ZIXI Zix Corp

Rebound in New First Year Orders for Email Encryption and Growing Contribution from New Products Lead to Strong Finish in 2014

Zix Corporation (NASDAQ: ZIXI), a leader in email data protection, today announced financial results for the fourth quarter and full year ended Dec. 31, 2014.

Fourth Quarter 2014 Financial Highlights

• Fourth quarter new first year orders of $2.5 million, an increase of 8.0% year-over-year
• Fourth quarter revenue of $12.9 million, an increase of 4.5% year-over-year
• Fourth quarter GAAP net income of $0.02 per share, a decrease of 79.5% year-over-year (1)
• Fourth quarter Non-GAAP net income of $0.03 per share, a decrease of 42.9% year-over-year (1) (3)
• The Company generated approximately $2.7 million in cash flow from operations, a decrease of $785 thousand year-over-year

Full-Year 2014 Financial Highlights

• Ending backlog of $69.3 million, an increase of 5.5% from the prior year end and the Company’s 11th consecutive quarterly record in backlog
• Full-year new first year orders of $8.5 million, a decrease of 5.9% year-over-year
• Full-year revenue of $50.3 million, an increase of 4.6% year-over-year
• Full-year GAAP net income of $0.07 per share, a decrease of 58.4% year-over-year (1)
• Full-year Non-GAAP net income of $0.15 per share, a decrease of 23.0% year-over-year(1) (3)
• The Company generated approximately $13.3 million in cash flow from operations for the full year ended Dec. 31, 2014, flat year-over-year
• Cash and cash equivalents at year-end was $21.7 million, despite $16.2 million spent on share repurchases during 2014. This $21.7 million is a decrease of $5.8 million compared to the ending cash balance for 2013

“We were pleased to conclude 2014 with strong New First Year Orders as well as meeting our full-year guidance in revenue and earnings. As anticipated, New First Year Orders for email encryption bounced back in the fourth quarter and achieved year-over-year growth. We also saw continued increase in the contribution to New First Year Orders from our new products ZixOne and ZixDLP, which in the fourth quarter represented 12% of our New First Year Orders. We believe ZixOne and ZixDLP will have a meaningful impact on accelerating our revenue growth in the long-term,” said Rick Spurr, ZixCorp’s Chief Executive Officer. “With a successful fourth quarter, the strength of our pipeline for email encryption and the increasing interest in our new products, we are optimistic about the opportunity for stronger revenue growth in 2015.”

 

Fourth Quarter and Full-Year 2014 Corporate Financial Summary and Other Operational Metrics

                        $ in Millions, except per share data    

Q42014

   

Q42013

    % or $

Change (2)

   

FY2014

   

FY2013

    % or $

Change (2)

Revenue     12.9     $12.3     4.5%     $50.3     $48.1     4.6% GAAP Gross Profit     10.7     $10.4     2.1%     $42.0     $40.5     3.7% GAAP Net Income (1)     $0.9     $4.8     (81.3)%     $4.1     $10.5     (60.7)% GAAP Net Income Per Share – Diluted (1)     $0.02     $0.08     (79.5)%     $0.07     $0.17     (58.4)% Non-GAAP Adjusted Gross Profit (3)     10.7     $10.5     2.1%     $42.2     $40.7     3.7% Non-GAAP Adjusted Net Income (3)     $2.0     $3.8     (47.9)%     $8.8     $12.1     (27.4)% Non-GAAP Adjusted Net Income Per Share – Diluted (3)     $0.03     $0.06     (42.9)%     $0.15     $0.19     (23.0)% Adjusted EBITDA (3) (4)     $2.5     $4.3     (43.0)%     $10.8     $13.9     (22.3)% Adjusted EBITDA Margin (3) (4)     19.1%     35.0%     (15.9)pts     21.5%     29.0%     (7.5)pts New First Year Orders     $2.5     $2.3     8.0%     $8.5     $9.0     (5.9)% Total Orders     $13.8     $14.1     (1.9)%     $55.4     $56.6     (2.1)% Backlog (5)     $69.3     $65.7     5.5%                     (1)   2013 fourth quarter and full year Net Income benefitted from adjustment of the Company’s deferred tax asset valuation allowance as required by accounting guidance. No such adjustment was necessary in 2014 resulting in higher GAAP income tax expense. In fourth quarter 2014 income tax expense increased $2.2 million compared to the same period last year and full year 2014, income tax expense increased $3.8 million compared to the same periods in 2013. (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  

Outlook

For the first quarter 2015, the Company forecasts revenue to be between $12.9 million and $13.1 million and fully diluted adjusted earnings per share to be between $0.03 and $0.04. Full-year 2015 revenues are projected to be between $54 million and $56 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 $0.19 and $0.21.

