1. ANASTASIA SUTJAHJO JEEWHAN SHIN TING-YING (ERICA) WU November 1, 2012 1

2. AGENDA Introduction and Current Holding Macroeconomic Review Stock Market Overview Industry Review Company Assessment Financial Analysis Financial Projection Methodology and Application Recommendation 2

3. CURRENT HOLDING April 17, 2012 Acquired 2,000 shares @ $2.89/share Cost basis = $5,780 October 31, 2012 Current holdings 2,000 shares @ 2.90/share Market value = $5,800 Annualized HPR = 0.642% 1.67 % of total portfolio

4. MACROECONOMIC REVIEW Unemployment Rate U.S. unemployment rate fell to 7.8 percent in September, which was the lowest since January 2009 GDP Growth Slow recovery from recession Source : http://finance.yahoo.com/news/us-jobless-rate-falls-7-123110416.html http://www.bea.gov/national/index.htm 4

5. STOCK MARKET 5 Source : Capital IQ

6. INDUSTRY OVERVIEW The global application software market Total industry revenue of $76 billion in 2010 Representing a 4.7% growth from 2006 to 2010 The performance of the market is forecasted to accelerate Anticipated to grow 7.8% during 2010 to 2015 The value of the market is expected to be $110.9 billion by the end of 2015 6 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)http://advantage.marketline.com/Product?pid=MLIP0318-0001

7. Global application software market value: $ billion, 2006–10 INDUSTRY OVERVIEW 7 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)http://advantage.marketline.com/Product?pid=MLIP0318-0001

8. Global application software market value forecast: $ billion, 2010–15 8 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)http://advantage.marketline.com/Product?pid=MLIP0318-0001

9. 9 Forces driving competition in the global application software market, 2010 9 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)http://advantage.marketline.com/Product?pid=MLIP0318-0001

10. COMPANY HISTORY 1988 Incorporated in Texas, named as Amtech Corporation 1999 Changed name to ZixIt Corporation and entered encrypted email market 2002 Became Zix Corporation as current name 2003 Entered the e-prescribing 2009 December 8, announced plan to exit from e-prescribing market 2011 Introduced ZixAccess, a new decryption service for inbound email delivery 10 Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012http://www.zixcorp.com/resources/

11. BUSINESS DISCONTINUED OPERATIONS E-prescribing Started in July, 2003 e-Prescribing consists of a single product line named PocketScriptR, which is an electronic prescribing service that allows physicians to use a handheld device to prescribe drugs and transmit the prescription electronically to virtually any pharmacy Business going downward December 8, 2009: Worked with Strategic View (Allen & Company LLC) Announced it would wind down the e-Prescribing business and exit the business by December 31, 2010 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm) 11

12. BUSINESS CONTINUING OPERATIONS Email encryption: Software-as-Service (“Saas”) ZixDirectory: largest email encryption information utility with more than 33 million members per week Transparent Email Encryption: easy to use and encrypted without any extra steps. Completely transparent to the sender and receiver, not utilizing decrypted password Zix Mobility: penetration to mobile support email encryption as a respond of technology trend 12 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

13. ZIX’S COMPETITIVE ADVANTAGE Competitors: Product based approach’ which is depends on each company’s own system Directory of each user identities is not shared Less desirable since different companies encrypted email systems are not interoperable ZIX Corp.: Saas architecture enable transparent email delivery through ZixDirectory Enable company to have secured communication with external network 13 Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012http://www.zixcorp.com/resources/

14. BUSINESS MODEL Go-to-market model: Multiple-year subscription contracts with the fees paid annually at the inception of each year of service. As a result, a high percentage of customers subscribe to the Email Encryption Service for a three-year term versus a one-year term 14 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

15. BUSINESS DISTRIBUTION CHANNEL 15 Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012http://www.zixcorp.com/resources/

16. CUSTOMERS Five division of US Treasury, all FFIEC U.S Federal Banking Regulators, SEC and FINRA, 22 U.S State Banking Regulators 1,800 Financial Institution, 20% all bank in U.S. 1,500 U.S. Hospital, 20% U.S Hospital, 32 Blue Cross Blue Shield Organizations 16 Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012http://www.zixcorp.com/resources/

17. BUSINESS RISKS Decrease in demand Unfavorable economic/political conditions Rapid technology change Lack of infrastructure Significant investment with no guarantee of revenue Fierce competition Weak position in the supply chain Market penetration failure Low quality of services (reputation, potential legal liability) 17 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

