Zix Corporation
November 20, 2014
Agenda
1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Macroeconomic Review
Relevant Stock Market Prospects
Company Review
Financial Analysis
Financial Projection
Application of Valuation Methodologies
Recommendation
Position
• Purchased 2000 shares @ $2.89/share on
April 17, 2012
• Basic cost: $5,780
• Current: 2000 shares @ $3.25/share on
November 19, 2014
• Market value: $6,500
• Holding period : 19 months
• Gain: 12.46%
• Annualized return: 7.82%
Source: Yahoo Finance
Company Review
A Leader in Email Data Protection
• Founded in 1998 as an email encryption company
• Nearly 192 employees in the US and Canada
• Committed to innovative, easy-to-use email
encryption
• Expanded into data loss prevention (DLP) with
email-specific solution
• Innovator in the bring-your-own-device (BYOD)
market
Source: Zix Corporation Investor Relations, page 2
Revenue Origination
Source: Zix Corporation Investor
Relations, page 30
Macroeconomic Outlook
BYOD - “Bring your own device”
• Strong trend & Growing fast
• 81% of Employees use at least one personal device for
business use in 2012.
• The United States, currently the largest BYOD market
with 71 million BYOD devices, will have 108 million by
2016, or a 52% growing rate.
• Security risk
• 90% of users disabled auto-lock for tablets and 75% of
users disabled auto-lock smartphones
• 71% of businesses that permitted BYOD had NO specific
security or support policies
Sources: akuity, 2012; Cisco, 2013; ITIC, 2012
Macroeconomic Outlook
Regulatory drivers
• The Health Insurance Portability and Accountability
Act (HIPAA)
• Health Information Technology for Economic and
Clinical Health Act (the “HITECH Act”)
• Gramm-Leach-Bliley Act (“GLBA”)
• State specific email encryption law
Source:U.S. Department of Health &
Human Services
Industry Analysis
U.S. Software Market Value Forecast
Source: Marketline
Industry Porter’s 5 Forces
• Bargaining Power of Suppliers: NA
• Bargaining Power of Buyers: Moderate to high
• Rivalry: High
• Threat of Substitutes: Low
• Threat of New Entrants: High
Management’s Strategy
• Be a leader and innovator in email data security
• Maintain Ease of Use
• Launch new products to establish the reputation in
email data security
• Expand customer reach through a network of
resellers and other distribution partners
Source: Zix 2013 Annual Report, page 3
Company Products
Email Encryption Services
• Enables the secure exchange of email including
sensitive information
• Allows an enterprise to use policy-driven rules
• Software-as-a-Service (“SaaS”) solution
• Customers pay an annual service subscription fee
Technology
-ZixDirectory
-Best Method of Delivery
-ZixData Center
-ZixResearch Center
ZixGateway
ZixMail
Senders
ZixGateway
ZixAccess
ZixPort
ZixDirect
Receivers
Source: Zix 2013 10-K, page 3
Easy-of-Use
How Zix Different From Other Solutions
Source: Zix Corporation
Investor Presentation, page 9-10
New-launched Products
Email Data Loss Prevention – ZixDLP
March 29, 2013
• Providing a straightforward DLP approach with a
focus strictly on email
• Addresses business’s greatest source of data risk
• Decreases the complexity and cost
• Reduces deployment timelines from month to
hours
• Easy-to-use for both employees and administrators
Source: Zix 2013 10-K, page 3
New-launched Products
BYOD – ZixOne
September 3, 2013
• Enables Android or IOS mobile devices to view
remotely-stored corporate email and to interact
with that data
• Never allows emails to be stored on the device,
where it might be subjected to exposure from theft
or loss of the device
• Not requires employees to relinquish device control
or personal privacy to their employer
Source: Zix 2013 10-K, page 3
Why ZixOne
MDM – Mobile Device Management
• Require individual users to permit their employer
access to and control over personally-owned
smartphones and tablet computers
• Create user concerns about loss of control and
privacy of their devices
ZixOne – Delivering a view of corporate email
on mobile devices in the cloud only
Source: Zix Corporation Investor Relations, page 22-24
SWOT Analysis
• Strengths
•
•
•
•
Easy-of-use
•
Software-as-a-Service (“SaaS”)
A more effective BYOD solution •
protecting business data
High defer tax credit
•
• Weaknesses
•
•
• Opportunities
Cisco ending IronPort Encryption
Appliance
Increased demand on security
of data and communication
