Zix Reports Third Quarter 2021 Financial Results

Record Net Dollar Retention of 103.1% Driven by Strong Customer Adoption of CloudAlly and Secure Cloud
18% Increase in Revenue and Annual Recurring Revenue (ARR)
Generated $10.1 Million in Cash Flow from Operations, $35.5 Million Year-to-date, up 46.7%
Cash Position Increased $5.1 Million or 15.0% to $39.0 Million Compared to Q2 2021

Zix Corporation (Zix) (NASDAQ: ZIXI), a leading provider of cloud email security, productivity, and compliance solutions, today announced financial results for the third quarter ended September 30, 2021.

Third Quarter 2021 Financial Highlights (results compared to the same year-ago quarter)

Revenue increased 18% to $64.9 million.
Annual recurring revenue (ARR) increased 18% to $262.8 million. Cloud ARR increased 19% to $236.9 million or 90% of total ARR.
GAAP net loss totaled ($2.4) million compared to a year ago net loss of ($0.7) million.
GAAP net loss attributable to common stockholders totaled ($4.9) million compared to a year ago net loss attributable to common stockholders of ($3.0) million. The company’s Q3 2021 net loss attributable to common shareholders includes the effect of a deemed dividend to preferred shareholders of $2.4 million and acquisition-related expenses of $0.5 million.
GAAP fully diluted earnings (loss) per share attributable to common stockholders totaled ($0.09) compared to ($0.05).
Non-GAAP adjusted net income before deemed dividends and excluding deferred tax (benefit) expense totaled $8.2 million compared to $9.2 million.
Non-GAAP adjusted net income per share before deemed dividends and excluding deferred tax (benefit) expense totaled $0.15.
Adjusted EBITDA increased to $13.9 million, representing an adjusted EBITDA margin of 21.5%.
The company ended the quarter with $39.0 million in cash, an increase of 15.0% or $5.1 million compared to the end of the prior quarter.
Cash flow from operations was $10.1 million, a decrease of 33% or $5.0 million compared to the prior year period.

Recent Operational Highlights

Expanded Global Partner Program in the United Kingdom and Germany, adding solutions and support services to further enhance partner growth and operating capabilities.
Zix added over 40,000 cloud mailboxes in Q3 2021.
Direct customers and MSP partners started nearly 2,800 trials of Advanced Threat Protection, ZixEncrypt, ZixArchive and Secure File Share in Q3 2021.

Management Commentary

“We delivered strong financial results across the board in the third quarter, highlighted by 18% growth in revenue and ARR, along with solid EBITDA and cash flow generation,” said David Wagner, Zix’s Chief Executive Officer. “The double-digit growth we achieved was driven by strong Zix IP attach rates as well as increasing sales synergies we are realizing across our organization, which produced a record of over 103% net dollar revenue retention rate in Q3. This achievement is a direct reflection of Zix’s successful transformation into a cloud-first organization and underscores the success we are having retaining customers, adding customers onto Secure Cloud, and selling CloudAlly backup into our base. CloudAlly continues to perform exceptionally well, with a record number of transacting partners coming online in Q3, helping produce 20% sequential growth and 74% year-over-year growth in this segment.”

Zix’s Chief Financial Officer Dave Rockvam commented: “In addition to robust, double-digit revenue and ARR increases as well as strong cash flow generation, we also delivered meaningful quarter-to-quarter adjusted EBITDA dollar expansion in Q3, highlighting our success in layering on organic, higher-margin products. We believe our financial performance also reflects the economic recovery we’re seeing globally across small and medium-sized businesses.”