Conference Call Information

The Company will discuss its financial results and outlook on a conference call on Tuesday, Feb. 17, 2015, 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 1-800-901-5241 (U.S. toll-free) or 1-617-786-2963 (international) at least 15 minutes before the call and entering access code 86863655.

An audio replay of the conference will be available until Feb. 24, 2015, by dialing 1-888-286-8010 (U.S. toll-free) or 1-617-801-6888 (international) and entering the access code 95134973. 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, 2014 December 31, (unaudited) 2013 ASSETS Current assets: Cash and cash equivalents $ 21,685,000 $ 27,518,000 Receivables, net 1,452,000 2,324,000 Prepaid and other current assets 2,372,000 2,038,000 Deferred tax assets   1,763,000   1,814,000 Total current assets 27,272,000 33,694,000 Property and equipment, net 4,399,000 2,608,000 Goodwill 2,161,000 2,161,000 Deferred tax assets   49,892,000   52,239,000 Total assets $ 83,724,000 $ 90,702,000     LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,436,000 $ 2,487,000 Deferred revenue   21,587,000   19,080,000 Total current liabilities 25,023,000 21,567,000 Long-term liabilities: Deferred revenue 898,000 1,278,000 Deferred rent   1,533,000   1,623,000 Total long-term liabilities   2,431,000   2,901,000 Total liabilities 27,454,000 24,468,000 Total stockholders’ equity   56,270,000   66,234,000 Total liabilities and stockholders’ equity $ 83,724,000 $ 90,702,000                       ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)      

Three Months Ended December 31,

Twelve Months Ended December 31,

2014 2013 2014 2013 Revenue $ 12,865,000 $ 12,311,000 $ 50,347,000 $ 48,138,000   Cost of revenue   2,205,000     1,871,000     8,324,000     7,614,000   Gross profit 10,660,000 10,440,000 42,023,000 40,524,000 Operating expenses: Research and development 2,398,000 2,119,000 9,051,000 9,563,000 Selling, general and administrative   6,611,000     4,839,000     26,222,000     21,646,000   Total operating expenses   9,009,000     6,958,000     35,273,000     31,209,000     Operating income 1,651,000 3,482,000 6,750,000 9,315,000

Operating margin

13 % 28 % 13 % 19 %   Other income, net 43,000 (9,000 ) 183,000 132,000   Income before income taxes 1,694,000 3,473,000 6,933,000 9,447,000 Income tax benefit (expense)   (790,000 )   1,367,000     (2,830,000 )   1,006,000   Net income $ 904,000   $ 4,840,000   $ 4,103,000   $ 10,453,000     Basic income per common share: $ 0.02   $ 0.08   $ 0.07   $ 0.17       Diluted income per common share: $ 0.02   $ 0.08   $ 0.07   $ 0.17     Shares used in per share calculation - basic   56,282,492     61,039,115     57,948,864     61,139,035     Shares used in per share calculation - diluted   57,043,838     62,553,160     58,966,625     62,526,507       ZIX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)            

Twelve Months Ended December 31,

2014 2013 Operating activities: Net income $ 4,103,000 $ 10,453,000 Non-cash items in net income 5,702,000 1,776,000 Changes in operating assets and liabilities   3,512,000     1,069,000   Net cash provided by operating activities 13,317,000 13,298,000   Investing activities: Purchases of property and equipment   (3,402,000 )   (1,593,000 ) Net cash used in investing activities (3,402,000 ) (1,593,000 )   Financing activities: Proceeds from exercise of stock options 748,000 1,705,000 Purchase of Treasury Stock   (16,496,000 )   (8,880,000 ) Net cash used in financing activities   (15,748,000 )   (7,175,000 )   Increase (Decrease) in cash and cash equivalents (5,833,000 ) 4,530,000 Cash and cash equivalents, beginning of period   27,518,000     22,988,000   Cash and cash equivalents, end of period $ 21,685,000   $ 27,518,000         ZIX CORPORATION RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited)              

