Zix Corporation (ZIXI)

Zix Corporation (ZIXI)
Analysts: Xiaodong (Kyle) Bu Wenqian (Cathy) Liang Kun (Katy) Chen Fang Liu April 12, 2016

Agenda Company Overview Business Model Industry Overview
Financial Analysis Projection & Valuation Technical Analysis Recommendation

Company Overview

Projection & Valuation
Current Holding Purchased 2000 shares at $2.89 on April 14, 2012 Basic cost: $5,780 Current: 2000 $3.78/share on April 11, 2016 Market value: $7,560 Gain: 30.8% Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Recent News Jan.19, Zix Corporation Appoints David Wagner as New CEO Former president of Entrust Successfully led the company’s smooth transition after its acquisition by Datacard Feb. 16, 2016 Zix Corp Delivers 20 Percent Annual Growth in New First Year Orders Year-over-Year Source: Zixcorp Website; Businesswire Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Company Overview Dallas-based company traded on NASDAQ (ZIXI) Additional offices in Canada Totaling 195 employees, as of Dec. 31, 2015 A leader in data protection Founded as an encryption company in 1989 Committed to innovative, easy-to-use security service Recognized as the industry leader in encryption by Gartner Research ZixDirectory - the world’s largest, shared encryption community Expanded into data loss prevention (DLP) with -specific solution in early 2013 Innovator in the bring-your-own-device (BYOD) market in late 2013 Source: Zix Website; K Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Business Model

Business Model encryption and DLP services: Purchased on sender side through a per user subscription model ZixOne (BYOD): Purchased for employees to access internal from mobile devices through a per user subscription model New customer contracts: Direct sales, telesales, value-added reseller Average 2.5-years contracts 98-99 percent of all customers complete full contract length Strong renewal rate resulting in retention of approximately 90 percent of revenue from year to year. Source: Zix website Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Regulatory Drivers The Health Insurance Portability and Accountability Act (HIPAA) --- Healthcare Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) Healthcare Gramm-Leach-Bliley Act (“GLBA”) --- Financial State specific encryption law --- Other industry demand for encryption in the healthcare sector In the financial services industry, financial institutions and their service providers are subject to the GLBA, businesses that transmit sensitive data by should be sure to encrypt the data. businesses may require protection to adhere to evolving industry best practices for protecting sensitive information Source: 2015 Zix 10-K Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Management Strategy Maintain ease-of-use advantage Grow the business by signing new customers to subscription services and selling new or higher volume services to existing customers Continue to executive on things they have done back and build upon their strong foundations with a focus on growth Source: 2015 Zix 10-K; Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

SWOT Analysis SWOT Analysis Threat Opportunities Weaknesses Strengths
-Ease-of-Use - No debt - Satisfying Service -Advantage in BYOD solutions Weaknesses -Heavily rely on third party distributors -Low substantial financial and technical resources Opportunities -Increasing market in BYOD -Strengthening Government Regulation Threat -Industry consolidation -Relationship with third-party distributors -Rapid change in technology substantial financial and technical resources compared with competitiors

Industry Overview

Revenue Drivers Number of individuals owning a mobile device Source: Radicati; GSMA global mobile economy report Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Data Processing & Hosting Service Industry Revenue and Growth Source: IBISWORLD Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Supplier Bargaining Power Buyer Bargaining Power
Porter’s Five Forces Analysis Industry Threat of new entrants High New ventures are easy to form and enter Threat of Substitutes Moderate High differentiation maybe replaced by Cloud Supplier Bargaining Power Heavily relies on third-party suppliers of the telecommunications infrastructure Potential to lose talent Buyer Bargaining Power Enforcement of laws Other alternatives Rivalry Many strong competitors

Financial Analysis

Financial Analysis No Debt No Dividend Tax Benefits The $1.0 million, $1.9 million, $11.9, and $35.5 million tax benefits in 2013, 2012, 2011, and 2010 resulted from the release of a portion of deferred tax asset valuation allowance. No tax benefit and paid income tax in 2014 and 2015 Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Profitability Tax has a huge impact on net income. Source: 10-K Group Calculation Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Liquidity and Capital Structure
Source: 10-K Group Calculation Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Efficiency and Greenblatt