Third Quarter 2021 Corporate Financial Summary and Other Operational Metrics

$ in Millions, except per share data

Q3 2021

Q3 2020

Change (1)

Revenue

$64.9

$54.8

18.4%

GAAP Net Income (Loss)

($2.4)

($0.7)

(242.9%)

GAAP Net Income (Loss) Attributable to Common Stockholders

($4.9)

($3.0)

(63.3%)

GAAP Net Income (Loss) Per Share Attributable to Common Stockholders – Diluted

($0.09)

($0.05)

(80%)

Non-GAAP Adjusted Net Income Attributable to Common Stockholders (3)

$5.7

$6.9

(17.4%)

Non-GAAP Adjusted Net Income Per Share Attributable to Common Stockholders – Diluted (2)

$0.10

$0.13

(23.1%)

Non-GAAP Adjusted Net Income Before Deemed Dividends(2)

$8.5

$8.1

(4.9%)

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends - Diluted(2)

$0.15

Non-GAAP Adjusted Net Income Before Deemed Dividends and Excluding Deferred Tax (Benefit) Expense(2)

$8.2

$9.2

(10.9%)

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends and Excluding Deferred Tax (Benefit) Expense(2)

$0.15

$0.17

(11.8%)

EBITDA (1)(2)

$9.3

$10.6

(12.3%)

EBITDA Margin

14.3%

19.3%

(5 pts)

Adjusted EBITDA (2)

$13.9

$13.8

1.0%

Adjusted EBITDA Margin (2)

21.5%

25.1%

(3.6 pts)

Total Billings

$61.6

$54.6

12.8%

Nine Month 2021 Corporate Financial Summary and Other Operational Metrics

$ in Millions, except per share data

YTD 2021

YTD 2020

Change (1)

Revenue

$187.7

$160.6

16.9%

GAAP Net Income (Loss)

($7.8)

($3.5)

(122.9%)

GAAP Net Income (Loss) Attributable to Common Stockholders

($15.0)

($10.2)

(47.1%)

GAAP Net Income (Loss) Per Share Attributable to Common Stockholders – Diluted

($0.27)

($0.19)

(42.1%)

Non-GAAP Adjusted Net Income Attributable to Common Stockholders (2)

$16.8

$17.1

(1.8%)

Non-GAAP Adjusted Net Income Per Share Attributable to Common Stockholders – Diluted (2)

$0.31

$0.32

(3.1%)

Non-GAAP Adjusted Net Income Before Deemed Dividends(2)

$25.0

$24.0

4.2%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends - Diluted(2)

$0.46

$0.44

4.5%

Non-GAAP Adjusted Net Income Before Deemed Dividends and Excluding Deferred Tax (Benefit) Expense(2)

$23.9

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends and Excluding Deferred Tax (Benefit) Expense(2)

$0.44

EBITDA (1)(2)

$26.5

$27.1

(2.2%)

EBITDA Margin

14.1%

16.9%

(2.8 pts)

Adjusted EBITDA (2)

$40.3

$37.5

7.5%

Adjusted EBITDA Margin (2)

21.5%

23.4%

(1.9 pts)

(1)

Earnings before interest, taxes, depreciation, and amortization

(2)

A reconciliation of GAAP to non-GAAP results is included in this press release and available on the Zix investor relations website at http://investor.zixcorp.com

Transaction with OpenText

As previously disclosed, under the terms of the merger agreement with OpenText announced earlier today, upon closing of that transaction, Zix shareholders are to receive $8.50 in cash for each share of Zix common stock they own. The transaction is subject to customary closing conditions, including receipt of regulatory approvals and the successful completion of a tender offer. Upon closing of the transaction, Zix’s common stock will no longer be listed on any public market.

In light of this transaction, Zix will not be hosting an earnings conference call to discuss the foregoing results and the Company will not be providing financial guidance for the fourth quarter or for the full year 2021.

