ZIX CORPORATION OCTOBER 15, 2013 Dan Ballantine, Alexander Johansson & Ye Liang
Agenda Introduction Holding Information Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation
Zix Corporation Leading Provider of Encryption Designed for Regulatory Compliance and Protecting Sensitive Communication 1 in Every 5 U.S. Bank and Hospital Products & Services: ZixGateway / ZixMail – Sender Service ZixAccess – Receiver Service ZixDirectory World’s Largest Shared Encryption Community Zix Research Center Source: MarketLine, Zix K
Current Holding April 17, 2012 Acquired 2,000 $2.89/share Cost basis = $5,780 October 15, 2013 Current holdings 2,000 $4.85/share Market value = $9,700 Annualized HPR = 41.22% Source: Yahoo Finance
Macroeconomic Overview Unemployment Rate BYOD Catalyst 4 Out of 5 Employees Use Their Own Devices At Work Sensitive Information Concerns Source: Bureau of Labor Statistics, Ribbit
Macroeconomic Overview HIPAA Compliance Health Insurance Portability and Accountability Act Covered entities: health plan, health providers, health care clearinghouses Also applies to business associates of covered entities Requirements: privacy, security, and transaction standards regarding health care patient information Deadline for compliance was September 23, 2013 Continued need for protection as more patient data is stored and transmitted electronically Source: Lorman, American Physical Therapy Association, US HHS
Stock Market Source: Google Finance
Industry Overview What is Software Industry? Components System Software Operating Systems Network and database management Other Application Software General business productivity and home use application Cross-industry and vertical market applications Other Source: MarketLine Industry Profile
Industry Overview Source: MarketLine
Industry Growth Source: MarketLine
Industry Life Cycle Steady growth in sales as product acceptance widens Source: UIUC BADM 449
Industry Forces Analysis Source: MarketLine
Industry Forces Analysis Buyer Power: MEDIUM High switching cost, open source substitutes available, large population of customers Supplier Power: MEDIUM Highly differentiated inputs, low threat of forward integration Rivalry Among Existing Competitors: MEDIUM Differentiated products, fast industry growth, many competitors Source: MarketLine
Industry Forces Analysis Threat of New Entrants: MEDIUM Low capital intensive, high labor intensive, trusts in certain sub-markets Threat of Substitutes: MEDIUM Cheap or free open source alternatives that update more frequently and quickly, capability issue with the alternatives Conclusion: Moderately attractive industry Source: MarketLine
Company Overview Products and Services: New to the Family in 2013 ZixONE; byod Source: Zix Corporation Website
Company Overview Strategy: Differentiation Highly specialized in data protection Software-as-a-Service (SaaS) Revenue method: Annual service subscription fee Pricing is fixed per sender each year 75% of deals are 3-yr contracts with an average of 2.5 years Cash generally collected annually upfront Retention of 90%+ of revenue Source: ZixCorp Investor Relations
Company Overview Source: Zix Corporation Investor Relations
Product Life Cycle Steady growth in sales as product acceptance widens: Demand increases as business related online communication expanding Products reach out to wider range of audience Source: UIUC BADM 449
Business Risk Analysis Changing regulations on internet privacy Main customers subject to political factors Rapidly growing technologies bring uncertainty Dependent on strong human capital Existing and potential big players End user preference Hacker population brings challenges
SWOT Analysis StrengthsWeaknesses -No long-term debt -Strong cash position -Growing product base -Subscription business model -Operating losses in past 5 years -Forced to exit business segments in the past few years OpportunitiesThreats -Healthcare compliance (HIPAA) -Increased emphasis on security of data and communication -BYOD trend in the workplace -Big data trends -NSA security threats -Increased hacker issues -Rapid technological change
Management Outlook Optimistic about subscription business model coupled with over $60 million backlog Enthusiastic about September release of ZixOne to address the BYOD segment Concerns over increased SG&A expenses in 2013 due to increased sales force Recognized increased competition from companies such as McAfee and Cisco Systems Source: Zix Corporation Q2 Earnings Call
Recent Financial Information Source: Zix K, Zix K
Recent Financial Information Source: Zix K, Zix K
Current Stock Information Source: Capital IQ, Yahoo Finance MetricValue Current Stock Price $4.85 Trailing P/E36.62 Forward P/E20.70 Market Cap ($ millions) $297.00
Financial Analysis
Comparable Companies Source: Capital IQ CompanyTicker (Exchange)Market Cap ($millions) Tucows Inc. TCX (AMEX)$ Axway Software S.A. AXW (ENXTPA)$ Fortinet Inc. FTNT (NASDAQ)$3, Trend Micro Inc (TSE)$5, Proofpoint, Inc. PFPT (NASDAQ)$1, USA Technologies Inc. USAT (NASDAQ)$53.17 Zix CorporationZIXI (NASDAQ)$291.49
Stock Performance Source: Yahoo Finance
Comparable Company Analysis Source: Capital IQ
Comparable Company Analysis Source: Capital IQ
Discount Rate Source: Yahoo Finance
Discount Rate
DCF Analysis
Decision Drivers Strengths Strong cash position and improving balance sheet Well positioned in health care segment Additional BYOD segment growth opportunities Concerns Strong recent stock performance Internet and data privacy threats Operating losses in the past
Recommendation Valuation Summary Current Stock Price: $4.85/share Comparable Companies Valuation: $4.66/share DCF Valuation: $3.51/share Recommendation: HOLD
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