Zix Corporation
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good afternoon. Welcome to Zix First Quarter 2018 Earnings Conference Call. My name is Skyler and I will be your operator this afternoon. 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 their remarks, we will open the call for your questions. I would now like to remind everyone that the call is being recorded and made available for replay via a link in the Investor Relations section of the company’s website. Now, I would like to turn the call over to Geoff Bibby. Sir, please proceed.

[Geoff Bibby:]

Thanks, Skyler. Good afternoon, everyone and thank you for joining us for our first quarter 2018 call. After the market closed, we issued a press release announcing our results for the first quarter ended March 31, 2018. A copy of which is available on the Investor Relations section of our website at www.zixcorp.com. Please note that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It’s important to note also that the company undertakes no obligation to update such statements. We caution you to consider Risk Factors that could cause actual results to differ materially from those in the forward-looking statements contained in today’s press release and in this conference call. The Risk Factors section in our most recent Form 10-K filing with the SEC provides examples of those risks. During the call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing the company’s performance. A reconciliation of certain GAAP to non-GAAP measures is included in today’s press release, which can be found in the Investor Relations section of our site. Now with that, I would like to turn the call over to David Wagner for his opening remarks. Dave?

[David Wagner:]

Thanks, Geoff. Good afternoon and thank you everyone for joining us today. We entered 2018 continuing to build on the momentum generated by our growth in cloud-based encryption and our strategy of enhancing customer value with a full suite of e-mail protection services. Whether it’s growth in the number of new customers acquired or success in building our add-on activity and retention, Q1 was a solid quarter all around and is further evidence that we are on the right path. More specifically in the first quarter, we delivered on our commitment to profitable growth. We grew revenue in Q1 by 5%, annual contract value by 7%, new first year orders by 9% and adjusted EBITDA by 8%. We recognized more than a year ago that building a full suite of e-mail security services was what customers are looking for in this market and that’s exactly what we delivered. Now, a year after the introduction and early success of our bundles, we are winning new customers and becoming a more formidable force in the e-mail security space. ZixProtect and ZixArchive are continuing the impressive momentum from 2017 generating meaningful competitive displacements. Our cross-selling initiatives are delivering as planned and the market is responding favorably to our positioning. With our recent addition of Erado, we have advanced our bundles to meet the absolute gold standard and compliance when it comes to protecting and archiving business communications. Our existing cloud-based solution is now bolstered by unified archiving and supervision capabilities that are best in class for compliance focused buyers. So, we are now in an even stronger position to meet our customers’ needs. Our leadership position has strengthened beyond e-mail to all forms of digital communications, including social media, instant messaging, mobile, web, audio and video. We are also welcoming a large customer base of 18,000 customers across the financial services vertical whole, who we can continue servicing with best-in-class archiving solutions that they are already familiar with and also provide added value to our bundled offerings and complete e-mail security solutions. The result is one, a happy customer, because they are better able to efficiently comply with FINRA and SEC regulations; two, a robust and complete e-mail security solution, because we are able to combine these archiving solutions with our e-mail encryption and advanced threat protection offerings; and three, a platform for continued growth as we work to solidify our status as one of the preferred choices for customers who must meet compliance requirements. In addition to bolstering our solutions, we also made positive strides on the distribution front. Just shortly after the quarter ended, we announced the expansion of our MSP program, which integrates additional offerings to provide best-in-class security for our partners. As we mentioned on our previous call, we are focusing more on distributor relationships that can drive the most value for us and our customers. So we are strengthening the MSP program and giving our valued partners more flexible options and a path to growing their businesses more successfully at high on our priority list. When you combine the expansion of our services, the continued investments in our products and strengthening of our channel program, it’s clear that we had a very busy and productive start for 2018. Not only did we achieve another record in an annual contract value of $68.4 million, but we also delivered year-over-year growth in our new first year orders and total orders demonstrating successful execution of our strategy. As a result, we are becoming increasingly convinced that our recent results and business transitions are putting us on the front, but strategically and on the trajectory towards reaccelerating profitable growth. Now, I will turn the call over to our CFO, Dave Rockvam to provide more details on the financials for the quarter. Dave?