Additional Information and Where to Find It

The tender offer referred to in this release has not yet commenced. The description contained in this release is for informational purposes only and is neither an offer to purchase nor a solicitation of an offer to sell any securities, nor is it a substitute for the tender offer materials that will be filed with the Securities and Exchange Commission (the “SEC”). The solicitation and offer to buy shares of Zix common stock will only be made pursuant to an offer to purchase and related tender offer materials. At the time the tender offer is commenced, OpenText and its acquisition subsidiary will file a tender offer statement on Schedule TO and thereafter Zix will file a solicitation/recommendation statement on Schedule 14D-9 with the SEC with respect to the tender offer. THE TENDER OFFER MATERIALS (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND CERTAIN OTHER TENDER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT ON SCHEDULE 14D-9 WILL CONTAIN IMPORTANT INFORMATION. ANY HOLDERS OF ZIX’S SHARES ARE URGED TO READ THESE DOCUMENTS CAREFULLY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION THAT HOLDERS SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SHARES. The offer to purchase, the related letter of transmittal and the solicitation/recommendation statement will be made available for free at the SEC’s website at www.sec.gov. Additional copies may be obtained for free by contacting OpenText or Zix. Copies of the documents filed with the SEC by Zix will be available free of charge on Zix’s internet website at https://investor.zixcorp.com or by contacting Zix’s Investor Relations Department at (214) 370-2241. Copies of the documents filed with the SEC by OpenText will be available free of charge on OpenText’s internet website at https://investors.opentext.com or by contacting OpenText’s Investor Relations Department at (415) 963-0825.

In addition to the offer to purchase, the related letter of transmittal and certain other tender offer documents, as well as the solicitation/recommendation statement, Zix and OpenText will each file annual, quarterly and current reports and other information with the SEC. You may read and copy any reports or other information filed by Zix or OpenText at the SEC public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Zix’s and OpenText’s filings with the SEC are also available to the public from commercial document-retrieval services and at the website maintained by the SEC at www.sec.gov.

About Zix Corporation

Zix Corporation (Zix) is a leader in email security, productivity, and compliance. Trusted by the nation’s most influential institutions in healthcare, finance, and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention, advanced threat protection, unified information archiving and cloud to cloud backup. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance needs. Zix is publicly traded on the Nasdaq Global Market under the symbol ZIXI. For more information, www.zixcorp.com.

Forward-Looking Statements

As more fully described in Zix's Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 5, 2021, the company has been actively monitoring the COVID-19 situation and its impact on both the company and the world in which we operate. The impact of COVID-19 and unprecedented measures to prevent its spread are affecting our business in various ways such as causing volatility in demand for our products, changes in customer behavior, including their spending and payment patterns, disruptions in the operations of our third-party suppliers and business partners, labor market conditions and limitations on our employees’ and partners ability to work and travel. We expect the ultimate significance of the impact of the foregoing on our financial and operational results will be dictated by the length of time that these circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic, or any variants thereof, and governmental and public actions taken in response. These factors also make it more challenging for management to estimate the future performance of our business, particularly over the near term.

Statements in this release that are not purely historical facts or that necessarily depend upon future events, including statements about forecasts of sales, revenue, annual recurring revenue, EBITDA, EBITDA margin, earnings or earnings per share, potential benefits of acquisitions and strategic relationships, 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 Zix on the date this release was issued. Zix 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 but not limited to, risks and uncertainties regarding the recently announced transaction with OpenText, including risks associated with the satisfaction of closing conditions (such as the tender of at least two-thirds of the outstanding shares of capital stock of Zix in order to close the tender offer) and the possibility that the transaction will not be completed, as well as risks and uncertainties related to the completion and integration of acquisitions, the effects of our debt and equity financing transactions, year-end adjustments to previously reported preliminary unaudited financial information, market acceptance of both existing and new Zix solutions, changing market dynamics resulting from technological change, innovation and continuing customer migration to the cloud, changes in the competitive ecosystem, how privacy and data security laws may affect demand for Zix data protection solutions, and business disruptions, uncertainty and market instability stemming from the COVID-19 pandemic and governmental actions related thereto. Zix may not succeed in addressing these and other risks. Further information regarding factors that could affect Zix’s business and its financial and other results can be found in the risk factors section of Zix’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, each as filed with the Securities and Exchange Commission, as those risk factors may be supplemented in subsequent filings.

