ZIXI Zix Corp

Zix Corporation (NASDAQ: ZIXI), the leader in email encryption services, today announced financial results for the third quarter ended Sept. 30, 2011.

Third Quarter 2011 Financial Highlights

• The Company achieved third quarter revenue from continuing operations of $9.6 million, an increase of 11.8%, year-over-year
• Third quarter GAAP net income of $0.04 per share, an increase of 47%, year-over-year
• Third quarter Non-GAAP net income of $0.04 per share, an increase of 13%, year-over-year
• Cash flow from operations for the third quarter of $4.8 million, an increase of $2.7 million, year-over-year
• Cash, cash equivalents and commercial paper investments totaling $22 million, an increase of $2.5 million compared to the ending cash balance for the third quarter last year

“ZixCorp’s industry-leading technology matched with our recurring revenue business model continues to translate into steady growth, as evident in third quarter financials,” said Rick Spurr, ZixCorp’s Chairman and Chief Executive Officer.

Third Quarter 2011 Corporate Financial Summary and Other Operational Metrics

$ in Millions, except per share data     Q3 2011     Q3 2010     % or $

Change (1)

Revenue (2)     $9.6     $8.5     11.8% GAAP Gross Profit (2)     $7.8     $6.9     12.8% GAAP Net Income     $2.6     $1.8     45.4% GAAP Net Income Per Share - Diluted     $0.04     $0.03     47% Non-GAAP Adjusted Gross Profit (2) (3)     $7.8     $6.9     12.4% Non-GAAP Adjusted Net Income (3)     $2.8     $2.5     11.4% Non-GAAP Adjusted Net Income Per Share-Diluted (3)     $0.04     $0.04     12.6%

Adjusted EBITDA (3) (4)

    $3.2     $2.9     12.9% Adjusted EBITDA Margin (3) (4)     33.7%     33.4%     0.3pts Email Encryption New First Year Orders     $1.6     $2.2     (25%) Email Encryption Total Orders     $9.7     $9.7     0% Email Encryption Bookings Backlog (5)     $52.6     $46.6     12.9%

(1) Changes reported are based on actual results, and numbers shown in the columns may reflect rounding

(2) Amounts indicated are from continuing operations

(3) A reconciliation of GAAP to Non-GAAP adjusted results is attached to this press release and is 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

Business Highlights

• 7-Eleven, Inc. signed a three-year renewal agreement with ZixCorp. The contract is the third, multi-year service agreement between 7-Eleven and ZixCorp. 7-Eleven leverages secure email to communicate confidential agreements, invoices and updates to partners, as well as protect internal email of sensitive employee information, intellectual property and executive exchanges.
• ZixCorp sponsored a study of “The State of Email Encryption.” Conducted independently by the Ponemon Institute, the study surveyed 830 IT, IT security and compliance practitioners. Among its key findings, the study revealed:
  • The majority of respondents strongly agree or agree that the use of email by employees is one of the main sources of data leakage in their organizations
  • Seventy percent of respondents are concerned about the loss of information via email on mobile devices
  • Seventy-one percent of respondents viewed ease of use for recipients as important or very important; similarly, 68 percent of respondents viewed ease of use for senders as important or very important
• Acknowledging ZixCorp® Email Encryption Services as one of its “best vendor solutions,” Kennedy Health System (Kennedy) signed a five-year renewal agreement. Kennedy uses ZixGateway® to protect the email communication of 2,000 hospital employees and to enable sending transparent, encrypted email to nearly 500 business partners.
• ZixCorp was issued U.S. patent 8,027,923, titled "Certified Transmission System," on Sept. 27, 2011. This is the company's second issued patent for a method of providing certified receipt of an encrypted email message. ZixCorp also owns U.S. patent 7,353,204, which was issued April 1, 2008, and is also titled “Certified Transmission System.”

Outlook

The Company expects to reach the high-end of its previously disclosed guidance for full-year 2011 adjusted earnings per share of $0.16 per share on a fully diluted basis and will be near the low-end of its previously disclosed guidance on full-year 2011 revenue of approximately $38 million.

Conference Call Information

The Company will discuss its financial results and outlook on a conference call on Tuesday, Oct. 25, 2011, 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 1-866-277-1181 (U.S. toll-free) or 1-617-597-5358 (international) at least 15 minutes before the call and entering access code 66739983. An audio replay of the conference will be available until Nov. 1, 2011, by dialing 1-888-286-8010 (U.S. toll-free) or 1-617-801-6888 (international) and entering the access code 84871805. An archive of the webcast will also be available on the ZixCorp investor relations Web site.