[David Rockvam:]

Thank you, Dave and good afternoon everyone. Once again, we achieved our guidance for both the top and bottom line and generated another quarter of solid new first year orders growth, over 20% of which were driven by ZixProtect and ZixArchive. We also returned to year-over-year growth in our total orders and maintained our 29% adjusted EBITDA margin. As our results for the quarter demonstrate, we are making steady progress in our efforts to capture a larger share of the broader e-mail security market. From both an operational and financial standpoint, we believe we are well positioned to build on this progress and move closer towards our next stage of growth. Turning to our financial numbers in more detail, revenue for the first quarter increased 5% to $16.7 million from $15.9 million in the same quarter last year. With $16.7 million we achieved our top line guidance for the quarter. The revenue for Q1 was primarily driven by continued success of our e-mail protection, bundled offerings and rapid adoption of our cloud based hosted encryption solution. Give our subscription accounting model, we determined no material impact of ASC 606 on our revenues. Our new first year orders in the quarter increased 9% to $2.3 million to $32.1 million in the same quarter last year. Once again our cloud based hosted solution and our bundled offerings made up a bigger percent of this metric, successful add-on sales to the base was also a strong driver of new first year orders with nearly 60% of new first year orders coming from the installed base in the quarter. Our adjusted gross profit for the quarter was $13.3 million or 79.8% of total revenue which was an improvement on a dollar basis from $13.1 million or 82.7% of total revenue in the first quarter of 2017. Our adjusted gross margin percent for Q1 was down year-over-year, this was because over the past year the significant growth in our hosted customer base, our expansion into the broader business communication market has let us to a necessary higher level of support in the infrastructure. We expect our adjusted gross margins to move higher from current levels that remain within 80% to 81% for the remainder of 2018. As we continue to invest to provide best in class customer support, threat intelligence and operational excellence. Our adjusted R&D expenses for the first quarter of 2018 were $2.7 million or 16.2% of total revenue compared to $2.3 million or 14.7% of total revenue in the first quarter of last year. The year-over-year increase was primarily due to investment in our advance threat protection and archiving capabilities. Our adjusted selling and marketing expenses for the quarter were $4.1 million or 24.7% of total revenue compared to $5 million or 31.3% of total revenue in Q1 of last year. The decrease was partially due to the last year replanting exercise which pushed up marketing spend in Q1 of 2017. However, the decrease in dollars was due primarily to our accounting change to comply with ASC 606 accounting. In accordance with ASC 606, we reported an intangible asset on our balance sheet of approximately $6.6 million. This intangible asset will be amortized over the expected life of the solution which we have estimated at 8 years for new contracts, 4 years for add-ons and 18 months for renewals. Our Q1 amortization was $444,000 versus a normalized expense for commissions free ASC 606 of approximately $983,000. For the first quarter of 2018, our adjusted general and administrative expenses were $2.1 million or 12.9% of total revenue compared to $2 million or 12.8% of total revenue reported in Q1 of last year. The year-over-year increase was primarily due to G&A associated with the acquisitions over the last year. On a GAAP basis, we reported net income of $1.9 million or $0.04 per fully diluted share compared to $1.8 million or $0.03 per share in Q1 last year. Our first quarter non-GAAP adjusted net income was $4.3 million or $0.08 per fully diluted share. $0.08 per share was consistent with our guidance for the quarter and represents an improvement of $0.01 per share over the amount we reported in Q1 of last year. And finally, our adjusted EBITDA for Q1 2018 totaled $4.8 million, an increase of 8.4% compared to $4.5 million we reported in Q1 of last year. As a percentage of total revenue, adjusted EBITDA for Q1 was 29%, which was higher than the same quarter last year and consistent with the 29% we reported last quarter. Cash flow from operations for the first quarter of 2018 was $1 million. This was down from last year mainly due to our lower deferred revenue balance, which is primarily from our designed shorter contract term length. Our balance sheet at the end of the quarter once again reflected our financial strength with $29.3 million in cash and no debt. Turning to our share repurchase program which the Board