Zix Corporation
Q2 2019 Earnings Call Transcript

Published: 1 Aug 2019

[Operator:]

Good afternoon. Welcome to Zix's Second Quarter 2019 Earnings Conference Call. My name is Brian, and I will be your operator this afternoon. Joining us for today's presentation are the Company's President and Chief Executive Officer, David Wagner; Chief Financial Officer, David Rockvam; and Vice President and General Counsel Noah Webster. Following their remarks, we will open the call for your questions. I would like to remind everyone that this call is being recorded and made available for replay via a link in the Investor Relations section of the Company's website. Now I'd like to turn the call over to Noah Webster. Sir, please proceed.

[Noah Webster:]

[David Wagner:]

Thanks, Noah. Good afternoon and thank you, everyone, for joining us today. The second quarter of 2019 continued the acceleration of our growth strategy as we delivered another quarter of solid results and made further progress integrating Zix and AppRiver. We achieved overall organic revenue growth of 15% and adjusted EBITDA margins of 23% pushing right up against ‘the rule of 40,’ and demonstrating that our business is moving in the right direction with improving profitable growth. Our annual recurring revenue or ARR was up 162% year-over-year and on an organic basis ARR was up 17% across Zix and AppRiver. I'm happy to report new company records for core Zix; record revenue of $18.7 million representing 7% growth over last quarter, and record ARR of $78.7 million representing 6% growth year-over-year.

[David Rockvam:]

Thank you Dave, and good afternoon everyone. As our results for the quarter demonstrate, we're continuing to build ahead of steam generating significant progress, integrating AppRiver, expanding our product suite into the cloud, starting new trials, securing new customers and retaining and cross selling our installed base. Total revenue of $45.9 million helped us exceed our revenue guidance once again, as we continue to outperform and build a foundation for more robust profitable growth. Turning now to our financial numbers in more detail. At the end of the second quarter, our ARR or annual recurring revenue totaled $193.7 million up 162% from Q2 of last year and 17% on a purely organic basis. Zix's standalone ARR increased 6% organically year-over-year to $78.7 million while AppRiver's standalone ARR increased 26% organically year-over-year to $115 million.

[David Wagner:]

Thanks for the financial overview, Dave. Now I will review our progress executing our growth strategy as an integrated company in the context of our three main growth drivers. Then I will provide an update on where we are with the AppRiver integration before we open the call for questions. As a reminder, our three growth drivers are new orders to new customers, sales to existing customers and increasing retention. Our first growth driver is new orders to new customers. Our largest five new customer wins in the quarter provide an interesting window into the early cross-selling success we're seeing, consistent with Zix's traditional success and compliance-oriented verticals. Four of the top five new customer wins in the second quarter, we're in the healthcare vertical, while the fifth within the finance vertical. Particularly encouraging in our top five wins was the high amounts of attach business we generated. One of our top five new customer wins purchased all four of our major solutions

[Operator:]

Thank you, sir. And our first question will come from the line of Mike Malouf with Craig-Hallum. Your line is now open.

[Mike Malouf:]

Great. Thanks a lot for taking my questions and well done integration. If I could just start off, it's pretty easy to see how the integration and cross-selling – I'm sorry the cross-selling of Zix products over to the AppRiver can be achieved. But I'm wondering if you could just delve a little bit deeper into the opportunity of Office 365 into the Zix customer base. And how you are going to approach that? And you've had a little bit of time now and if you could just give us a sense of how much impact or potential there would be over the next couple of years, that would be helpful. Thanks.

[David Wagner:]

Okay, that's a great question, Mike. And for the trials as you mentioned off the AppRiver platform are progressing in that seamless, frictionless motion that needs to be augmented by better awareness in marketing – channel marketing and sales activities that we're endeavoring to do. On the Zix side, the positioning of Office 365 is already going very well. We just launched the Office 365 SKUs into the Zix selling channel in the middle of May and we already had the 13 closed transactions just in the first six weeks. So that's good. What we're finding so far is consistent with the survey results we got prior to the acquisition that suggested that 19% of our customers would be highly likely to buy Office 365 within 24 months from Zix and as similar but slightly lower percentage interested in Secure Hosted Exchange from Zix. So the potential to me remains on attach at that 19%, at the very high end to our customers with less than 500 mailboxes. So to be clear, the way that Microsoft licensing works, 500 users and above, the pricing is really consistent, no matter the channel that the end customer buys from or through as you move above 1,000 users. And for sure by 5,000 users, Microsoft is offering enterprise license agreement that makes it less practical but not impossible, less practical for customers to value that what we can provide. So we're really looking at the 1.3 million mailboxes. We have in the hands of customers with less than 250 mailbox to be our target for that high attach rate.

[Mike Malouf:]

Okay, great. And the 13 that you've closed so far, are those all in that target number?

[David Wagner:]

Yes, I mean, it was just really early days. We're in the hundreds of seats, not thousands of seats sold in the first six weeks. We'll be looking to grow that obviously quarter-on-quarter as we move forward.

[Mike Malouf:]

Okay, perfect. And then just to follow-up, now that you've put the companies together, I know that the first, I guess you wouldn't necessarily call it a whole, but certainly the added product that you had was the large file transfer. Have you seen any more out there that you think you want to include in there or is there some more you think acquisitions or tuck-in acquisitions that you think might help you? Or do you think you have it right now and we just kind of run with it over the next couple of years?

