Zix Corporation
Q4 2019 Earnings Call Transcript

Published: 20 Feb 2020

[Operator:]

Good afternoon. Welcome to Zix's Fourth Quarter and Full-Year 2019 Earnings Conference Call. My name is Gigi, and I will be your operator today. Joining us for today's presentation are the company's President and CEO, David Wagner; CFO, David Rockvam; and Vice President of Marketing, Geoff Bibby. Following the remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via a link and the Investor Relations section of the company's Web site. Now I would like to turn the call over to Geoff Bibby. Sir, please proceed.

[Geoff Bibby:]

Thank you, Gigi. Good afternoon everyone, and thank you for joining our fourth quarter and full-year earnings call. With me today, as Gigi mentioned, is our CEO Dave Wagner, and our CFO Dave Rockvam.

[David Wagner:]

Thanks, Geoff. Good afternoon, and thank you everyone for joining us today. The fourth quarter kept off an excellent finish to a record year for Zix. This earnings call is on the exact one year anniversary of the closing of the AppRiver acquisition on February 20, 2019. It has been an exciting year as a larger integrated company. We grew Annual Recurring Revenue or ARR by 177% from $76 million at year-end 2018 to nearly $210 million at year-end 2019. We grew revenue by more than 15% organically for each of the last three consecutive quarters. Our success continued in Q4 as we delivered double-digit organic revenue, adjusted EBITDA, and ARR growth, while maintaining solid adjusted EBITDA margins and generating strong cash flow. I am very proud and appreciative of our team as we deliver this outperformance in the phase of a demanding, rigorous, and successful integration process during the year. As we look back on 2019, we are extremely pleased with the progress we've achieved. We are already more than twice as large as either Zix or AppRiver was on a standalone basis prior to the combination, illustrating the fact that our new hole is greater than the sum of the parts. We are now a cohesive team aligned around one shared vision, becoming the leading provider of cloud email security, compliance, and productivity solutions for companies of all sizes.

[Dave Rockvam:]

Thank you, Dave, and good afternoon everyone. As our performance for the quarter and full-year demonstrates, we're continuing to realize the financial benefits and operational efficiencies that come from being a fully integrated organization at scale. Now let's talk about the numbers in more detail. At the end of the fourth quarter, our ARR totaled $209.7 million, up 177% from Q4 of 2018, and up 16% on a purely organic basis. On a combined company basis, cloud based ARR now makes up 81% of total ARR. For the fourth quarter, we had just over 101% net dollar retention, which represents our renewals plus our new sales and the installed base divided by their renewals that were available at the beginning of the quarter. Our strong gross dollar retention of over 90%, growth in new customers, and continued success, and cross-selling drove yet another quarter of record ARR. Total revenue for the fourth quarter increased 173% to $50.4 million from $18.4 million in the same quarter of 2018. With $50.4 million of revenue, we exceeded our guidance for the quarter. Total organic revenue growth across Zix AppRiver was 15% during the quarter, which once again was at the high end of our implied growth guidance from the time of the AppRiver acquisition. For the full-year of 2019, total revenue increased 146% to $173.4 million from $17.5 million as of the same date last year. On an organic basis across Zix and AppRiver revenue for the full-year was up 15%, compared to 2018. Our adjusted gross profit for the fourth quarter was $29.2 million, or 58% of total revenue, which was an improvement on $1 basis from $14.6 million, or 79.3% of total revenue in the fourth quarter of 2018. This means we doubled our gross margin dollars from Q4 2018, demonstrating the positive gross margin dollar generation ability of the combined company and the true ability to continue our profitable growth trajectory. For the full-year of 2019, our adjusted gross profit was $104.7 million, or 60.3% of total revenue, which was an improvement on $1 basis from $56 million, or 79.5% of total revenue in 2018.

[David Wagner:]