DuPont Analysis: ROE after tax

Tax Benefits and Deferred Tax Assets
Positive earnings in FY2010 Net operating losses (NOLs) from 1996 to 2009 History of positive earnings from continuing operations and successful exit from e-Prescribing High net operating loss carryforwards in DTA More likely than not that the company would not realize most of the DTA More likely than not that a portion of the deferred tax asset would be realized Reduced its valuation allowance by $4.1 million, $5.2 million, $15 million and $35.3 million in 2013, 2012, 2011, and 2010, respectively Provided a full valuation allowance against most of accumulated U.S. deferred tax assets Benefit from those reductions were recorded in part as an income tax benefit of corresponding years Source: 10-K Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Tax Benefits and Deferred Tax Assets The $1.0 million, $1.9 million, $11.9, and $35.5 million tax benefits in 2013, 2012, 2011, and2010 resulted from the release of a portion of deferred tax asset valuation allowance. In 2014 and 2015, total amounts of both DTA and valuation allowance remain flat. No decrease of valuation allowance was used to offset income tax. Source: 10-K Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Two Scenarios in Valuation
No Tax Benefit Pay Tax at 35% Scenario 2 Tax Benefits Increase in NI Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

DCF Analysis

Projection assumptions
Revenue Projection based on “percentage of backlog realized from previous year” provided by management (57% for 2016) Establish a relationship between backlog, value of total orders and revenue Revenue growth slowed in 2014 due to low orders from Google; see pickup in Google order in 2015, expected to see continued revenue improvement from Google in 2016 Two scenarios Scenario 1: Zix continues paying income tax from 2016 to 2020, with an estimated tax rate of 35% Scenario 2: Zix won’t pay income taxes benefiting from reduction in valuation allowance from 2016 to 2019, but pays tax again in 2020 Backlog: Contractual commitments expected to recognized as revenue in the future. We breakdown the value of total orders as ”increase in backlog” and “new orders signed this year with recognized revenue”; we break down revenue as “realized backlog from last year” and “new orders signed this year with recognized revenue”. Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Projection assumptions：revenue growth
Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Projection: income statement

WACC Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

DCF Scenario 1: no income tax benefit

DCF Scenario 2: tax benefit from 2016 to 2019

Comparable Analysis

Comparable company analysis Company industry debt/equity Market Cap Operating margin ROE Qtrly Rev Growth weight Zix Corporation Application Software 0.00% 216.01M 18.80% 8.88% 11.00% Proofpoint 572.77% 2.10B -30.30% -9.08% 33.00% 10% Tucows Internet Information Providers 11.92% 233.60M 34.99% 9.32% 16% 40% Vmware Technical & System Software 18.93% 22.03B 21.68% 12.86% 10.00% 30% MobileIron 372.44M -48.10% -92.21% 14% VASCO Data Security International Security Software & Services 637.09M 20.90% 18.59% -18.50% Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Comparable company analysis Company Trailing P/E Price/Sales Price/Book Value EV/EBITDA weight Zix Corporation 42.92 3.85 3.71 15.24 Proofpoint N/A 7.99 34.81 -38.13 10% Tucows 21.85 1.35 8.86 11.24 40% Vmware 22.22 3.24 2.71 8.78 30% MobileIron 2.29 5.48 -3.57 VASCO Data Security International 15.16 2.65 2.58 9.91 Average 3.504 10.888 -2.354 estimate 2.805 8.644 3.951 Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Comparable company analysis Per share Implied price Trailing EPS 0.09 Sales Value 0.97 Book Value 1.02 EBITDA 0.22 Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Technical Analysis

Recommendation: Sell 1000 Shares @ Market (Hold remaining 1000 shares)

Hold 1000 shares Sell 1000 shares at market price The industry is growing. Company’s business model is promising. They have achieved positive earnings since 2010. Based on DCF Sce2 (with tax benefits), there is still room for the stock price to increase. CON Zix doesn’t pay any dividend. Company can easily use deferred tax assets to manipulate net income The actual value of deferred tax assets remains questionable. History of revaluing its financial statements and changing the numbers of key factors Company Overview Business Model Industry Overview Financial Analysis Projection & Valuation Technical Analysis Recommendation

Thank you!

Zix Corporation (ZIXI)

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