ZIXI Zix Corp

Company successfully launched two new solutions and continued to set records in backlog, revenue and adjusted earnings per share

Zix Corporation (NASDAQ: ZIXI), a leader in email data protection, today announced financial results for the fourth quarter and full year ended Dec. 31, 2013.

Fourth Quarter 2013 Financial Highlights

• Fourth quarter new first year orders of $2.3 million
• Fourth quarter revenue of $12.3 million, an increase of 5.3% year-over-year, the Company’s 20th consecutive quarterly record in revenue
• Fourth quarter GAAP net income of $0.08 per share, an increase of 19.5% year-over-year (1)
• Fourth quarter Non-GAAP net income of $0.06 per share, an increase of 24.9% year-over-year (1) (3)
• The Company generated approximately $3.5 million in cash flow from operations, an increase of $3.1 million year-over-year

Full-Year 2013 Financial Highlights

• Ending backlog of $65.7 million, an increase of 13.9% from the prior year end and a record high for the Company
• Full-year new first year orders of $9.0 million, flat in comparison to the prior year (0.3% increase) despite what we currently believe to be a temporary slow-down of new sales from our largest OEM partner
• Full-year revenue of $48.1 million, an increase of 11.0% year-over-year and a record high for the Company
• Full-year GAAP net income of $0.17 per share, down $0.01 year-over-year due to changes in deferred tax valuation allowances (1)
• Full-year Non-GAAP net income of $0.19 per share, an increase of 4.8% year-over-year and a record high for the Company (1) (3)
• The Company generated approximately $13.3 million in cash flow from operations for the full year ended Dec. 31, 2013, an increase of $0.8 million year-over-year
• Cash and cash equivalents at year-end was $27.5 million, despite $8.9 million spent on share repurchases during 2013. This $27.5 million is an increase of $4.5 million compared to the ending cash balance for 2012

“Zix achieved a new milestone in 2013 successfully launching two new solutions – ZixOne and ZixDLP – building on our reputation as a leader in email data protection. With ZixOne, we entered the Bring-Your-Own-Device market, one of the hottest trends to emerge in IT. Our next generation approach allows employees to access corporate data in the cloud rather than downloading the corporate data to their personal devices where it can be lost or stolen. This approach maximizes corporate data security and leaves employees in complete control of their personal information. We introduced these new products and, at the same time, delivered new record backlog, revenue and adjusted earnings per share,” said Rick Spurr, ZixCorp’s Chairman and Chief Executive Officer. “We are proud of what we accomplished last year and excited about 2014. We believe that our leadership in and reputation for innovative, easy-to-use technology combined with increased investments in sales and marketing will enable us to gain momentum in the Bring-Your-Own-Device market and further expand adoption of our email encryption and DLP solutions.”

Fourth Quarter and Full-Year 2013 Corporate Financial Summary and Other Operational Metrics

$ in Millions, except per share data    

Q42013

   

Q42012

   

% or $Change (2)

   

FY2013

   

FY2012

   

% or $Change (2)

Revenue     $12.3     $11.7     5.3%     $48.1     $43.4     11.0% GAAP Gross Profit     $10.4     $9.6     8.4%     $40.5     $35.7     13.4% GAAP Net Income (1)     $4.8     $4.0     21.3%     $10.5     $11.0     (5.0%) GAAP Net Income Per Share – Diluted (1)     $0.08     $0.06     19.5%     $0.17     $0.17     (4.5%) Non-GAAP Adjusted Gross Profit (3)     $10.5     $9.7     8.3%     $40.7     $35.9     13.4% Non-GAAP Adjusted Net Income (3)     $3.8     $3.0     26.8%     $12.1     $11.6     4.2% Non-GAAP Adjusted Net Income Per Share – Diluted (3)     $0.06     $0.05     24.9%     $0.19     $0.18     4.8% Adjusted EBITDA (3) (4)     $4.3     $3.4     27.8%     $13.9     $13.3     5.0% Adjusted EBITDA Margin (3) (4)     35.0%     28.9%     6.2pts     29.0%     30.6%     (1.7pts) New First Year Orders     $2.3     $2.2     5.9%     $9.0     $9.0     0.3% Total Orders     $14.1     $12.9     9.0%     $56.6     $48.2     17.3% Backlog (5)     $65.7     $57.7     13.9%                                           (1)  