Thanks, Dave. Now I'd like to review our Q4 execution in the context of our three primary growth drivers, after which I will provide an update on our integration initiatives and our outlook for 2020 before opening the call for questions. As a reminder, our three primary growth drivers are one; new orders to new customers, two; sales to existing customers and three; increased retention. Starting with new orders to new customers, as I remarked earlier, it is clear that our go-to-market effort and sales channels are gaining traction. During the fourth quarter, we saw strong demand for all of our solutions from customers of all sizes in a wide range of verticals. Under Zix go-to-market side, three of our top five new customer wins were in healthcare, one within government and the other in finance, traditionally, our strongest verticals. Our largest new customer in the quarter was a six-figure win with the Canadian government entity that purchased our new large file transfer solution. This customer was in a pilot deployment and went to a full competitive RFP this fall, which we run for 4,000 seats. They are exploiting the full range of this product's robust features, and we scored a remarkable 97% on the technical portion of the RFP. The second largest deal was equally remarkable as we closed our first standalone phenomenal support sale in the quarter with a 7,000-employee healthcare organization. Phenomenal support is a premium support skew for Office 365. We expect larger enterprise customers to continue to buy Office 365 directly from Microsoft. But this deal shows the value we can bring to enterprise customers with phenomenal support to enhance their Office 365 experience. These two wins further demonstrate how tightly we've already integrated as Zix and AppRiver pre-sale and post-sale teams work side-by-side as one cohesive team to win these deals. The third largest deal was for Office 365 and advanced threat protection in the finance vertical and the last two deals were in encryption and threat and healthcare. These three deals averaged two solutions per customer. On the partner side, we increased our total number of monthly transacting MSP partners to 4,338 in the quarter. Some of the larger new partner additions were in the U.K. As an example, we have an MSP with more than 100 customers that has already added 3500 users of Office 365 and our advanced threat solution. They are affecting encryption and archiving as well. A new Irish partner added Office 365 in it's valuating threat as a competitive displacement, as well as encryption and archive as new services. In North America, we want the headquarters location of a 200 location IT franchise business. Locations, we hope to penetrate in the coming quarters. Moving on to our second growth driver, which is sales to existing customers, three of the top five add-ons we secured in the fourth quarter were in healthcare one was in real-estate and the other in government. All three cross selling motions were represented, which includes our Office 365, advanced threat, and archiving solutions. Only one of the top five add-ons was encryption only. In total, this group also averaged two solutions per customer. On the partner side, I already mentioned the 70% increase in trials from Q3 to Q4 for encryption archive. More specifically in North America, our largest MSP agreed to standardize on our advanced threat offer for their basic package, and has agreed to add encryption and archive to their better and best packages respectively. We also added encryption to a healthcare focused MSP that expects to standardize on encryption to all their existing healthcare accounts in Q1 and has added encryption as a mandatory feature for all future new healthcare accounts. In the U.K., a partner added earlier in 2019 agreed to standardize on advance threat solution for 4,500 mailboxes, displacing a competitor. Now, let's look at our results for the fourth quarter by solution area. Well, we believe this ARR by solution information is helpful to investors. It's important to note that we do not manage our business by solution category. Increasingly our sales are made as bundled solution. This means we have to use management judgment to allocate value to each solution area. That having been said productivity ARR increased 9% sequentially to $96 million, which represents an increase of 27% year-over-year. Net of turn, we added more than 77,000 mailboxes in the quarter as I mentioned earlier. Encryption ARR was $73 million, which is essentially unchanged from last quarter and is up 7% year-over-year. Our encryption seats declined by less than 1,000 -- 1% or about 30,000 seats from Q3. This decrease is primarily the result of the ZCT end-of-life. ZCT is our former OEM product with Cisco. As previously disclosed, these customers will migrate either our core product or to Cisco. When they stay with us, our seat count is unchanged but our price per seat more than doubles. When they go with Cisco, we lose the lower priced OEM fee. And that's what happened with a couple of accounts last quarter. Our seat count is up 20% year-over-year, and we do expect to continue to grow our core encryption business. However, it will not be surprising at intermittent small debts like this one. Advanced threat protection ARR was $23.4 million compared to $22.8 million last quarter. We continue to gain traction from our cross-sell into the Zix space, as well as AppRiver selling motion with partners. Our seat count was up nearly 8% year-over-year while we have increased our annual recurring revenue by 25% as we continue to add more value for our customers in this area. And finally, our emerging category grew 5% quarter-over-quarter to $18 million of ARR driven by growth in both our archiving business and in total defense, our consumer endpoint business. Moving on now to our third growth driver, increasing retention, our total company net dollar retention was 101%, which was down slightly from last quarter, we were down just a little bit in both AppRiver and Zix net retention, which of course was offset this quarter by higher sale to new customers. For the full-year, we finished over 102% with both Zix's and AppRiver ending both Q4 and the full-year at over 100%. Increasing retention is one of the key drivers of our increasing overall revenue and annual recurring revenue. And we're really pleased with the success we're having to-date and we expect to continue to build on this success. We also successfully transitioned hundreds of customers over the past two quarters into the AppRiver platform and with a new launch of our secure cloud in early Q2, which we'll talk about more next; we expect our net dollar retention to begin to accelerate further. Closing out the revenue section, I would like to highlight the addition of our new Chief Revenue Officer, John Di Leo. John was a sales leader at NCR for nearly 20 years, leading teams in various product lines with revenues up to $2 billion annually and in various geographies, including a several-year assignment in the United Kingdom. He moved on to Datacard where he led the sales and service team there as they grew from $300 million to more than $600 million in revenues over five-years. Dave and I worked with John for two years at Datacard as we integrated Entrust into Datacard. John brings a wealth of go-to-market knowledge across many products, geographies and sales motions. We expect his experiences and his expertise to be invaluable as we focus on scaling Zix to the next level. John consulted with Zix in various roles over the past 18 months, but just joined as our permanent Chief Revenue Officer effective February the 1st. As I mentioned earlier, one of the most impressive things I've seen since bringing Zix and AppRiver together is the level of collaboration and commitment across the organization and key functional areas. Our teams are closely aligned around our major new product launch planned for early Q2 2020. This release replace every one of our products into a single platform called secure cloud, where our customers will have one pane of glass that means one login and one unified interface across their cloud applications for productivity, security and compliance. There are three components that make up our secure cloud and make it so uniquely powerful. One is the deep suite of offerings, two the cloud native platform architecture that undergirds them, and three the intelligent technologies like analytics and machine learning that improved them both continuously. It's a complete offering that continuously makes employees safer, freer and more productive. It delivers a level of efficiency that doesn't just translate into advantage for the information technology and security teams, it's a whole business advantage, I'm really excited to see this combination of our integration play out for our partners and customers in the coming quarters. I should also mention that the unification of our formally separate technologies for advanced threat has progressed better than expected. Our development team is unifying the best aspects of both Advanced Threat Solutions into a single email security solution more tightly integrating our core IP and completely modernizing and refreshing the user interface look and feel for a best-in-class experience. While this launch accelerates our transition on a visual and a product level, it will also bring even greater value to our partners and customers. For many of our customers, this transition will be a multi-step multi-year process, but we're aiming for the majority of new customer onboardings to be in the new Cloud Platform secure cloud by Q4 of this year. In closing, 2019 was an extraordinary year for Zix as we grew and recurring revenue by 177% from $76 million to nearly $210 million. Our scale increased our operating leverage has led to improving sales and better overall execution, which is best exemplified by our 106% year-over-year adjusted EBITDA improvement in Q4. Taken together, our success integrating our solution and our teams as of entering 2020 with significant operating and financial momentum. We believe we're well-positioned to augment our current cross-selling success, which should lead to continued revenue growth and profitability improvements into 2020 and beyond. We're confident that our building sales momentum will allow us to maintain steady growth, while also enabling us to achieve our three to five-year vision of profitably scaling into the leading cloud-based email security compliance and productivity solutions provider in the marketplace. That concludes our prepared remarks. Gigi, we're ready to open the call for questions.

