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Analysts: Su Chen Jionghan Dai Liang Nan Presented: March 29, 2012. Introduction. Zix Corp. Zix Corporation provides email encryption solutions in software as a service model in the United States. Market Cap185 million PEG ratio0.83 Adjusted P/E18 - PowerPoint PPT Presentation
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Analysts: Su Chen
Jionghan DaiLiang Nan
Presented: March 29, 2012
Zix Corp.◦ Zix Corporation provides email encryption
solutions in software as a service model in the United States.
◦ Market Cap 185 million◦ PEG ratio 0.83◦ Adjusted P/E 18 ◦ 1-year implied growth in earning 30%◦ 7-10 years implied growth 5%
Stock price closed at $ 2.93 on Mar. 28, 2012◦ Underperformed compared to SP Small Cap 600
Index in the past 5 months
Source: Yahoo Finance
The initial unemployment claim lowered to 348,000 on March 22, 2012
Policy markers forecasts federal fund rate to keep near zero at least through late 2014
The U.S. economy is recovering slowly from the 2008 recession
Sector: Technology
GICS MAP: Application Software
# 45103010
External Driver◦ Regulation Demand◦ Corporation Demand
Risk Factor ◦ New technology and product◦ High R&D investment◦ Relationship with third party distributors ◦ Strong competition
Protect confidential data from been seized by unauthorized parties while transporting via email◦ Required by some data privacy laws, such as
Health Information Portability Accountability Act (“HIPAA”), Gramm-Leach-Bliley Act (“GLBA”)
◦ Companies with business secrets want to protect the property
Healthcare, financial services, insurance and government sectors
More than 1,200 hospitals and over 1,600 financial institutions, including SEC
Source: Zix Corp investor presentation http://investor.zixcorp.com/phoenix.zhtml?c=108645&p=irol-IRHome
Encryption Decryption
Stricter regulations◦ increased penalties for violations, e.g. HIPAA◦ stricter and more onerous breach notification
requirements◦ The first state law requiring encryption of emails
containing sensitive information was passed by Nevada on Oct 1st, 2008
◦ Mar 1st, 2010 in Massachusetts, they reach far beyond the state borders
Trusted by most influential institutions◦ 5 Divisions of the U.S. Treasury ◦ SEC◦ All of the FFIEC U.S. federal banking regulators ◦ 17% US banks◦ Nearly 1 in 5 US hospitals
No significant customers◦ Not any customer accounts for more than 10%
sales
Low incremental costs to add new users◦ Large up-front investment to establish the service
Strong renewal rate◦ Result in retention of 95% of revenue from year to
year
On Dec 31, 2010, Zix Corp completed the wind down of its e-prescribing business◦ Had previously been reported as a segment◦ No longer fit the company’s strategy◦ Assets were compatible with the remaining
business and were therefore absorbed
In 2011, the company included a tax benefit of 11.8 million, comparing to 35.3 million in 2010◦ Largely attribute to the reduction of valuation
allowance because the company is optimistic about their future operation
◦ Still have 57.4 million valuation allowance left◦ Involve subjective judgment of future taxable
income from mangers, and thus we don’t want to include into our analysis
In 2011, the company had a lower new first year order of 7.1 million compared to 8.7 million in 2010◦ Partly explain its underperformance recently◦ Reorganization of sales force◦ Uncertainty in economy◦ Not because of pricing or competition
They actually have fewer competitors
Financial DataFinancial Data
Comparables Price Shares Market Cap Net Debt EV Revenue EBITDA EBIT
eGain Communications Corp. (NasdaqCM:EGAN)
5.49 24.36 133.75 -2.1 131.67 42.7 4.3 3.6
SciQuest, Inc. (NasdaqGS:SQI)
15.2 22.07 335.46 -59.6 275.81 53.4 7.2 5.5
VASCO Data Security International Inc.
(NasdaqCM:VDSI)9.75 37.69 367.46 -84.5 282.96 168.1 28.6 24.8
Technical Communications(NasdaqCM:TCCO)
11.59 1.83 21.17 -11.5 9.69 13.8 4.4 4.2
Zix Corporation (NasdaqGM:ZIXI)
2.93 62.88 184.24 -20.7 163.56 38.1 12 10.6
Trading Data
Comparables TEV/Rev TEV/EBITDA TEV/EBIT
eGain Communications Corp. (NasdaqCM:EGAN)
3.08 30.74 36.4
SciQuest, Inc. (NasdaqGS:SQI) 5.16 38.3 50.61
VASCO Data Security International Inc. (NasdaqCM:VDSI)
1.68 9.9 11.43
Technical Communications Corp. (NasdaqCM:TCCO)
0.7 2.18 2.29
Zix Corporation (NasdaqGM:ZIXI) 4.29 13.69 15.46
Average 2.655 20.28 25.1825
Implied Valuation 1.94 4.20 4.57
Comprable Price 3.57
Improving operating results
◦ Revenue grows without increasing SG&A
2011 2010 2009
Gross Margin 81.10% 80.44% 82.67%
Operating Margin
27.73% 15.56% 8.65%
A big amount of cash
◦ Start repurchasing stock in 2011
2011 2010 2009
Cash From Operating(in million)
13.22 7.19 0.60
Cash ( in million) 20.68 24.62 13.29
Cash / CA 84.90% 87.51% 87.33%
Cash / TA 26.67% 36.83% 67.28%