of Directors approved in April 2017. During Q1 2018, we repurchased 706,994 shares for an aggregate amount of $3.1 million at an average share price of $4.37. Under the current program, we are authorized to purchase an additional $3.1 million worth of shares as of April 1, 2018 subject to certain conditions. In fact, we continue to repurchase shares during April of this year. While we continue to invest in our solutions to better serve the compliance-oriented and security driven customers in the mid-market segment, we are reiterating our commitment to a balanced capital allocation strategy. Over the last 27 months, we have demonstrated this balance by purchasing $19.2 million of our stock and used approximately $20 million for acquisitions. The mindset of deploying capital in the areas where we see highest returns will be what guides us as we look to continue increasing shareholder value. CapEx for the quarter was $546,000, which consisted primarily of normal business capital purchases. We continue to expect CapEx for 2018 to be between $2.3 million and $2.7 million and for depreciation to be approximately $2.7 million. Our backlog which represents the dollar value of committed contracts was $70.8 million as of March 31, 2018 which was down 10.3% from $78.9 million as of the same date last year. Similar to prior quarters, the decrease in backlog was due to the shorter term commitment associated with new customer pricing and bundled offerings. This has produced the desired effect of increasing our transaction volume and number of touch points with customers. As a reminder, we accomplished this by decreasing the financial incentives for most of our customers to go longer term. However, we note that our average term length has stabilized to a level that aligns with our goals and we don’t expect to see further declines in term length as we did last year. Looking at our deferred revenue, we expect to recognize approximately $43.2 million or 61.1% of our deferred revenue balance as revenue over the next 12 months. Just like the part three quarters, you can see the impact of the shift towards shorter term contracts when you compare with 61.1% of revenue recognition of deferred over the next 12 months to last year’s 57.3%. At the end of the end of the first quarter, our ACV or annual contract value totaled a record $68.4 million, up 7% from Q1 of last year. From an industry perspective, our revenue breakdown was 50% from healthcare, 28% from financial services, 7% from government and 15% from other verticals, all excluding our acquisitions from 2017 and 2018. Now, for our second quarter and full year 2018 financial guidance, because of the acquisition of Erado in April, we are updating our guidance for the quarter and full year as we disclosed earlier this month. For the full year of 2018, we expect subscription revenue from the acquisition to contribute $1.5 million and expect operating cash flow to be neutral, but expect net income and EBITDA to decrease approximately $1 million due primarily to an anticipated purchase accounting adjustment to deferred revenues. We currently anticipate revenue for the second quarter to range between $17.3 million and $17.5 million, representing an increase of 6% to 7% compared to Q2 of last year. We are also forecasting fully diluted GAAP earnings per share to be between $0.03 and $0.04 and fully diluted non-GAAP adjusted earnings per share to be $0.07. We expect revenue for the full year range to be between $69 million and $70.5 million, which represents an increase of 5% to 7% compared to revenue in fiscal 2017. Our previous guidance for revenue range between $67.5 million and $69 million, the only adjustment being adding the $1.5 million of revenue for the Erado acquisition. As part of our updated guidance, we are also forecasting our fully diluted GAAP earnings per share to be between $0.15 and $0.16 and our fully diluted non-GAAP adjusted earnings per share to be $0.30 for fiscal 2018. In closing, while we have not yet cleared through all the additional churn in our on-premise appliance customers, we have made significant progress and have our business aligned well to execute in 2018. With our bundles performing exceptionally well along with our cloud based encryption solution we are displacing competitors and becoming a bigger part of our customers overall data protection platform. We also as Dave mentioned have expanded our product suite and capabilities and now have a much stronger distribution channel due to launch our new MSP program. All of these steps articulate our progress towards reaccelerating our growth, improving our attention and building on our overall traction in the market. This completes my financial summary. For a more detailed analysis of our financial results, please reference our form 10-Q which we plan to file by May 9. Dave?