18. POTENTIAL CONTROLS Lobbying Activities $20,000 in 2005 by hiring Health Policy Group lobbying firm High Operating Costs SG&A (5yr avg.): 57.4% of total sales R&D Expenses (5yr avg.): 15% of total sales Significant Cash Holdings Cash & ST Investment (5yr avg.): 86% of current assets  Might mitigate some business risks 18 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

19. HOW COMPANY GENERATES MONEY Revenue Drivers Email Encryption Contracts: New First Year Order (“NFYO”): New Subscription Multiyear contract which is irrevocable and nonrefundable Price is manufactured to induce long term contract Upfront payment and revenue will be recognized ratably throughout subscription year Retention of subscription: Renewal Subscription 90% retention rate Account for 95% revenue Regulatory Driver Significant increase in demand in healthcare sector led by April 2005 HIPAA (Health Insurance Portability and Accountability Act) HITECH ACT: Increase penalty while expanding the scope of HIPPA Current trend: Law, and regulation across the country have enhanced security awareness. Governments have focused on encryption. Licensing (potential) Potential large number of future NYFO Signed extended 3 year contract with Blue Cross Blue Shield, Pen Publishing Interactive, Austin Bank xDefenders, Berkshire Bank in 2011 19 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

20. HOW COMPANY GENERATES MONEY Revenue Breakdown Price * Quantity Price: Constant, even allowance due to high competition Matter of Quantity, Maximizing volume of contracts Backlog: Contractually bound agreements expected to be recognized as services are performed (Deferred Revenue) Approximately 60% to be recognized during the next 12 month Order: New First Year Order (NFYO) and Renewals As of June 2012: Backlog is $55.5M and Total Order is $22.6M Source: ZIXI 10-K and 10-Q FY2007 – 2012 (http://www.sec.gov/cgi-bin/browse- edgar?action=getcompany&CIK=0000855612&type=10&dateb=&owner=exclude&count=40) 20

21. FINANCIAL ANALYSIS Quarterly Revenue Growth Average Growth of 16.74% Source: ZIXI 10-Q FY2002 – 2012 (http://www.sec.gov/cgi-bin/browse- edgar?action=getcompany&CIK=0000855612&type=10-q&dateb=&owner=exclude&count=40) 21

22. FINANCIAL ANALYSIS Key Observations Great Gross Profit Margin: Approx. Above 80% Stable Operating Expenses Improving EBIT Huge Tax Refund in 2010 and 2011 Source: Capital IQ (ZIXI Financial Statements from 2007 to 2011) 22

23. FINANCIAL ANALYSIS Key Observations Significant Cash Holdings and Deferred Tax Assets PP&E and Depreciation 99% Equity Financing: No public debt Deferred Revenue is 88% of Current Liabilities and 87% of Total Liabilities Negative Retained Earnings 23 Source: Capital IQ (ZIXI Financial Statements from 2007 to 2011)

24. FINANCIAL PROJECTIONS Sales are Increasing Industry growth trend Economy recovery Increase of contracts sourced from the regulatory drivers and new product initiatives Increasing backlog to be recognized Cost of Goods Sold is Increasing with Revenue SG&A is Decreasing Declining percentage of the revenue comes from the direct sales distribution, which may lead the company to reduce marketing expense Discontinuation at E-Prescription business R&D is Increasing Rapid technology change Development of new products such as ZixMobility Increase quality of products (reputation, potential legal liability) 24

25. DISCOUNTED CASH FLOW 25 CAPM CAPM (50%)6.50% ROE (50%)16.60% Discount Rate11.55% Enterprise Value$160.60 Market Capitalization181.28 Share Price2.94 Terminal Growth Rate3.50%

26. COMPARABLE ANALYSIS 26 CompanyTicker Market Capitalization Enterprise ValueSales Gross Profit EBITDA EBIT Net Income Total AssetsCash Zix Corp. ZIXI177.6154.541.634.111.710.32277.620.68 EdgeWave, Inc. EWVE1.78.717.512.4-3.4-3.8-4.217.62.61 IceWEB Inc. IWEB15.116.72.70.6-3.4-3.7-8.62.80.004 Proofpoint, Inc. PFPT426.2349.793.762-11.4-19.8-21689.77 Mean155.15132.438.87527.275-1.625-4.25-2.9541.58.266 Median96.3585.629.5523.25-3.4-3.75-6.442.86.19 LowMediumHigh Enterprise Value $ 155.26 $ 192.34 $ 399.07 Market Capitalization 178.49 215.57 422.30 Share Price2.933.496.84

27. VALUATION SUMMARY 27 DCF $2.94 Comparables $3.54

28. RECOMMENDATION † High growth potential † Competitive advantage through ZixDirectory † Growing stage − Negative retained earnings − Smaller size compared to diversified competitors 28 HOLD