ZIX CORPORATION OCTOBER 15, 2013 Dan Ballantine, Alexander Johansson & Ye Liang
Dec 23, 2015
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 Largest Shared Email Encryption Community
Zix Research CenterSource: 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
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 clearinghousesAlso 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
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 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 competitorsSource: 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 2013ZixONE; 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
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
Current Stock Information
Source: Capital IQ, Yahoo Finance
Metric Value
Current Stock Price
$4.85
Trailing P/E
36.62
Forward P/E
20.70
Market Cap ($ millions)
$297.00
Financial Analysis
2008 2009 2010 2011 2012Current Ratio 0.83 0.82 1.54 1.29 1.32 Quick Ratio 0.77 0.76 1.42 1.13 1.16 Cash Ratio 0.74 0.72 1.34 1.10 1.11
2008 2009 2010 2011 2012Operating Profit Margin -21.42% -14.88% 15.56% 27.73% 20.63%Net Margin -19.41% -14.47% 125.45% 59.13% 25.38%ROA -28.03% -22.68% 95.80% 31.24% 13.72%ROE (Book Value) 683.67% 269.44% 184.78% 43.11% 18.49%
2008 2009 2010 2011 2012Debt/Assets 0.92 0.89 0.25 0.23 0.22 Debt/Equity NM NM 0.36 0.30 0.30 Interest Coverage NM NM 233.91 1,511.00 8,943.00
Liquidity Ratios
Profitability Ratios
Solvency Ratios
Financial Analysis
2008 2009 2010 2011 2012A/R Turnover 35.15 49.60 31.43 37.25 51.89 Days Sales Outstanding 10.38 7.36 11.61 9.80 7.03 A/P Turnover 26.51 12.24 7.52 13.17 16.97 Days Payable Outstanding 13.77 29.81 48.53 27.71 21.51 Fixed Asset Turnover 12.37 14.02 15.22 17.19 18.80 Total Asset Turnover 1.44 1.57 0.76 0.53 0.54
2008 2009 2010 2011 2012Tax Burden 100.78% 101.53% 794.67% 211.48% 121.53%Interest Burden 89.91% 95.77% 101.44% 100.83% 101.24%Operating Profit Margin -21.42% -14.88% 15.56% 27.73% 20.63%Asset Turnover 144.39% 156.76% 76.36% 52.83% 54.06%Leverage (24.39) (11.88) 1.93 1.38 1.35 ROE 683.67% 269.44% 184.78% 43.11% 18.49%
Activity Ratios
DuPont Analysis
Comparable Companies
Source: Capital IQ
Company Ticker (Exchange)
Market Cap ($millions)
Tucows Inc. TCX (AMEX) $105.44
Axway Software S.A. AXW (ENXTPA) $594.36
Fortinet Inc. FTNT (NASDAQ) $3,446.84
Trend Micro Inc. 4704 (TSE) $5,029.95
Proofpoint, Inc. PFPT (NASDAQ) $1,039.23
USA Technologies Inc. USAT (NASDAQ) $53.17
Zix Corporation ZIXI (NASDAQ) $291.49
Comparable Company Analysis
Source: Capital IQ
Target CompanyTicker Symbol (Exchange)
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA Forward P/E
Zix Corporation ZIXI (NASDAQ) 4.62x 5.14x 16.35x 20.70
Comparable CompaniesTucows Inc. TCX (AMEX) 4.75x 0.78x 10.47x 15.00 Axway Software S.A. AXW (ENXTPA) 1.84x 1.75x 10.97x 18.54 Fortinet Inc. FTNT (NASDAQ) 6.07x 4.60x 20.97x 37.20 Trend Micro Inc. 4704 (TSE) 4.00x 3.32x 12.79x 23.82 Proofpoint, Inc. PFPT (NASDAQ) 27.50x 6.71x NM NMUSA Technologies Inc. USAT (NASDAQ) 2.61x 1.18x 6.42x 25.00
Comparable StatisticsHigh 27.50x 6.71x 20.97x 37.20 Median 4.37x 2.54x 10.97x 23.82 Low 1.84x 0.78x 6.42x 15.00 Mean 7.79x 2.62x 13.80x 23.64
Comparable Company Analysis
Source: Capital IQ
Multiple Low Median High MeanPrice/Book Value 1.89$ 4.50$ 28.32$ 8.03$ Forward TEV/Sales 0.29$ 1.79$ 5.35$ 1.86$ Forward TEV/EBITDA 1.35$ 2.57$ 5.25$ 3.33$ Forward P/E 3.45$ 5.48$ 8.56$ 5.44$
Implied ZIX Share Price
Multiple Weight Implied ZIX Stock Price
Price/Book Value 25% 8.03$ Forward TEV/Sales 25% 1.86$ Forward TEV/EBITDA 25% 3.33$ Forward P/E 25% 5.44$
ZIX Implied Stock Price 4.66$
Discount Rate
Source: Yahoo Finance
CAPM
Risk-Free Rate 2.64%Market Risk Premium 6.00%5-Year Beta 0.41
CAPM Cost of Equity 5.12%
Year Actual1 2.23%2 112.57%3 -36.25%4 16.94%5 67.59%
Total Realized Return 171.51%
Arithmetic Annual Return 32.62%Geometric Annual Return 22.11%
Annual Realized Returns
Discount Rate
Share Price 4.76$ Shares Outstanding (thousands) 61,240.00 Market Value of Equity 291,502.40$
Debt -
Percent Equity Weight 100.00%Percent Debt Weight 0.00%
Cost of DebtCost of Equity
CAPM Cost of Equity 5.12% 50.00%ZIX Realized Return 22.11% 50.00%
Cost of Equity 13.62%
Tax Rate 38.0%
WACC 13.62%
Weighted Average Cost of Capital
Cost of Equity Weightings
DCF Analysis
2013E 2014E 2015E 2016E 2017ETerminal
ValueNet Income 12,615 14,794 18,002 21,460 25,309 Depreciation 1,430 1,472 1,504 1,532 1,558 Capital Expenditures (1,500) (1,525) (1,550) (1,575) (1,600) Changes in Net Working Capital
Less Increases in A/R (130) (107) (115) (46) (121) Less Increases in Inventories - - - - - Plus Increases in A/P 247 227 278 340 361
Free Cash Flow 12,662 14,860 18,119 21,710 25,507 247,484 Present Value 11,145 11,512 12,354 13,029 13,473 130,725
Discount Rate 13.62%
Calculation of Implied Share Price Terminal ValueImplied Enterprise Value 192,238$ Terminal Growth Rate 3.00%Less Debt -$ Plus Cash $22,988Implied Market Cap 215,226$
Implied Share Price 3.51$
Zix Corporation Discounted Cash Flow Analysis ($ thousands)
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