We monitor ARR as an operating metric, which we define as the aggregate annualized contract value attributable to recurring revenue contracts as of the end of the applicable reporting period. We calculate ARR by determining the annual or monthly revenue of subscription agreements that are active as of the end of the applicable period and multiplying by 1 or 12. We monitor this metric to aid in determining to what extent individual customer relationships, considered in the aggregate, are growing or declining in financial magnitude. ARR is an operating metric derived as of the date of determination, and should be viewed independently of revenue, unearned revenue and any other GAAP financial measure over any period.

ZIX CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

2021

December 31,

(unaudited)

2020

ASSETS Current assets: Cash and cash equivalents

38,973,000

21,362,000

Receivables, net

19,317,000

16,831,000

Prepaid and other current assets

4,394,000

5,430,000

Total current assets

62,684,000

43,623,000

Property and equipment, net

5,530,000

7,345,000

Operating lease assets

10,994,000

14,259,000

Other assets and deferred costs

12,378,000

12,767,000

Intangible Assets, Net

129,959,000

144,163,000

Goodwill

195,687,000

195,013,000

Deferred tax assets

33,691,000

32,554,000

Total assets

450,923,000

449,724,000

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses

32,869,000

30,382,000

Deferred revenue

41,902,000

40,447,000

Other current liabilities

8,181,000

7,963,000

Total current liabilities

82,952,000

78,792,000

Long-term liabilities: Deferred revenue

593,000

1,079,000

Operating and finance lease liabilities

6,306,000

10,208,000

Debt

208,939,000

209,658,000

Total long-term liabilities

215,838,000

220,945,000

Total liabilities

298,790,000

299,737,000

Total preferred stock

122,722,000

115,552,000

Total stockholders’ equity

29,411,000

34,435,000

Total liabilities, preferred stock and stockholders’ equity

450,923,000

449,724,000

ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) `

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Revenue

64,850,000

54,840,000

187,694,000

160,611,000

Cost of revenue

36,219,000

27,928,000

103,961,000

82,265,000

Gross profit

28,631,000

26,912,000

83,733,000

78,346,000

Operating expenses: Research and development

6,429,000

5,720,000

19,371,000

16,926,000

Selling, general and administrative

22,468,000

18,813,000

66,156,000

58,058,000

Total operating expenses

28,897,000

24,533,000

85,527,000

74,984,000

Operating income

(266,000

)

2,379,000

(1,794,000

)

3,362,000

Operating margin

-1

Other income (expense) Investment and other income (expense)

(53,000

)

127,000

(58,000

)

104,000

Interest expense

(2,200,000

)

(2,035,000

)

(6,513,000

)

(7,190,000

)

Total other income (expense)

(2,253,000

)

(1,908,000

)

(6,571,000

)

(7,086,000

)

Income before income taxes

(2,519,000

)

471,000

(8,365,000

)

(3,724,000

)

Income tax benefit (expense)

113,000

(1,196,000

)

568,000

244,000

Net (loss) income

(2,406,000

)

(725,000

)

(7,797,000

)

(3,480,000

)

Deemed and accrued dividends on preferred stock

(2,448,000

)

(2,267,000

)

(7,170,000

)

(6,714,000

)

Net (loss) income attributable to common shareholders

(4,854,000

)

(2,992,000

)

(14,967,000

)

(10,194,000

)

Basic (loss) income per share attributable to common shareholders:

(0.09

)

(0.05

)

(0.27

)

(0.19

)

Diluted (loss) income per share attributable to common shareholders:

(0.09

)

(0.05

)

(0.27

)

(0.19

)

Shares used in per share calculation - basic

55,179,775

54,999,114

54,932,530

53,933,721

Shares used in per share calculation - diluted

55,179,775

54,999,114

54,932,530

53,933,721

Other Comprehensive income, net of tax: Foreign currency translation adjustments

39,000

493,000

240,000

(118,000

)