Corporate Governance

ZixCorp announced, in accordance with Nasdaq Stock Market Rule 5635, that the Company awarded an aggregate of 108,000 inducement stock options to two new employees in the past 20 months. As previously disclosed in a SEC filing on Form 4, ZixCorp granted 100,000 of these options to James F. Brashear in February 2010, when he was hired as General Counsel. ZixCorp also granted 8,000 of these options in July 2011 to a new, non-executive employee. Exercise prices of these options range from $1.82 to $3.89 per share, with a weighted average exercise price of $1.97. These options vest quarterly, pro rata, during the three years from the date of grant.

About Zix Corporation

Zix Corporation (ZixCorp) provides the only email encryption services designed with your most important relationships in mind. Many of the most influential companies and government organizations use the proven ZixCorp® Email Encryption Services, including WellPoint, Humana, the SEC, and more than 1,200 hospitals and 1,600 financial institutions. ZixCorp Email Encryption Services are powered by ZixDirectory®, the largest email encryption community in the world. The tens of millions of ZixDirectory members can feel secure knowing their most important relationships are protected. 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 new orders, 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 how privacy law mandates may affect demand for email encryption and ZixCorp’s ability to obtain and retain customers and grow revenues. 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       September 30,   2011 December 31, (unaudited) 2010 ASSETS Current assets: Cash and cash equivalents $ 19,738,000 $ 24,619,000 Commercial paper 2,290,000 - Receivables, net 891,000 1,344,000 Prepaid and other current assets 1,026,000 1,115,000 Deferred tax assets   950,000   1,056,000 Total current assets 24,895,000 28,134,000 Property and equipment, net 2,196,000 2,209,000 Goodwill 2,161,000 2,161,000 Deferred tax assets 34,407,000 34,304,000 Other assets   -   44,000 Total assets $ 63,659,000 $ 66,852,000     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,489,000 $ 2,844,000 Deferred revenue 17,346,000 15,331,000 License subscription note payable   -   137,000 Total current liabilities 19,835,000 18,312,000 Long-term liabilities: Deferred revenue 745,000 1,439,000 License subscription note payable, non-current - 49,000 Deferred rent   155,000   165,000 Total long-term liabilities   900,000   1,653,000 Total liabilities 20,735,000 19,965,000 Total stockholders’ equity   42,924,000   46,887,000 Total liabilities and stockholders’ equity $ 63,659,000 $ 66,852,000     ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)             Three Months Ended September 30,   Nine Months Ended September 30,   2011     2010     2011     2010   Revenues $ 9,558,000 $ 8,548,000 $ 28,260,000 $ 24,221,000   Cost of revenues   1,789,000     1,662,000     5,362,000     4,734,000   Gross profit 7,769,000 6,886,000 22,898,000 19,487,000 Operating expenses: Research and development 1,343,000 1,261,000 3,948,000 3,817,000 Selling, general and administrative   3,754,000     4,026,000     11,310,000     12,242,000   Total operating expenses   5,097,000     5,287,000     15,258,000     16,059,000     Operating income 2,672,000 1,599,000 7,640,000 3,428,000 Operating margin 28 % 19 % 27 % 14 %   Other income, net 18,000 22,000 79,000 66,000   Income from continuing operations before income taxes 2,690,000 1,621,000 7,719,000 3,494,000 Income tax (expense) benefit   (119,000 )   50,000     (132,000 )   80,000   Income from continuing operations 2,571,000 1,671,000 7,587,000 3,574,000   Discontinued operations

Income from operations of discontinued e-Prescribing segment

- 150,000 - 628,000 Income tax expense   -     (53,000 )   -     (221,000 ) Income on discontinued operations (Note 1) - 97,000 - 407,000   Net income $ 2,571,000   $ 1,768,000   $ 7,587,000   $ 3,981,000     Basic income per common share: Income from continuing operations $ 0.04 $ 0.03 $ 0.12 $ 0.05 Income from discontinued operations   -     -     -     0.01   Net income $ 0.04   $ 0.03   $ 0.12   $ 0.06     Diluted income per common share: Income from continuing operations $ 0.04 $ 0.03 $ 0.11 $ 0.05 Income from discontinued operations   -     -     -   $ 0.01   Net income $ 0.04   $ 0.03   $ 0.11   $ 0.06     Shares used in per share calculation - basic   64,140,926     64,148,452     65,499,763     63,973,102     Shares used in per share calculation - diluted   65,927,794     66,636,460     67,727,404     66,170,440  