[David Wagner:]

Thank you for the financial overview Dave. On our last call we introduced our three main growth drivers which are one new customer acquisition, two sales to existing customers through add-on and cross-selling and three reducing churn and increasing retention. I will now spend the remainder of the call going over our financial performance and progress with respect to each of these three growth areas before double-clicking our acquisition of Erado and what it means for Zix going forward. Starting with our first growth area, as noted earlier total new first year orders were $2.3 million, up 9% year-over-year. Similar to last quarter ZixProtect and ZixArchive new first year orders represented more than 20% of the total new first year orders. About the percentage of orders from the new products was relatively flat as both a percentage and in absolute dollar terms the number of ZixProtect and ZixArchive customers was up almost 10% sequentially. New first year orders from new customers made up 41% of total new first year orders are about $900,000. Four of top five wins in the quarter were in our core healthcare vertical, the fifth was in government. Similar to last quarter two of our top five new customer wins during the quarter were for ZixEncyrpt. One with the PGP displacement and the other had no prior meaningful encryption use. The other three top five new customer wins were for the bundle. One of them was a competitive displacement of Microsoft, one Proofpoint and one barracuda demonstrating again that our bundling proposition is resonating with our customers. When you look at our total new first year orders during the quarter by distribution channel, 46% came from our direct sales efforts, 44% through VARs and MSPs, 2% from web sales and 8% through our OEM partners. So we were relatively light in both MSPs and OEMs which are both areas that we are picking specific steps to improve. Our April launch of our new Zix Partner MSP program is a perfect example of our plans to improve our distribution. The new program is a major step forward for MSPs and will help us attract new partners to the program for continued growth. At a very high level, the program provides MSPs with the ability to sell and administer e-mail threat protection and e-mail archiving in addition to our existing e-mail encryption offering. The program offers MSPs flexible billing, rapid deployment and a centralized management console for administration of all of our solutions. We have already added 5 new MSP partners to the program and we are looking forward to adding more in addition to migrating many of our existing encryption partners into the program to give them the ability to offer a broader Zix solution set for their customers. On the OEM side, we had a good quarter with Symantec in Q1 and we are pleased with the progress that we made with both Google and Cisco during the quarter towards realigning our partnerships for maximum value to our end customers. On the Google side, during Q2, we are moving from our historical OEM arrangement into the Google cloud partner program and we are working collaboratively with Google to transition the existing game customers into standard Zix customers primarily through the end customers current reseller. This new arrangement gives Zix the ability to better address the needs of the Google end users and resellers with our full suite of e-mail services. The launch of our new MSP Zix partner program was perfectly timed to intercept this transition and maximize the cross-sell opportunity into our Google end customers. On the Cisco side, we continue to collaborate with the Cisco go-to-market teams to position ZCT and increasingly also ZixEncrypt and ZixEncrypt EMS into accounts where Cisco’s CRES resolution is not well suited to meet the customers’ requirements. As a result of these changes beginning on the Q2 earnings call, we will no longer be reporting Cisco and Google as OEM channels and we will bundle the remaining immaterial OEM partner orders into a new category of web sales and other. We do not expect any meaningful impact to this year’s new first year orders or revenues from these relationship transitions although we do think that both transitions will be positive for our end customers, our resellers and Zix. Turning quickly to our progress on the international front, during the first quarter, we announced our partnership with Progress Distribution and Proact IT to distribute ZixEncrypt to help UK and European enterprises comply with the new GDPR rules. Proact IT is a publicly traded company with more than 3,500 customers, primarily in the UK and Nordic regions. They will be selling our standard ZixEncrypt solutions hosted in their data centers. We are excited about the opportunity of providing our gold standard encryption services to their customers as they help their end-users comply with GDPR. Moving on to our second main growth area, which is additional sales to existing customers, approximately 59% of our new first year orders during the first quarter came from our installed base, which is above our average of 40% and totaled approximately $1.3 million in the quarter. Similar to the new customers, 4 of our top 5 add-on sales were in the healthcare, and fifth, was a government customer. Three of the five were encryption add-ons, one with ZixProtect and the other added both ZixProtect and ZixArchive. We are very pleased to see the increasing sales into our installed base as we add products and services. The third and final growth area we are focused on is reducing churn and increasing attention. I am pleased to report that retention is gradually improving and that we were solidly above 90% in the quarter and that we achieved the second highest quarterly retention rate since 2016. We continued to get in front of our on-premise appliance customers. Total ACV from on-premise appliance customers decreased from 20% to 19% of ACV in the quarter. We can’t stress enough how important it is that we migrate our on-premise customers to the cloud, because that’s where they become stickier and where they can most easily take advantage of a complete product suite. During Q1, we successfully migrated 200 customers to our hosted platform and an additional 30 from Google game to our multi-tenant cloud. It’s very encouraging to see the pace at which our customers are moving to our multi-tenant cloud solution and during Q1, we reached the point where just over 50% of our ACV is from customers who are 100% cloud deployed. So, as a result, retention is improving both in the quarter and on a rolling 12-month basis. Going forward, excluding the last part of the 2017 excess churn that we expect to work through this quarter, we expect our renewal rates to stabilize at a new normal. ZixProtect and ZixArchive are no longer new products, but our products with hundreds of reference customers allowing us to a strong bundle for our existing customers as well as new prospects. This success combined with success we are having migrating customers from on-premise both appliance and virtual to our cloud has us increasingly confident that the retention drag will subside. However, the new normal of the cloud-based bundle means that we do not expect to return to the record high retention rates we saw in 2016 for some time. Lastly, before we open the call for questions, I would like to spend a moment on our acquisition of Erado, which was announced in early April. We are very excited about the acquisition as it expands our cloud-based e-mail archiving capabilities into more than 50 digital communication content channels and adds strong supervisory capabilities for compliance officers to monitor and review, all of the organization’s business communications from one centralized, uniformly indexed set of content. More than 50% of Erado’s revenue comes from archiving channels other than e-mail, with LinkedIn being by far the most important channel other than e-mail. Many businesses with compliance requirements are moving to LinkedIn and other social channel to prospect and to communicate with customers. The unified archiving capabilities are a perfect fit for our compliance-oriented customers in the healthcare, finance and government sectors and the addition of the Erado customers to the Zix family makes us even stronger in financial services. We see a very strong opportunity for the Erado capability in the market and as we integrate we will be focusing on two areas

