347
4.6
8,324
9.3
42,023
9,051
(5.4)
26,222
21.1
6,750
2015F
59,613
18.4
10,535
26.6
49,078
8,566
(5.4)
27,530
13.3
12,981
$ thousands
$ thousands
$ thousands
$ thousands
$ thousands
$ thousands
$ thousands
$ thousands
$ thousands
$ thousands
96
(22)
74
5,220
35,500
40,720
762
(269)
493
41,213
95
(7)
88
10,665
11,889
22,554
0
0
0
22,554
112
(1)
111
9,054
1,949
11,003
0
0
0
11,003
132
0
132
9,447
1,006
10,453
0
0
0
10,453
183
0
183
6,933
(2,830)
4,103
0
0
0
4,103
239
0
239
13,220
(4,495)
8,725
0
0
0
8,725
272
0
272
13,547
(4,606)
8,941
0
0
0
8,941
313
0
313
15,454
(5,254)
10,199
0
0
0
10,199
358
0
358
18,522
(6,298)
12,225
0
0
0
12,225
413
0
413
22,358
(7,602)
14,756
0
0
0
14,756
478
0
478
27,401
(9,316)
18,084
0
0
0
18,084
$ thousands
5,713
10,665
9,054
9,447
6,933
13,220
13,547
15,454
18,522
22,358
27,401
6,468
26,598
5,089
16,363
2016F
67,766
13.7
11,720
11.2
56,045
11,136
30.0
31,634
18.6
13,275
2017F
77,968
15.1
13,234
12.9
64,734
12,807
15.0
36,786
16.2
15,141
2018F
89,237
14.5
15,044
13.7
74,193
14,087
10.0
41,942
17.3
18,164
2019F
102,997
15.4
17,578
16.8
85,419
15,214
8.0
48,259
16.4
21,945
2020F
119,254
15.8
20,480
16.5
98,774
15,975
5.0
55,876
17.1
26,922
Discount Factor
CAPM
S.D.s&p
S.D.zixi
Correlation
Beta
Market Risk Premium
Risk Free rate
CAPM Expected Cost of Equity
Annual Realized Returns
Year
5
4
3
2
1
Arithmetic Annual Return
Geometric Annual Return
0.01
0.03
0.49
1.39
Weighted Average Cost of Capital
Weight
CAPM Expected
Cost of Equity
10.33%
60%
5.75%
Realised Return
6.68%
Cost Of Equity
8.87%
2.34%
10.33%
Cost of Debt
Actual
57.83%
-21.65%
53.45%
9.38%
-33.42%
13.12%
6.68%
WACC
0
8.87%
Business Premium
1.00%
Discount rate
9.87%
40%
DCF Valuation (Scenario 1 – exc. Tax Benefit)
Zix Corporation Discounted Cash Flow Analysis ($ thousands)
1
2
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
2016E
13,547
1655.16
(1,718)
(1,508)
(1,595)
2017E
15,454
1669.46
(1,784)
1,016
900.05
3
2018E
18,522
2083.49
(3,533)
(269)
(398)
4
2019E
22,358
2081.66
(1,852)
(2,340)
(2,498)
5
Terminal
2020E
Value
27,401
2076.62
(1,923)
1,492
1303.83
86.15
115.61
129.14
158.46
188.59
11,976
16,355
16,804
20,248
29,046
471,981
$10,900.37 $13,548.84 $12,670.43 $13,895.60 $18,142.86 $294,807.33
Calculation of Implied Share Price
Implied Enterprise value
$363,965.44
Less Debt
0
Implied Market Value
$363,965.44
Number of shares outstanding
55,860.83
Price
$6.52
Discount
Rate
Sensitivity Table
Terminal Growth
$6.52 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%
8.87% 6.75 7.24 7.83 8.54 9.41 10.50
9.37% 6.21 6.63 7.12 7.69 8.39 9.24
9.87% 5.76 6.11 6.52 6.99 7.56 8.24
10.37% 5.36 5.66 6.00 6.40 6.87 7.43
10.87% 5.00 5.27 5.56 5.90 6.30 6.76
DCF Valuation (Scenario 2 – inc. Tax Benefit)
Zix Corporation Discounted Cash Flow Analysis ($ thousands)
1
2
2016E
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
8,941
1655.16
(1,718)
(1,508)
(1,595)
2017E
10,199
1669.46
(1,784)
1,016
900.05
3
4
5
2018E
2019E
2020E
12,225
2083.49
(3,533)
(269)
(398)
14,756
2081.66
(1,852)
(2,340)
(2,498)
Terminal
Value
18,084
2076.62
(1,923)
1,492
1303.83
86.15
115.61
129.14
158.46
188.59
7,370
11,101
10,507
12,646
19,730
320,600
$6,708.12 $9,196.15 $7,922.11 $8,678.76 $12,323.80 $200,252.21
Calculation of Implied Share Price
Implied Enterprise value
$245,081.16
Less Debt
0
Implied Market Value
$245,081.16
Number of shares outstanding
55,860
Price
$4.39
Sensitivity Table
Terminal Growth
4.39 2.50% 3.00% 3.50% 4.00% 4.50%
8.87% 4.54 4.88
5.28 5.76 6.35
4.79 5.19 5.66
Discount 9.37% 4.18 4.46
Rate
9.87% 3.87 4.11
4.39 4.71 5.10
10.37% 3.60 3.81
4.04 4.31 4.63
10.87% 3.36 3.54
3.74 3.97 4.24
Comparable Analysis
• Product and Service
• Messaging infrastructure
protection
• Data loss prevention, encryption
• Enforcement of data governance
• Email encryption
• Data loss prevention
• BYOD: a mobile email app, prevent
data from being stored on device
BYOD: To enable IT to securely manage
mobile devices across mobile operating
systems and provide secure corporate
email, automatic device configuration,
and certificate-based security.
• Customers by industry
Financial Service
Healthcare
Government
Education
Pharmaceutical
Manufacturing
Retail
ZIXI
√
√
√
PFPT
√
√
√
√
√
√
√
MOBL
√
√
√
√
√
√
√
Comparable Ratio
• ZIXI had positive net profit
• ZIXI and MOBL did not have
debt
• All three companies had a large
number of deferred revenue
recorded as liability, causing the
large leverage ratio
• MOBL have a negative NI and
positive tax expense
Comparable Valuation
Multiple
Ticker
ZIXI
MOBL
PFPT
Price/Book Value
5.31
4.2x
37.7x
Price/Sales
5.34
2.2x
11.6x
Ticker
MOBL
PFPT
Comparable Statistics
MOBL
PFPT
Implied ZIXI Share Price
Price/Book Value
0.90
0.10
Price/Sales
0.50
0.50
Weight
3.82
3.77
$ 7.33
Weighted Average Stock Price $ 6.98
1.09
5.82
$ 6.64
Buiness Overview
Industry Overview
Macroeconomic Overview
Financial Analysis
Projection & Valuation
Technical Analysis
Recommendation
Technical Analysis
Source: Yahoo Finance
Buiness Overview
Industry Overview
Macroeconomic Overview
Financial Analysis
Technical Analysis
Projection & Valuation
Recommendation
Recommendation
HOLD
External Drivers
• Growing BYOD
solution
• Growing email
encryption industry
DCF Valuation
• $6.52 per share
under scenario 1
(exc. Tax benefit)
valuation
• Additional rate of
return of 20%
Technical &
Comparable
Valuation
• Comparable
valuation is still
atractive
• Technical analysis,
SMA 20 above SMA
200
Acquisition Target
• Zix could be an
attractive
acquisition target
with its unique
business and high
tax loss carry
forward reserve