[Operator:]

And our first question comes from the line of Daniel Ives from Wedbush. Your line is now open.

[Daniel Ives:]

Yes, thanks, and great quarter the year.

[David Wagner:]

Thanks, Daniel.

[Daniel Ives:]

So, when you're seeing, especially on the Microsoft side, and obviously you had the vision and it seems like it's really starting to really execute. I mean what's the biggest thing that you're seeing as you're hearing from customers and maybe the cross-sell opportunity that maybe surprised you on the -- maybe on the positive side in terms of what you're seeing in terms of numbers from where we were maybe three to six months ago?

[David Wagner:]

Yes, that's a great question, Dan, and we're not totally surprised, but we are really pleased with the acceleration in the marketplace around the cloud, around Office 365. We had done careful work in advance of the acquisition to at least past the -- sort of a past the thesis that our partners and customers wanted a partner to help them make this migration. The thing that I would say surprised me to take that 7,000 seat healthcare account that was working for the enhanced support and service solution around their Office 365 implementation, you know, that's something we didn't expect to see, and then that Gartner report that I highlighted in my opening remarks, it's not a complete surprise, but we're really pleased with where Microsoft has taken their go-to-market strategy and really bolstering the CSP part of their business, and we think we're really now uniquely positioned to help medium-sized enterprises in addition to the more mid-market buyers that we were thinking would be applicable to our solution set. So, it's coming together really well. The last thing that is a surprise that I could not be more proud of our technical teams, we talked a year-ago that we thought it'd be a three to five-year journey to get the platforms integrated, that platform integration is coming together in early Q2, it's coming together in a way that's really visually appealing, really in my way of thinking really compelling value proposition, because we uniquely bring together productivity, security and compliance by design for our partners and customers.