Comprehensive (loss) income

(2,367,000

)

(232,000

)

(7,557,000

)

(3,598,000

)

ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Ended September 30,

2021

2020

Operating activities: Net (loss) income

(7,797,000

)

(3,480,000

)

Non-cash items in net income

44,155,000

33,958,000

Changes in operating assets and liabilities

(879,000

)

(6,233,000

)

Net cash provided by operating activities

35,479,000

24,245,000

Investing activities: Purchases of property and equipment and capitalized software

(12,832,000

)

(13,992,000

)

Acquisition of business, net of cash acquired

(339,000

)

Net cash used in investing activities

(13,171,000

)

(13,992,000

)

Financing activities: Proceeds from exercise of stock options

251,000

334,000

Proceeds from long term debt

6,000,000

Repayment of long term debt

(1,654,000

)

(1,388,000

)

Repayment of finance lease obligations

(528,000

)

(1,086,000

)

Payment of acquisition-related contingent consideration

(1,125,000

)

Purchase of treasury stock

(2,499,000

)

(2,717,000

)

Net cash provided used in financing activities

(4,430,000

)

18,000

Effect of exchange rate changes on cash

(267,000

)

42,000

(Decrease) Increase in cash and cash equivalents

17,611,000

10,313,000

Cash and cash equivalents, beginning of period

21,362,000

13,349,000

Cash and cash equivalents, end of period

38,973,000

23,662,000

ZIX CORPORATION

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

2021

2020

2021

2020

Revenue:

GAAP revenue

64,850,000

54,840,000

187,694,000

160,611,000

Cost of revenue

GAAP cost of revenue

36,219,000

27,928,000

103,961,000

82,265,000

Stock-based compensation charges (1)

(A)

(134,000

)

(97,000

)

(525,000

)

(1,105,000

)

Strategic consulting and litigation costs (2)

(B)

(1,000

)

(10,000

)

(115,000

)

Intangible Amortization (3)

(C)

(2,906,000

)

(2,486,000

)

(8,745,000

)

(7,432,000

)

Corporate separation payment (4)

(D)

(52,000

)

(867,000

)

Non-GAAP adjusted cost of revenue

33,178,000

25,345,000

94,629,000

72,746,000

Gross profit:

GAAP gross profit

28,631,000

26,912,000

83,733,000

78,346,000

Stock-based compensation charges (1)

(A)

134,000

97,000

525,000

1,105,000

Strategic consulting and litigation costs (2)

(B)

1,000

10,000

115,000

Intangible Amortization (3)

(C)

2,906,000

2,486,000

8,745,000

7,432,000

Corporate separation payment (4)

(D)

52,000

867,000

Non-GAAP adjusted gross profit

31,672,000

29,495,000

93,065,000

87,865,000

Research and development expense

GAAP research and development expense

6,429,000

5,720,000

19,371,000

16,926,000

Stock-based compensation charges (1)

(A)

(517,000

)

(433,000

)

(2,093,000

)

(1,184,000

)

Strategic consulting and litigation costs (2)

(B)

(17,000

)

(49,000

)

(132,000

)

Intangible Amortization (3)

(C)

(76,000

)

(76,000

)

(227,000

)

(227,000

)

Corporate separation payment (4)

(D)

(167,000

)

(128,000

)

Non-GAAP adjusted research and development expense

5,819,000

5,211,000

16,835,000

15,255,000

Selling and marketing expense

GAAP selling and marketing expense

15,656,000

13,489,000

46,225,000

42,288,000

Stock-based compensation charges (1)

(A)

(1,248,000

)

(565,000

)

(3,587,000

)

(1,877,000

)

Strategic consulting and litigation costs (2)

(B)

(14,000

)

(160,000

)

(16,000

)

(212,000

)

Intangible Amortization (3)

(C)

(3,349,000

)

(3,106,000

)