GAAP Net Income for the quarters and years ended Dec. 31, 2013, and Dec. 31, 2012, include tax benefits of $1.4 million and $2.3 million, respectively, resulting from reductions to the deferred tax valuation allowance

(2) Changes are based on actuals versus numbers shown in the columns which may reflect rounding (3)

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

(4) Adjusted earnings before interest, taxes, depreciation and amortization (5) Service contract commitments that represent future revenue to be recognized as the services are provided  

Fourth Quarter Business Highlights

• The Company’s board of directors approved a share repurchase program that enables the Company to purchase up to $15 million of its shares of common stock from time to time in the open market. The share repurchase program is scheduled to expire on June 30, 2014

Outlook

Beginning in the first quarter of 2014, the Company expects to meaningfully increase its investment in sales and marketing. These investments are aimed at increasing momentum of ZixOne in the Bring-Your-Own-Device market and to further expand adoption of our email encryption and DLP solutions. The new sales benefits from these investments, if successful, would begin in 2014 while much of the revenue benefits would be deferred until 2015 due to revenue recognition timing of the Company’s subscription model. Taking this into consideration, for the first quarter 2014, the Company forecasts revenue to be between $12.2 million and $12.5 million and fully diluted adjusted earnings per share to be between $0.02 and $0.03. Full-year 2014 revenue is projected to be between $53 million and $55 million. Fully diluted Non-GAAP adjusted earnings per share, which are adjusted primarily for non-cash stock-based compensation and non-recurring expense items, are projected to be between $0.15 and $0.17.

Conference Call Information

The Company will discuss its financial results and outlook on a conference call on Tuesday, Feb. 18, 2014, at 5 p.m. ET. A live webcast of the conference call will be available on its investor relations Web site at http://investor.zixcorp.com. Alternatively, participants can access the conference call by dialing 1-877-415-3186 (U.S. toll-free) or 1-857-244-7329 (international) at least 15 minutes before the call and entering access code 26195100.

An audio replay of the conference will be available until Feb. 25, 2014, by dialing 1-888-286-8010 (U.S. toll-free) or 1-617-801-6888 (international) and entering the access code 32800127. An archive of 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 or earnings, 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 market acceptance of new ZixCorp solutions and how privacy and data security laws may affect demand for ZixCorp email data protection solutions. 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             December 31, 2013 December 31, (unaudited) 2012 ASSETS Current assets: Cash and cash equivalents $ 27,518,000 $ 22,988,000 Receivables, net 2,324,000 967,000 Prepaid and other current assets 2,038,000 1,697,000 Deferred tax assets   1,814,000   1,600,000 Total current assets 33,694,000 27,252,000 Property and equipment, net 2,608,000 2,384,000 Goodwill 2,161,000 2,161,000 Deferred tax assets   52,239,000   51,052,000 Total assets $ 90,702,000 $ 82,849,000     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,487,000 $ 3,156,000 Deferred revenue   19,080,000   17,470,000 Total current liabilities 21,567,000 20,626,000 Long-term liabilities: Deferred revenue 1,278,000 902,000 Deferred rent   1,623,000   76,000 Total long-term liabilities   2,901,000   978,000 Total liabilities 24,468,000 21,604,000 Total stockholders’ equity   66,234,000   61,245,000 Total liabilities and stockholders’ equity $ 90,702,000 $ 82,849,000     ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)                      

