1. Zix Corp. Applied Portfolio Management Gies College of Business 2018
Azamat Assanov | Xuan Jia
Gies College of Business
2018
MARCH 27

2. Share Market Prospects
Financial Overview
Price Per Share
4.40
Market Cap
239.9M
Enterprise Value
208.6M
Forward P/E
12.22
Enterprise Value/Revenue
3.18
Valuation
$4.5 - $4.9
Hold
Sold 1,000
@ $3.96
Bought $2.89
Source: Yahoo Finance

3. Company Overview Zix Protect:
Analyze s before entering inbox to prevent from malware or virus
Company Overview
Zix Encryption:
Automatically encrypts s that contain sensitive information
Zix One:
No data resides on devices
Zix Archive:
Archive s by different categories
Source: Zix. Corp.

4. Sales and Marketing Diversified sales approach:
Direct sales focuses on large business
Telesale focuses on small or medium size business
254 value-added resellers
136 managed security service providers
OEM partnerships with Google, Cisco and other technology leaders
Source: Zix Corp.

5. Customers Analysis Large and loyal customer base:
Over 30 Blue Cross Blue Shield organizations
More than 1200 US hospitals
Federal Financial Institutions Examination Council
Divisions of US Treasury
US SEC
Large and loyal customer base:
Over 19,000 customers
Encrypted over 495,000,000 s per year
90% customer retention rate
30% of US Banks
Source: 10-K | Zix Corp IR

6. Management Strategies
Establish new customers for ZixOne by increasing investment on selling and marketing
Keep New First Year Order (NYFO) growing
Combine encryption with quality managed service providers and resellers
(In thousands)
(In thousands)
Source: 10-K | Zix Corp

7. Macroeconomic and Industry Trends
Growing Trend in Business
(In billions)
(In billions)
Source: The Radicati Group, Inc

8. Relevant Regulations
Health Industry: Obey the Final Omnibus Rule to protect health information, HIPAA compliance
Financial Industry: Gramm-Leach-Bliley Act mandates the protection of consumer privacy, CFPB compliance
Education: The Family Education Rights and Privacy Act
General Data
Protection
Regulation: Enterprises in the UK and Europe
Source: Annual 10-K

9. Macroeconomics (cont’d)
US IT Salary Growing Trend %
units
Source: Bureau of Labor Statistics

10. Industry ZiXi Highly Competitive Fragmented Technology Change Rapidly
Grows rapidly
Cyber Security
Data Security
Encrypt
Incidence
Process
Hardware
Security
Cyber Consult
ZiXi
Source: NASDAQ

11. Email Encryption Industry
Proofpoint: Large scale, relatively short history, More industries like retailers, aerospace and defense contractors, petroleum refining, worldwide
Symantec:
Huge scale,
Not focus in encryption

12. Cyber Security Industry
Factors to be competitive:
Product Quality
Breadth of Product Offerings
Customer Support
Sales and Marketing
Barracuda Networks taken off by Thoma Bravo
DigiCert’s acquisition of Symantec’s website security and PKI solutions
Synopsis bought Black Duck
Mercury Systems acquired Themis Computer
Proofpoint purchased Cloudmark
Source: Cybersecurity Ventures

13. SWOT Analysis Weakness: Strengths: Sales Distribution Patents Scale
Cost Control
Strengths:
Patents
Mature technology
Loyal customers
Opportunities:
Cyber security outlook
Regulations on data and privacy
Threats:
Competition with large companies
Government regulation

14. Financial Analysis of Past Performance
4.6%
8.7%
9.9%
9.2%
Growth rate (%)
83.5%
82.5%
80.8%
Gross Profit Margin (%)
8.1%
9.2%
9.7%
-12.3%
Net Profit Margin* (%)
16.6%
18.4%
19.3%
19.7%
EBITDA Margin (%)
*On Dec. 22, 2017 the U.S. enacted the Tax Act that lowered tax rate from 35% to 21% (effective Jan. 1, 2018 resulting in one-time income tax expense (non-cash) of $12.3 million due to adjustment of deferred tax balances.
Source: Annual 10-K

15. Financial Analysis of Past Performance (cont’d)
Balance sheet items
Dec. 31, 2017
Cash & cash equivalents
$33.0
Short-term debt
$0.0
Long-term debt
Deferred tax assets*
$25.6
Company has strong balance sheet with no debt
The Company has $232M in net operating loss carryforwards which begin to expire in 2020
Company is able to meet immediate obligations and pays no dividends
ZIXI management expects to utilize deferred tax assets before expiration. ZIXI has not utilized deferred tax assets since 2013 and continued to pay income taxes in
Thus, financial projections are based on:
Scenario 1: If deferred tax assets are not utilized
Company pays income taxes at 21%
No change in deferred tax assets
Scenario 2: If deferred tax assets are utilized
Company pays no taxes till 2021
Deferred tax assets decrease by income tax exp.
Source: Annual 10-K |

16. Dupont Analysis

17. Multiples and acquisition of Barracuda Networks
Barracuda Networks Acquisition:
In February 2017, Thoma Bravo LLC, a leading private equity investment firm announced that it completed the acquisition of Barracuda Networks, Inc. in all-cash transaction valued at $1.6 billion.
Source: Capital IQ

18. Discount rate Beta Rf Rm -Rf CAPM
Source: Yahoo Finance | Damodaran Online

19. Financial Projections (Base version)
Revenue growth:
2018 9%
2019 9%
2020 8%
2021 7%
2022 7%
Source: 10-K

20. Financial Projections (Analyst version)
Revenue growth:
2018 9%
2019 5%
2020 5%
2021 4%
2022 4%
Source: Annual 10-K | Analyst estimates: Capital IQ

21. PV according to DCF Model (Base version)
If deferred taxes are not utilized:
If deferred taxes are utilized:

22. PV according to DCF Model (Analyst version)
If deferred taxes are not utilized:
If deferred taxes are utilized:

23. Recommendation Current price: $ 4.40 Multiples: $6.9 – $10.4
Based on analysis and assumptions applied 23
Supportive comments:
Growing industry
Increased addressable market through acquisition of Greenview data to further increase revenue (attempt to diversify revenues)
Good operational performance despite small capitalization and undiversified revenue stream
Management has managed to increase revenues for up to record level year on year meeting expectations
Potential target for acquisitions (management & insiders own 3% of the Zix Corp.)
Current price: $ 4.40
MAR
Multiples: $6.9 – $10.4
Share value: $ $4.9 27
Recommendation: Hold
MAR

24. Price projections based on current P/E ratio
Current P/E ratio is multiplied by the forecasted EPS
Price per share
$4.40
$5.4
$6.0
$6.5
$7.0
$7.6
P/E
ratio is based on normalized EPS of $0.13
33.8x
2018
based on EPS of $0.16
2019
based on EPS of $0.18
2020
based on EPS of $0.19
2021
based on EPS of $0.21
2022
based on EPS of $0.22
2018
2019
2020
2021
2022
Exp. Return
35%
20%
15.7%
13%
12%