Analysts: Amey Dargude Cindy Anggraini Jiaqi (Tommy) Jiang Siwei (Lerrisa) Li Xuan (Lucy) Liang University of Illinois at Urbana-Champaign Applied Portfolio Management November 19, 2015

ANALYSTS Amey Dargude Cindy Anggraini Lerrisa Li Lucy Liang Tommy Jiang

Company Overview Industry Overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation AGENDA

Purchased 2000 shares at $2.89 on 4/17/2012 Weight of portfolio ( Market value): 2.5% Current price: $5.54 Capital Gain: 88.24% Current Holding

Company Overview Industry Overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Incorporated in Texas 1989 Entered into encryption business 1999 Acquired PocketSript, LLC, expanded into electronic prescribing business 2003 Exited electronic prescribing marketplace after 10-year loss 2010 Expanded business into data loss prevention and bring-you-own- device solutions 2013 Company Overview Company History Company Service Encryption Data Loss Prevention Bring-Your- Own-Devices

Zix’s Unique Encryption Service Source: ZixCorp Website ZixGateway and ZixDirectory enable the customers to send encrypted s transparently, which forms Zix’s competitive advantage in the industry

Revenue: per user subcription fee Contract: 2.5-year long in average Distribution channels: Company Overview-Business Model Direct Sales Telesales Value- Added Resellers Original Equipment Manufactur e (OEM) New First Year Orders as per Q315 Source: ZixCorp Website

Distribution Channels (Cont.) Zix heavily relies on third party distribution channels: Original equipment manufacturing (OEM), resellers, and referral leaders

Company Overview-Industry Focus Revenue as per Q315New First Year Orders as per Q315 Source: ZixCorp Website

SWOT Analysis Rapid Change in Technology Industry Consolidation Expansion Limitation by Govt Regulation BYOD solution Strengthening Govt Regulation Cloud-based service Heavily rely on Third Party Distribution Channels No Debt Strong Alliance SW TO

Litigation risk Fail to retain key empolyees Infrustrcure Outage Industry consolidation risk Heavily relay on third party distribution chaneel Rapid changing technology Business Risks

Porter’s Five Analysis Competitive rivalry: High Threats of substitutes: Medium Threat of new entrants: High Bargaining power of buyers: Medium Bargaining power of suppliers: Very High

Buiness Overview Industry overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Industry Overview Application Software Data Security Encryption Communication encryption business is a small fraction of the overall software industry Large companies provide services across different functions in the industry High occurrence in business consolidation

Buiness Overview Industry overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Regulations on Data Security Number of Exchange Number of Mobile Internet Connection Number of Broadband Connection Total Health Expenditure Macroeconomic Overview

Worldwide Users Number of Sent/Received per day Source: Statista Number of Business Sent/Received per day Increase in number exchange predicts strong demand for encryption service

Internet Industry Development Number of Mobile Internet Connections Number of Broadband Connections Source: Ibis World Futures Increase in the number of mobile internet connection predicts a stronger demand for BYOD solution

Healthcare Industry Total Health Expenditure Incerasing growth rate of total health expenditures perdicts a growth in the healthcare industry, which will increase the demand for encrytion service Source: Ibis World

Buiness Overview Industry Overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Financial Highlights Revenue & Cost Tax benefit impact Profitability Liquidity & Capital Structure Asset Management Efficiency & Greenblatt Dupont Ratio Financial Analysis

Financial Highlights No Debt No Dividend Payment Deferred Tax Assets By the end of 2014, Zix U.S. Net operating loss carry forward of $254M which begin to expire in year 2020 Zix realized tax benefit of $1.0M, $1.9M, $11.9M, and $35.5M in year 2013, 2012, 2011, and 2010 resulted from the decrease in deferred tax assts valuation allowance Zix did not recognize tax benefit and paid income tax in year 2014 and 2015

Revenue & Costs Revenues (y/y) Costs (% of Revenue)

Tax Benefit Impact on Net Income Tax Benefit Impact (% of Revenue)

Profitability Return on Assets and Equity (exc. Tax Benefit) Profitability Ratios

Liquidity and Capital Structure Ratio Current Ratio Equity Ratio (%)

Asset Management Efficiency Greenblatt Ratio Asset Management Efficiency Ratio Greenblatt Ratio

Dupont Model ROE is declining due to the decreasing profit margin. The high tax burden in 2010 was because of the high tax benefit that was reflected on bottomline

Buiness Overview Industry Overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Projection Assumption Income Statement Projection Valuation Comparable Valuation DCF Valuation Projection & Valuation

Revenue Backlog: urealized revenue Recognized revenue of new orders Revenue prjected by forecasting the value of total orders based on the historical performance Tax The company’s tax benefit realizaion policy is not predicted. We consider two scenarios: Tax benefit will be realized to offset income tax expense No tax benefit will not be realized R&D/SG&A Chang with revenue, no significant expenditure is projected Projection Assumptions

Revenue Assumption

Income Statement Projection

Discount Factor

DCF Valuation (Scenario 1 – exc. Tax Benefit)

DCF Valuation (Scenario 2 – inc. Tax Benefit)

Comparable Analysis Messaging infrastructure protection Data loss prevention, encryption Enforcement of data governance encryption Data loss prevention BYOD: a mobile app, prevent data from being stored on device BYOD: To enable IT to securely manage mobile devices across mobile operating systems and provide secure corporate , automatic device configuration, and certificate-based security. Product and Service Customers by industry Financial ServiceHealthcareGovernmentEducationPharmaceuticalManufacturingRetail ZIXI√√√ PFPT√√√√√√√ MOBL√√√√√√√

Comparable Ratio ZIXI had positive net profit ZIXI and MOBL did not have debt All three companies had a large number of deferred revenue recorded as liability, causing the large leverage ratio MOBL have a negative NI and positive tax expense

Comparable Valuation Multiple TickerPrice/Book ValuePrice/Sales ZIXI MOBL4.2x2.2x PFPT37.7x11.6x Weight TickerPrice/Book ValuePrice/Sales MOBL PFPT Comparable Statistics MOBL PFPT Implied ZIXI Share Price $ 7.33 $ 6.64 Weighted Average Stock Price $ 6.98

Buiness Overview Industry Overview Macroeconomic Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Technical Analysis Source: Yahoo Finance

Buiness Overview Industry Overview Macroeconomic Overview Financial Analysis Technical Analysis Projection & Valuation Recommendation

HOLD External Drivers Growing BYOD solution Growing encryption industry DCF Valuation $6.52 per share under scenario 1 (exc. Tax benefit) valuation Additional rate of return of 20% Technical & Comparable Valuation Comparable valuation is still atractive Technical analysis, SMA 20 above SMA 200 Acquisition Target Zix could be an attractive acquisition target with its unique business and high tax loss carry forward reserve