[Daniel Ives:]

Got it. And when you think about before the acquisition, some of the pricing increases and things that went on, does it feel like now -- you know all the handholding, that's really basically on the rearview mirror?

[David Wagner:]

Yes, so that is in the rearview mirror. That's a really positive thing, and the forward mirror is that continued growth I see in the future for our sales teams. I talked about adding Chief Revenue Officer just here a couple of weeks ago, and we're already seeing a benefit of bringing the teams together, collaborating more closely on training, and value proposition. So, we have some good learning and good work ahead of us to continue to operate better as we move forward.

[Dave Rockvam:]

Yes, I think if you look at in Q2 we'll be delivering to those AppRiver customers on Advanced Threat, they'll be getting a lot of new feature functionality that's coming over from the Zix Protect product. So that should help even further with retention and winning new customers and winning new partners. So, we're excited about that.

[Daniel Ives:]

Thanks again, great job to the team.

[David Wagner:]

Thanks.

[Dave Rockvam:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Tyler Wood from Northland Securities. Your line is now open.

[Tyler Wood:]

Yes, thanks for taking our question. When you look at those 600 trials into the AppRiver base, how is the conversion rate of those trending, is it holding up versus where it was in the last couple of quarters?

[David Wagner:]

Yes, there was a big uptick this quarter. The initial quarter, we saw a lot of partners trying, and then you know, to see how it works. We saw really big uptick in conversions. It's not yet where the longer term AppRiver products, but it's edging up that way very nicely, and that as you recall is a 90% conversion rate from a trial, which is extraordinary from everything we can see in the market.

[Tyler Wood:]

Great. And then, one last one, you've mentioned Europe before on previous calls, going off of that, could you kind of walk us through, what you expect there and kind of more broadly the international contribution you think about when you're putting out 2020 guidance? Thanks.

[David Wagner:]

Yes. So, I'm really proud of our international teams, I don't want to diminish, but it's still nascent in where it is, and where it's going. So, we expect to continue to see them execute well in 2020. We're still building out our localization, data localization plans throughout the course of 2020. So, we look at that to be a more meaningful opportunity heading into 2021.

[Tyler Wood:]

All right, thanks. That's all for me.

[David Wagner:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Nick Yako from Cowen & Company. Your line is now open.

[Nick Yako:]

Hey, guys, thanks for taking my question and congrats on the strong results. Just wondering, once the integration is complete, just curious if you could provide any color on how you're sort of thinking about the go-forward product roadmap, and to that, how you sort of think about build versus buy?

[David Wagner:]

Yes, those are two great questions, Nick, and so I'm really, as I said really proud of the team as it's come together into one core platform secure cloud, and that is the focus of our development going forward. That will roll out into the market in April as we train up the sales force, and that will become the primary motion for the company, and that's the motion that we really see customers wanting with as they move to the cloud service provider agreement, that consumption, that true cloud consumption model where they can add the users they have literally every day, every week, and be billed only for the users that they have in the organization at that time is really a powerful differentiator as you think about CSP versus EAs and increasingly then as you think about our encryption and archiving capabilities delivered as an integrated security and compliant solution with its customers. So, our roadmap is going to be focused there. We're going to continue to take great care of the Legacy Zix customers and find them easy migration upgrade path into that cloud platform. That will be a multi-year journey for some customers, and that that will come together as I said with the of having the vast majority of new customer onboarding onto the secure cloud by Q4. On the build versus buy, I feel like we've done a nice job over the last four years thinking carefully and deliberately about the technology that would help accelerate the business further, we continue to do that, and with the integration coming together well, we'll be continuing to evaluate areas we can augment the technology portfolio through both organic efforts and potential inorganic additions to the company going forward.

[Nick Yako:]

Okay, that's helpful. And then I think Broadcom has been fairly clear that they want to focus on sort of Symantec's larger customers, just curious if you guys are seeing any benefit from some dislocation from that deal?

[David Wagner:]

So, we are. We've been able to win competitively against them consistently across time. We're a little bit different than the others in this space. We have an OEM relationship to our last OEM at Symantec, and so, we have -- you say arguably, our OEM customers would be at risk while we're at the same side taking advantage of the displacement. So, we're balanced, a little more balanced on that particular competitive dynamic.

[Nick Yako:]

Okay, great. Thanks, guys.

[David Wagner:]

Thank you, Nick.

[Operator:]

Thank you. At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Wagner for his closing remarks.

[David Wagner:]

Well, thank you everybody for joining us today for your time and attention to Zix, and we look forward to our next quarterly call in April.

[Operator:]

Thank you for joining us today for Zix's fourth quarter and full-year 2019 earnings call. You may now disconnect.