Note: EPS totals off due to rounding

    Note 1 Three Months Ended Sept. 30, Nine Months Ended Sept. 30, Components of Income from discontinued operations:   2011     2010     2011     2010     Revenue from discontinued operations $ - $ 492,000 $ - $ 2,150,000 Expenses from discontinued operations - 342,000 - 1,522,000 Tax expense   -     (53,000 )   -     (221,000 ) Income from discontinued operations $ -   $ 97,000   $ -   $ 407,000       ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)       Nine Months Ended September 30,   2011       2010   Operating activities: Net income $ 7,587,000 $ 3,981,000 Non-cash items in net income 1,436,000 2,589,000 Changes in operating assets and liabilities   1,638,000     (99,000 ) Net cash provided by operating activities 10,661,000 6,471,000   Investing activities: Purchases of property and equipment (1,103,000 ) (1,150,000 ) (Purchase) sale of marketable securities   (2,290,000 )   25,000   Net cash used in investing activities (3,393,000 ) (1,125,000 )   Financing activities: Proceeds from exercise of stock options 1,778,000 1,032,000 Proceeds from exercise of warrants 1,259,000 - Payment of license subscription note payable (186,000 ) (94,000 ) Purchase of Treasury Stock   (15,000,000 )   -   Net cash (used by) provided by financing activities   (12,149,000 )   938,000     (Decrease) increase in cash and cash equivalents (4,881,000 ) 6,284,000 Cash and cash equivalents, beginning of period   24,619,000     13,287,000   Cash and cash equivalents, end of period $ 19,738,000   $ 19,571,000       ZIX CORPORATION RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)         Three Months Ended     Nine Months Ended September 30, September 30,   2011       2010     2011       2010   Revenue: GAAP revenue $ 9,558,000   $ 8,548,000   $ 28,260,000   $ 24,221,000     Gross profit: GAAP gross profit $ 7,769,000 $ 6,886,000 $ 22,898,000 $ 19,487,000 Stock-based compensation charges (1) (A)   21,000     43,000     45,000     123,000   Non-GAAP adjusted gross profit $ 7,790,000   $ 6,929,000   $ 22,943,000   $ 19,610,000     Operating income: GAAP operating income $ 2,672,000 $ 1,599,000 $ 7,640,000 $ 3,428,000 Stock-based compensation charges (1) (A) 196,000 530,000 413,000 1,450,000 Non-recurring severance payments (2) (B) - 169,000 - 258,000 Expenses related to wind down of e-Prescribing business (3) (C)   -     2,000     -     4,000   Non-GAAP adjusted operating income $ 2,868,000   $ 2,300,000   $ 8,053,000   $ 5,140,000     Income from continuing operations: GAAP income from continuing operations $ 2,571,000 $ 1,671,000 $ 7,587,000 $ 3,574,000 Stock-based compensation charges (1) (A) 196,000 530,000 413,000 1,450,000 Non-recurring severance payments (2) (B) - 169,000 - 258,000 Expenses related to wind down of e-Prescribing business (3) (C) - 2,000 - 4,000 Income tax impact (D)   -     (54,000 )   4,000     (212,000 ) Non-GAAP adjusted income from continuing operations $ 2,767,000   $ 2,318,000   $ 8,004,000   $ 5,074,000     Income from discontinued operations: GAAP income on discontinued operations $ - $ 97,000 $ - $ 407,000 Stock-based compensation charges (1) (A) - 9,000 - 86,000 Non-recurring severance payments (2) (B) - 7,000 - 90,000 Expenses related to wind down of e-Prescribing business (3) (C) - - - 8,000 Income tax impact (D)   -     53,000     -     221,000   Non-GAAP adjusted income from discontinued operations $ -   $ 166,000   $ -   $ 812,000     Net income: GAAP net income $ 2,571,000 $ 1,768,000 $ 7,587,000 $ 3,981,000 Stock-based compensation charges (1) (A) 196,000 539,000 413,000 1,536,000 Non-recurring severance payments (2) (B) - 176,000 - 348,000 Expenses related to strategic review and wind down of e-Prescribing business (3) (C) - 2,000 - 12,000 Income tax impact (D)   -     (1,000 )   4,000     9,000   Non-GAAP adjusted net income $ 2,767,000   $ 2,484,000   $ 8,004,000   $ 5,886,000     Diluted income from continuing operations per common share: GAAP income from continuing operations $ 0.04 $ 0.02 $ 0.11 $ 0.06 Adjustments per share