Three Months Ended December 31,

Twelve Months Ended December 31, 2013 2012 2013 2012 Revenue $ 12,311,000 $ 11,689,000 $ 48,138,000 $ 43,356,000   Cost of revenue   1,871,000     2,055,000     7,614,000     7,609,000   Gross profit 10,440,000 9,634,000 40,524,000 35,747,000 Operating expenses: Research and development 2,119,000 2,431,000 9,563,000 7,419,000 Selling, general and administrative   4,839,000     5,665,000     21,646,000     19,385,000   Total operating expenses   6,958,000     8,096,000     31,209,000     26,804,000     Operating income 3,482,000 1,538,000 9,315,000 8,943,000

Operating margin

28 % 13 % 19 % 21 %   Other income, net (9,000 ) 95,000 132,000 111,000   Income before income taxes 3,473,000 1,633,000 9,447,000 9,054,000 Income tax benefit (expense)   1,367,000     2,358,000     1,006,000     1,949,000   Net income $ 4,840,000   $ 3,991,000   $ 10,453,000   $ 11,003,000     Basic income per common share: $ 0.08   $ 0.07   $ 0.17   $ 0.18       Diluted income per common share: $ 0.08   $ 0.06   $ 0.17   $ 0.17     Shares used in per share calculation - basic   61,039,115     60,913,533     61,139,035     62,211,228     Shares used in per share calculation - diluted   62,553,160     61,633,224     62,526,507     62,875,347       ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)            

Twelve Months Ended December 31,

2013 2012 Operating activities: Net income $ 10,453,000 $ 11,003,000 Non-cash items in net income 1,776,000 224,000 Changes in operating assets and liabilities   1,069,000     1,306,000   Net cash provided by operating activities 13,298,000 12,533,000   Investing activities: Purchases of property and equipment   (1,593,000 )   (1,533,000 ) Net cash used in investing activities (1,593,000 ) (1,533,000 )   Financing activities: Proceeds from exercise of stock options 1,705,000 308,000 Purchase of Treasury Stock   (8,880,000 )   (9,000,000 ) Net cash used in financing activities   (7,175,000 )   (8,692,000 )   Increase (Decrease) in cash and cash equivalents 4,530,000 2,308,000 Cash and cash equivalents, beginning of period   22,988,000     20,680,000   Cash and cash equivalents, end of period $ 27,518,000   $ 22,988,000       ZIX CORPORATION RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)          

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2013 2012 2013 2012 Revenue: GAAP revenue $ 12,311,000   $ 11,689,000   $ 48,138,000   $ 43,356,000   Cost of revenue GAAP cost of revenue $ 1,871,000 $ 2,055,000 $ 7,614,000 $ 7,609,000 Stock-based compensation charges (1) (A)   (38,000 )   (41,000 )   (172,000 )   (135,000 ) Non-GAAP adjusted cost of revenue $ 1,833,000   $ 2,014,000   $ 7,442,000   $ 7,474,000   Gross profit: GAAP gross profit $ 10,440,000 $ 9,634,000 $ 40,524,000 $ 35,747,000 Stock-based compensation charges (1) (A)   38,000     41,000     172,000     135,000   Non-GAAP adjusted gross profit $ 10,478,000   $ 9,675,000   $ 40,696,000   $ 35,882,000   Research and development expense GAAP research and development expense $ 2,119,000 $ 2,431,000 $ 9,563,000 $ 7,419,000 Stock-based compensation charges (1) (A)   (51,000 )   (51,000 )   (212,000 )   (142,000 ) Non-GAAP adjusted research and development expense $ 2,068,000   $ 2,380,000   $ 9,351,000   $ 7,277,000   Selling and marketing expense GAAP selling and marketing expense $ 3,078,000 $ 2,974,000 $ 13,416,000 $ 10,984,000 Stock-based compensation charges (1) (A)   (122,000 )   (114,000 )   (507,000 )   (360,000 ) Non-GAAP adjusted selling and marketing expense $ 2,956,000   $ 2,860,000   $ 12,909,000   $ 10,624,000   General and administrative expense GAAP general and administrative expense $ 1,761,000 $ 2,691,000 $ 8,230,000 $ 8,401,000 Stock-based compensation charges (1) (A) (202,000 ) (165,000 ) (820,000 ) (539,000 ) Non-recurring litigation costs (2) (B)   (38,000 )   (1,014,000 )   (1,324,000 )   (1,712,000 ) Non-GAAP adjusted general and administrative expense $ 1,521,000   $ 1,512,000   $ 6,086,000   $ 6,150,000   Operating income: GAAP operating income $ 3,482,000 $ 1,538,000 $ 9,315,000 $ 8,943,000 Stock-based compensation charges (1) (A) 413,000 371,000 1,711,000 1,176,000 Non-recurring litigation costs (2) (B)   38,000     1,014,000     1,324,000     1,712,000   Non-GAAP adjusted operating income $ 3,933,000   $ 2,923,000   $ 12,350,000   $