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2014 2013 2014 2013 Revenue: GAAP revenue $ 12,865,000   $ 12,311,000   $ 50,347,000   $ 48,138,000     Cost of revenue GAAP cost of revenue $ 2,205,000 $ 1,871,000 $ 8,324,000 $ 7,614,000 Stock-based compensation charges (1) (A)   (34,000 )   (38,000 )   (180,000 )   (172,000 ) Non-GAAP adjusted cost of revenue $ 2,171,000   $ 1,833,000   $ 8,144,000   $ 7,442,000     Gross profit: GAAP gross profit $ 10,660,000 $ 10,440,000 $ 42,023,000 $ 40,524,000 Stock-based compensation charges (1) (A)   34,000     38,000     180,000     172,000   Non-GAAP adjusted gross profit $ 10,694,000   $ 10,478,000   $ 42,203,000   $ 40,696,000     Research and development expense GAAP research and development expense $ 2,398,000 $ 2,119,000 $ 9,051,000 $ 9,563,000 Stock-based compensation charges (1) (A)   (51,000 )   (51,000 )   (236,000 )   (212,000 ) Non-GAAP adjusted research and development expense $ 2,347,000   $ 2,068,000   $ 8,815,000   $ 9,351,000     Selling and marketing expense GAAP selling and marketing expense $ 4,811,000 $ 3,078,000 $ 18,284,000 $ 13,416,000 Stock-based compensation charges (1) (A)   (107,000 )   (122,000 )   (532,000 )   (507,000 ) Non-GAAP adjusted selling and marketing expense $ 4,704,000   $ 2,956,000   $ 17,752,000   $ 12,909,000     General and administrative expense GAAP general and administrative expense $ 1,800,000 $ 1,761,000 $ 7,938,000 $ 8,230,000 Stock-based compensation charges (1) (A) (155,000 ) (202,000 ) (734,000 ) (820,000 ) Non-recurring consulting and legal costs (2) (B)   (3,000 )   (38,000 )   (599,000 )   (1,324,000 ) Non-GAAP adjusted general and administrative expense $ 1,642,000   $ 1,521,000   $ 6,605,000   $ 6,086,000     Operating income: GAAP operating income $ 1,651,000 $ 3,482,000 $ 6,750,000 $ 9,315,000 Stock-based compensation charges (1) (A) 347,000 413,000 1,682,000 1,711,000 Non-recurring consulting and legal costs (2) (B)   3,000     38,000     599,000     1,324,000   Non-GAAP adjusted operating income $ 2,001,000   $ 3,933,000   $ 9,031,000   $ 12,350,000  

 

 

Adjusted Operating Margin 15.6 % 31.9 % 17.9 % 25.7 %     Net income: GAAP net income $ 904,000 $ 4,840,000 $ 4,103,000 $ 10,453,000 Stock-based compensation charges (1) (A) 347,000 413,000 1,682,000 1,711,000 Non-recurring consulting and legal costs (2) (B) 3,000 38,000 599,000 1,324,000 Income tax impact (C)   726,000     (1,489,000 )   2,396,000     (1,401,000 ) Non-GAAP adjusted net income $ 1,980,000   $ 3,802,000   $ 8,780,000   $ 12,087,000       Diluted net income per common share: GAAP net income $ 0.02 $ 0.08 $ 0.07 $ 0.17 Adjustments per share (A-C) $ 0.02   $ (0.02 ) $ 0.08   $ 0.02   Non-GAAP adjusted net income $ 0.03   $ 0.06   $ 0.15   $ 0.19     Shares used to compute Non-GAAP adjusted net income per share - diluted   57,043,838     62,553,160     58,966,625     62,526,507     Reconciliation of Net income to EBITDA and Adjusted EBITDA: (D) Net income $ 904,000 $ 4,840,000 $ 4,103,000 $ 10,453,000 Income tax provision 790,000 (1,367,000 ) 2,830,000 (1,006,000 ) Interest expense - - - - Depreciation expense   413,000     388,000     1,622,000     1,466,000   EBITDA 2,107,000 3,861,000 8,555,000 10,913,000   Adjustments: Share-based compensation expense (A) 347,000 413,000 1,682,000 1,711,000 Non-recurring consulting and legal costs (2) (B)   3,000     38,000     599,000     1,324,000   Adjusted EBITDA $ 2,457,000   $ 4,312,000   $ 10,836,000   $ 13,948,000     Adjusted EBITDA margin 19.1 % 35.0 % 21.5 % 29.0 %   (1) Stock-based compensation charges are included as follows: Cost of revenues $ 34,000 $ 38,000 $ 180,000 $ 172,000 Research and development 51,000 51,000 236,000 212,000 Selling and marketing 107,000 122,000 532,000 507,000 General and administrative   155,000     202,000     734,000     820,000   $ 347,000   $ 413,000   $ 1,682,000   $ 1,711,000   (2) Non-recurring consulting and legal costs are included as follows: General and administrative   3,000     38,000     599,000     1,324,000   $ 3,000   $ 38,000   $ 599,000   $ 1,324,000    

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 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 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 consulting and legal 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, restricted stock units, and performance 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 consulting and legal costs. See item (2) on previous page for breakdown of non-recurring consulting and legal 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.com