Strong trend of BYOD
• Threats
Limited resources
•
Forced to exit business segments
in the past few years
•
•
•
Industry consolidation (M&A,
strategic alliance)
Rapid technology changes
The reliability and sustainability of
data center
The relationships with third-party
distributors
Financial Analysis – Ratio
Liquidity Ratios
2010A 2011A 2012A 2013A
Current Ratio
1.54
1.29
1.32
1.56
Quick Ratio
1.54
1.29
1.32
1.56
Cash to Total Asset
37%
27%
28%
30%
Profitability Ratios
2010A 2011A
Revenue Growth Rate
25.22% 15.36%
Gross Margin
80.44% 81.10%
Operating Margin
15.79% 27.96%
ROA
7.81% 13.75%
ROE (With Tax Benefit)
86.8% 39.0%
ROE (Without Tax Benefit) 11.1% 18.5%
2012A
13.66%
82.45%
20.88%
10.93%
18.0%
14.8%
2013A
11.03%
84.18%
19.62%
10.42%
15.8%
14.3%
Financial Analysis – Ratio
Greenblatt
2010A 2011A 2012A 2013A
43% 137%
99%
63%
3%
5%
6%
4%
EBIT/Tangible Assets
EBIT/EV
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage TA/ TE
2010A 2011A 2012A 2013A
7.80
2.11
1.22
1.11
1.01
1.01
1.01
1.01
16%
28%
21%
19%
0.49
0.49
0.52
0.53
1.43
1.34
1.35
1.37
ROE
86.8%
39.0%
18.0%
15.8%
ROE (Without Tax Benefit)
11.1%
18.5%
14.8%
14.3%
Technical Analysis
Weighted Cost of Capital
Beta
Beta from Yahoo
3yr Beta
2yr Beta
1yr Beta
Adj Beta
CAPM
Risk Free Rate
Market Premium
CAPM
1.15
1.15
1.12
1.63
1.20
2.40%
6%
9%
Return to Owner
2 Year (Annualized)
8%
1 Year
-28%
Half Year (Annualized)
-8%
Adj ZIXI Return to Owner 9%
Graham Growth Rate
Trailing P/E
24.85
Graham Implied g%
8.18%
Capital Structure
Equity
$198,702 100.0%
Total Financing
$198,702 100%
Discount Rate
ZIXI Return to Owner
Graham Implied g%
CAPM
Adj Cost of Equity
Cost of Equity
WACC
Risk Premium
Discount Rate
9%
33%
8.18%
33%
9%
33%
8.7%
8.7% 100.0%
8.7%
3.5%
12.2%
Financial Projection
Income Statement
Historical Figures
Revenues
% growth
Cost of revenues
% of Sales
Gross margin
% margin
R&D
% of Sales
SG&A
% of Sales
Operating income
% margin
Interest expense
% of Sales
Income before income taxes
% margin
Income tax benefit
% of EBT
Income from operations
% margin
2009A 2010A
26,407 33,066
25%
4,576 6,468
17%
20%
21,831 26,598
82.7% 80.4%
3,619 5,089
14%
15%
15,927 16,363
60.31% 49.49%
2,285 5,146
9%
16%
-21
-22
-0.08% -0.07%
2,478 5,220
9%
16%
-67 35,500
-0.3% 107.4%
2,411 40,720
9% 123%
2011A
38,145
15%
7,211
19%
30,934
81.1%
5,229
14%
15,128
39.66%
10,577
28%
-7
-0.02%
10,665
28%
11,889
31.2%
22,554
59%
2012A
43,356
14%
7,609
18%
35,747
82.4%
7,419
17%
19,385
44.71%
8,943
21%
-1
0.00%
9,054
21%
1,949
4.5%
11,003
25%
2013A
48,138
11%
7,614
16%
40,524
84.2%
9,563
20%
21,646
44.97%
9,315
19%
0
0.00%
9,447
20%
1,006
2.1%
10,453
22%
Forecasted Figures
2014E
49,727
3.3%
7,956
16.0%
41,770
84.0%
9,945
20.0%
22,377
45.0%
9,584
19.3%
0
0.0%
9,584
19%
0
0.0%
9,584
19%
2015E
56,191
13.0%
8,991
16.0%
47,200
84.0%
7,867
14.0%
25,286
45.0%
14,202
25.3%
0
0.0%
14,202
25%
0
0.0%
14,202
25%
2016E
62,372
11.0%
9,980
16.0%
52,392
84.0%
8,732
14.0%
28,067
45.0%
15,764
25.3%
0
0.0%
15,764
25%
0
0.0%
15,764
25%
2017E
69,233
11.0%
11,077
16.0%
58,156
84.0%
11,770
17.0%
29,078
42.0%
17,498
25.3%
0
0.0%
17,498
25%
0
0.0%
17,498
25%
2018E
75,464
9.0%
12,074
16.0%
63,390
84.0%
12,829
17.0%
31,695
42.0%
19,073
25.3%
0
0.0%
19,073
25%
0
0.0%
19,073
25%
DCF Analysis
Net earnings pre tax
Depreciation and amortization
Capital expenditures
Change NWC
FCF
PV FCF
Implied Equity Value
Current Share Outstanding
Implied share price
2014
9,584
1,510
(1,641)
(134)
9,588
8,543
$186,448
57,610.4
$3.24
2015
14,202
1,555
(1,690)
(3,516)
17,583
13,961
2016
15,764
1,602
(1,741)
(2,586)
18,212
12,885
2017
17,498
1,650
(1,793)
(2,871)
20,226
12,751
Post 2023
2018 2019-2023 with Tax
19,073
1,699
(1,847)
(2,607)
21,533
426,494
323,708
12,096
97,485
28,726
Discount rate
Terminal Value Growth Rate
12.23%
2.50%
Implied Price
Terminal Growth
Rate
DCF : $3.24
Current Stock Price : 3.25
3.24 11.23%
1.75% $3.41
2.00% $3.48
2.25% $3.55
2.50% $3.62
2.75% $3.70
3.00% $3.79
Discount Rate
11.73% 12.23%
12.73%
$3.23 $3.07
$2.92
$3.29 $3.12
$2.97
$3.35 $3.18
$3.02
$3.42 $3.24
$3.07
$3.49 $3.30
$3.12
$3.56 $3.36
$3.18
13.23%
$2.79
$2.83
$2.87
$2.92
$2.97
$3.02
Key Factors
Pro
•
•
•
•
•
Easy-of-Use
BYOD trend
ZixOne uniqueness
Google partnership
Cisco IronPort Encryption Appliance
Con
• Industry rivalry high
• First year order decreasing
• Weak quarter expectation
• No specific industry alignment
Recommendation
HOLD