[David Wagner:]

We're really pleased where we are now that DeliverySlip large file transfer business. We did have two small cross-sells earlier than we thought we'd have. That’s something really complimentary piece of technology, particularly into the Zix space. Of course, it's the product that's been offered through the AppRiver base. We're now offering that side-by-side with ZixEncrypt in the AppRiver platform. So we feel really good about where our position is today. We continue to scan and be aware of the ecosystem around us for highly accretive opportunities, but we feel really good about the set of solutions we have for our customers today.

[Mike Malouf:]

Okay, great to know. Thanks for taking my questions.

[David Wagner:]

Sure, thanks Mike.

[David Rockvam:]

Thanks Mike.

[Operator:]

Thank you. And our next question will come from the line of Tim Klasell with Northland Securities. Your line is now open.

[Tim Klasell:]

First question is Microsoft just historically had a great relationship with AppRiver, now that, you guys have been together for a little bit and maybe through – obviously through some meetings, maybe you can tell me, where do you expect to see most of the cross-selling for the M365? Is it ATP into that base or maybe you can sort of say where you walked away from those meetings with Microsoft being the most excited? Thanks.

[David Wagner:]

That's a great question. And so from Microsoft perspective, the addition of the Zix IP in the way they look at it to address edge cases, in compliance-oriented verticals for HIPAA Compliance on our outgoing email, for FINRA compliance on – from broker dealers, for connectors outside Microsoft and even Microsoft connectors for things like Teams and Skype. These are things that they feel are really good compliment to their technology and we'll be working with them more closely on how we position them as complimentary value-add for the partners. So they're excited about a true sell with partner with value-added technology to put on top of what AppRiver already was and is one of the very top leading CSPs in the productivity modern workplace environment. And what we also add with Zix, as I mentioned, is better coverage into the mid-market buyer where Microsoft field of coverage is less than perfect and they feel that it's an additive part of the equation as well. And I didn't understand that as well 90 days ago as I do today after having spent that time with the Microsoft go-to-market executive. So we're really excited about, position the complimentary technology and specialized use cases, we're excited about extending Office 365 into the Zix space. And then finally, in terms of percentage attach, of course, advanced rep leads the charge in terms of where we expect them at the most attacks. We believe that every mailbox should have a second layer of protection, no matter how good Microsoft’s coverage get I guess, I think it'd be good to have a second layer of protection is a best-in-class practice.

[Tim Klasell:]

Okay, perfect. And then just one quick follow-up. You mentioned the OEM cleanup maybe caused a little bit of drag this quarter that you overcame, but was some extra drag, how long do you expect that to last? Will that last in the next quarter or two quarters or, how long will that drag be there? Thanks.

[David Wagner:]

Okay. So, I think that's a one quarter bump down, it's a long standing partnership. They made an adjustment in the way that, we're working together. We're down to, really only one meaningful OEM partnership and that's of course with Symantec. We would expect it to continue. We do not expect it to grow and so it's one that would – not a growing revenue stream, but we don't expect it – a bump down like we experienced this past quarter again.

[Tim Klasell:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question will come from Nick Yako with Cowen and Company. Your line is now open.

[Unidentified Analyst:]

Hi, this is on from Nick. Congrats on solid quarter and the successful integration thus far. I had two quick ones here. So last quarter you signed the largest deal in company history, has that opened up any new doors or opportunities and maybe you weren't included in the past. And do you have the potential for similar sized deals in the future?

[David Wagner:]

All right, so on that one, actually those are going to be, as I said last quarter, they're going to be inconsistent. We're making progress on it, on a small pipeline of big deals. But they won't be consistent but they'll be intermittent as they’re large, there's so many large opportunities like that.

[Unidentified Analyst:]

Okay, that makes sense. And then shifting gears a bit, could you discuss what DeliverySlip brings to your portfolio in addition to the margin benefit and then as a follow-up to that, as you look to build-out the new combined portfolio, has your thinking around the build versus buy model changed.

[David Wagner:]

So thank you again for asking a question about DeliverySlip. It tends to get lost in that same survey we did of our customer base last December before the acquisition of AppRiver, large file transfer was the number one identified adjacency that our customers were looking for us to have a product in. So, bringing that solution into the fold, first and foremost, to mitigate any disruption to the AppRiver go-to-market motion those hundred of and thousands of customers have accumulated, that was job one. That's done and going well. Job two is the enhancement of that code base to segment it into what we perceive are the three proper segments of value. Large file transfer, digital signing, and email encryption and that R&D work is progressing and we would expect a release in Q1 that will start to allow us to have Zix branded large file transfer application that's getting integrated into the product suite. In the meantime, it's a product that's been available for eight years with thousands of customers that is available for sale. It's just in a separate – today it is separate law again, different looks and feel. But again, available for sale, so it is going to be a great add-on for our customers and especially as we move into 2020 and they're able to take advantage of the fully integrated product we expect to have later in 2020. That's why I think it's a really special, solution for our customers.

[Unidentified Analyst:]

Great. Thanks for that color.

[Operator:]

Thank you. And I'm showing no further questions over the phone. So, now I'd like to turn the call back over to Mr. Wagner for his closing remarks.

[David Wagner:]

Well, thank you all for joining us this evening. Have a great evening and I look forward to sharing additional progress with you in October.

[Operator:]

Thank you for joining us today for Zix’s second quarter 2018 earnings call. You may now disconnect.