(A-D)

$ 0.00   $ 0.01   $ 0.01   $ 0.02   Non-GAAP adjusted income from continuing operations $ 0.04   $ 0.03   $ 0.12   $ 0.08     Diluted net income per common share: GAAP net income $ 0.04 $ 0.03 $ 0.11 $ 0.06 Adjustments per share (A-D) $ 0.00   $ 0.01   $ 0.01   $ 0.03   Non-GAAP adjusted net income $ 0.04   $ 0.04   $ 0.12   $ 0.09     Shares used to compute Non-GAAP adjusted net income per share - diluted   65,927,794     66,636,460     67,727,404     66,170,440     Reconciliation of Net income to EBITDA and Adjusted EBITDA: (E) Net income $ 2,571,000 $ 1,768,000 $ 7,587,000 $ 3,981,000 Income tax provision 119,000 3,000 132,000 141,000 Interest expense (10,000 ) 5,000 (3,000 ) 17,000 Depreciation expense   348,000     362,000     1,020,000     1,047,000   EBITDA 3,028,000 2,138,000 8,736,000 5,186,000   Adjustments: Share-based compensation expense (A) 196,000 539,000 413,000 1,536,000 Non-recurring severance payments (B) - 176,000 - 348,000 Expenses related to strategic review and wind down of e-Prescribing business (C)   -     2,000     -     12,000   Adjusted EBITDA $ 3,224,000   $ 2,855,000   $ 9,149,000   $ 7,082,000     Adjusted EBITDA margin 33.7 % 33.4 % 32.4 % 29.2 %   (1) Stock-based compensation charges are included as follows: Cost of revenues $ 21,000 $ 43,000 $ 45,000 $ 123,000 Research and development 20,000 48,000 47,000 139,000 Selling, general and administrative 155,000 439,000 321,000 1,188,000 Discontinued operations   -     9,000     -     86,000   $ 196,000   $ 539,000   $ 413,000   $ 1,536,000   (2) Non-recurring severance payments are included as follows: Selling, general and administrative - 169,000 - 258,000 Discontinued operations   -     7,000     -     90,000   $ -   $ 176,000   $ -   $ 348,000   (3) Expenses related to strategic review and the wind down of e-Prescribing business are as follows: Selling, general and administrative - 2,000 - 4,000 Discontinued operations   -     -     -     8,000   $ -   $ 2,000   $ -   $ 12,000  

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 (E) on the next page.

ZIX CORPORATIONNOTES 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 Gross profit, Operating income, Income from continuing operations, Income from discontinued operations, Net income, Income per share - diluted from continuing operations, Net income per share - diluted, and EBITDA for non-cash stock-based compensation expense, non-recurring severance expenses and expense related to the wind down of our e-Prescribing business to derive Non-GAAP adjusted Gross profit, adjusted Operating income, adjusted Income from continuing operations, adjusted Income from discontinued operations, adjusted Net income, adjusted Income per share - diluted from continuing operations, 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, Income from continuing operations, Income from discontinued operations, Net income, Income per share - diluted from continuing operations, 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. At this time, such one-time transactions are unknown and not available. Estimates of these one-time items may differ materially from actual results. See items (A) through (C) below for further information on the current quarter's reconciling items.

Items (A) through (E) 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 from continuing operations," "Net income from discontinued operations," "Net income," "Net income from continuing operations per share - diluted," "Net income per share - diluted" and "EBITDA" and correspond to the categories explained in further detail below under (A) through (E).

(A) Non-cash stock-based compensation charges relating to stock option grants awarded to employees and third-party service providers 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) Severance payments related to reduction in workforce. See item (2) on previous page for breakdown of severance payments. 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) Expenses related to strategic review and wind down of the Company’s e-Prescribing business segment. The Company’s management excludes these costs when evaluating the ongoing performance and/or predicting its earnings trends and therefore excludes these charges when presenting Non-GAAP financial measures.

(D) 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.

(E) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based compensation, severance payments and expenses relating to the wind down of the Company's e-Prescribing business.