(10,025,000

)

(9,333,000

)

Corporate separation payment (4)

(D)

18,000

(156,000

)

(439,000

)

Non-GAAP adjusted selling and marketing expense

11,063,000

9,658,000

32,441,000

30,427,000

General and administrative expense

GAAP general and administrative expense

6,812,000

5,324,000

19,931,000

15,770,000

Stock-based compensation charges (1)

(A)

(2,163,000

)

(1,013,000

)

(6,121,000

)

(3,183,000

)

Strategic consulting and litigation costs (2)

(B)

(513,000

)

(923,000

)

(1,005,000

)

(1,125,000

)

Corporate separation payment (4)

(D)

(45,000

)

(109,000

)

Non-GAAP adjusted general and administrative expense

4,136,000

3,388,000

12,760,000

11,353,000

Operating income:

GAAP operating income

(266,000

)

2,379,000

(1,794,000

)

3,362,000

Stock-based compensation charges (1)

(A)

4,062,000

2,108,000

12,326,000

7,349,000

Strategic consulting and litigation costs (2)

(B)

545,000

1,083,000

1,080,000

1,584,000

Intangible Amortization (3)

(C)

6,331,000

5,668,000

18,997,000

16,992,000

Corporate separation payment (4)

(D)

(18,000

)

420,000

1,543,000

Non-GAAP adjusted operating income

10,654,000

11,238,000

31,029,000

30,830,000

Adjusted Operating Margin

16.4

20.5

16.5

19.2

Net income:

GAAP net (loss) income

(2,406,000

)

(725,000

)

(7,797,000

)

(3,480,000

)

Stock-based compensation charges (1)

(A)

4,062,000

2,108,000

12,326,000

7,349,000

Strategic consulting and litigation costs (2)

(B)

545,000

1,083,000

1,080,000

1,584,000

Intangible Amortization (3)

(C)

6,331,000

5,668,000

18,997,000

16,992,000

Corporate separation payment (4)

(D)

(18,000

)

420,000

1,543,000

Non-GAAP adjusted net income

8,514,000

8,134,000

25,026,000

23,988,000

Deferred tax (benefit) expense

(345,000

)

1,077,000

(1,077,000

)

(129,000

)

Non-GAAP adjusted net income excluding deferred tax (benefit) expense

8,169,000

9,211,000

23,949,000

23,859,000

Deemed and accrued dividends on preferred stock

(2,448,000

)

(2,267,000

)

(7,170,000

)

(6,714,000

)

Adjusted Net income attributable to common stockholders

5,721,000

6,944,000

16,779,000

17,145,000

Diluted net income per common share:

GAAP net income per share before deemed dividends

(0.04

)

(0.01

)

(0.14

)

(0.06

)

Adjustments per share

(A-D)

0.19

0.16

0.60

0.51

Non-GAAP adjusted net income per share before deemed dividends

0.15

0.46

0.44

Deferred tax (benefit) expense impact to Non-GAAP adjusted net income before deemed dividends per share

(E)

(0.00

)

0.02

(0.02

)

(0.00

)

Non-GAAP adjusted net income before deemed dividends per share excluding deferred tax (benefit) expense

0.15

0.17

0.44

Deemed dividends per share impact to Non-GAAP adjusted net income

(0.04

)

(0.04

)

(0.13

)

(0.12

)

Adjusted Net income per share attributable to common stockholders

0.10

0.13

0.31

0.32

Shares used to compute Non-GAAP adjusted net income per share - diluted

55,179,775

54,999,114

54,932,530

53,933,721

Reconciliation of Net income to EBITDA and Adjusted EBITDA:

(F)

Net income

(2,406,000

)

(725,000

)

(7,797,000

)

(3,480,000

)

Income tax provision

(113,000

)

1,196,000

(568,000

)

(244,000

)