11,831,000

  $

 

Adjusted Operating Margin 31.9 % 25.0 % 25.7 % 27.3 %   Net income: GAAP net income $ 4,840,000 $ 3,991,000 $ 10,453,000 $ 11,003,000 Stock-based compensation charges (1) (A) 413,000 371,000 1,711,000 1,176,000 Non-recurring litigation costs (2) (B) 38,000 1,014,000 1,324,000 1,712,000 Income tax impact (C)   (1,489,000 )   (2,377,000 )   (1,401,000 )   (2,295,000 ) Non-GAAP adjusted net income $ 3,802,000   $ 2,999,000   $ 12,087,000   $ 11,596,000     Diluted net income per common share: GAAP net income $ 0.08 $ 0.06 $ 0.17 $ 0.17 Adjustments per share (A-C) $ (0.02 ) $ (0.01 ) $ 0.02   $ 0.01   Non-GAAP adjusted net income $ 0.06   $ 0.05   $ 0.19   $ 0.18   Shares used to compute Non-GAAP adjusted net income per share - diluted   62,553,160     61,633,224     62,526,507     62,875,347   Reconciliation of Net income to EBITDA and Adjusted EBITDA: (D) Net income $ 4,840,000 $ 3,991,000 $ 10,453,000 $ 11,003,000 Income tax provision (1,367,000 ) (2,358,000 ) (1,006,000 ) (1,949,000 ) Interest expense - - - 1,000 Depreciation expense   388,000     355,000     1,466,000     1,343,000   EBITDA 3,861,000 1,988,000 10,913,000 10,398,000   Adjustments: Share-based compensation expense (A) 413,000 371,000 1,711,000 1,176,000 Non-recurring litigation costs (B)   38,000     1,014,000     1,324,000     1,712,000   Adjusted EBITDA $ 4,312,000   $ 3,373,000   $ 13,948,000   $ 13,286,000     Adjusted EBITDA margin 35.0 % 28.9 % 29.0 % 30.6 %   (1) Stock-based compensation charges are included as follows: Cost of revenues $ 38,000 $ 41,000 $ 172,000 $ 135,000 Research and development 51,000 51,000 212,000 142,000 Selling and marketing 122,000 114,000 507,000 360,000 General and administrative   202,000     165,000     820,000     539,000   $ 413,000   $ 371,000   $ 1,711,000   $ 1,176,000   (2) Non-recurring litigation costs are included as follows: General and administrative   38,000     1,014,000     1,324,000     1,712,000   $ 38,000   $ 1,014,000   $ 1,324,000   $ 1,712,000    

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.

ZixCorpInvestor RelationsTodd Kehrli or Jim Byers, 323-468-2300zixi@mkr-group.comorPublic RelationsTaylor Stansbury Johnson, 214-370-2134tjohnson@zixcorp.com