Interest expense

2,200,000

2,035,000

6,513,000

7,190,000

Depreciation

1,009,000

1,204,000

3,216,000

3,801,000

Amortization

8,636,000

6,887,000

25,111,000

19,804,000

EBITDA

9,326,000

10,597,000

26,475,000

27,071,000

Adjustments:

Stock-based compensation charges (1)

(A)

4,062,000

2,108,000

12,326,000

7,349,000

Strategic consulting and litigation costs (2)

(B)

545,000

1,083,000

1,080,000

1,584,000

Corporate separation payment (4)

(D)

(18,000

)

420,000

1,543,000

Adjusted EBITDA

13,915,000

13,788,000

40,301,000

37,547,000

Adjusted EBITDA margin

21.5

25.1

21.5

23.4

(1) Stock-based compensation charges are included as follows:

Cost of revenues

134,000

97,000

525,000

1,105,000

Research and development

517,000

433,000

2,093,000

1,184,000

Selling and marketing

1,248,000

565,000

3,587,000

1,877,000

General and administrative

2,163,000

1,013,000

6,121,000

3,183,000

4,062,000

2,108,000

12,326,000

7,349,000

(2) Strategic consulting, acquisition, integration and litigation costs are included as follows:

Cost of revenues

1,000

10,000

115,000

Research and development

17,000

49,000

132,000

Selling and marketing

14,000

160,000

16,000

212,000

General and administrative

513,000

923,000

1,005,000

1,125,000

545,000

1,083,000

1,080,000

1,584,000

(3) Intangible Amortization is included as follows:

Cost of revenues

2,906,000

2,486,000

8,745,000

7,432,000

Research and development

76,000

227,000

Selling and marketing

3,349,000

3,106,000

10,025,000

9,333,000

6,331,000

5,668,000

18,997,000

16,992,000

(4) Corporate separation payment is included as follows:

Cost of revenues

52,000

867,000

Research and development

167,000

128,000

Selling and marketing

(18,000

)

156,000

439,000

General and administrative

45,000

109,000

(18,000

)

420,000

1,543,000

(5) Net Income tax components:

Current tax (benefit)/expense

232,000

119,000

509,000

(115,000

)

Deferred tax (benefit)/expense

(345,000

)

1,077,000

(1,077,000

)

(129,000

)

(113,000

)

1,196,000

(568,000

)

(244,000

)

This presentation includes Non-GAAP measures. Our Non-GAAP measures, including "Non-GAAP adjusted net income and net income per share excluding deferred tax expense" 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 Notes to Reconciliation of GAAP to Non-GAAP Financial Measures 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 excluding deferred tax (benefit) expense, Net income per share - diluted, Net income per share - diluted excluding deferred tax (benefit) expense, and EBITDA for non-cash stock-based compensation expense, and strategic consulting and litigation costs 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.

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 litigation expenses and non-recurring items that impact our ongoing business. See items (A) through (E) below for further information on the current quarter's reconciling items.

Items (A) through (F) 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 excluding deferred tax (benefit) expense," "Net income per share - diluted," "Net income per share excluding deferred tax (benefit) expense- diluted," and "EBITDA" and correspond to the categories explained in further detail below under (A) through (F).

(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) Strategic consulting, acquisition integration and litigation costs. See item (2) on previous page. The Company’s management excludes certain board-directed consulting costs and litigation expenses when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(C) Intangible amortization costs. See item (3) on previous page. The Company’s management excludes amortization expenses associated with the acquisition of intangible assets when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(D) Corporate separation payment relating to employment termination benefits agreement. See item (4) on previous page. The Company’s management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(E) Deferred tax expense 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.

(F) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based compensation charges and litigation expenses

View source version on businesswire.com: https://www.businesswire.com/news/home/20211108005672/en/

Zix Company Contact Geoff Bibby 1-214-370-2241 gbibby@zixcorp.com

Zix Investor Contact Matt Glover and Tom Colton Gateway Investor Relations 1-949-574-3860 ZIXI@gatewayir.com

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