[Operator:]

[Operator Instructions] Our first question comes from Mike Malouf with Craig-Hallum Group. Your line is now open.

[Eric Des Lauriers:]

Hey, guys. This is Eric on for Mike. Thanks for taking my questions.

[David Wagner:]

Hi, Eric.

[Eric Des Lauriers:]

I was wondering if we could just drill in a little bit more into churn and retention, I know you have talked a lot about it, but could you just give us a sense of the new normal level and how that compares to what the previous level was?

[David Wagner:]

Yes, great. What we are talking about is, anyway, has been consistent is over 90% is what we achieved last year and expect to continue to achieve, but 2016 was an exceptionally strong year. We were several 100 basis points above that. And given the shortening term of contracts in the market space and a lack of stickiness or the less stickiness in the advanced threat space we think will be in the low 90s as opposed to mid 90s as our new normal.

[Eric Des Lauriers:]

Okay, that makes sense. And then gross margins, they were down this quarter I think you said it was just because of highest staffing, could you just talk about that a bit more and then you expect that to stay more in that 80% to 81% as we look forward or should that be a little bit more of a gradual return to that level?

[David Wagner:]

So the increase is people related as we continue to grow the customers on the ZixProtect offerings. We have some great technology that’s intersecting the threats and staying active and light and current all the time, but we also use 24/7 threat analysts to review the traffic update to build those rules and so it’s that the people side of that business that has caused our margins to go down a couple of 100 basis points since the acquisition last March. Dave can maybe give a little more color?

[David Rockvam:]

Yes, I would just add a little bit. Like in past quarters, we had a full quarter of Greenview Data expense in this quarter in just catching up with full revenue, so a little bit higher than last quarter. So that’s part of it. And then the 80% to 81% as we bring on Erado will kind be in a similar situation during the years that we will have that little bit of the revenue haircut while we have all of the expense. So that picks it up a little bit for the 80 to 81. So, we hit right at 80 here and we expect March towards the 81 towards the end of the year and we should go and pickup a little bit from that as we go forward.

[Eric Des Lauriers:]

Okay, that makes sense. And then lastly, you guys have had some good success with the bundling and cloud efforts, do you feel that your offering is now pretty complete or are there still – are you still looking for tuck-in acquisitions throughout the year to sort of continue to enhance your bundle and cloud offering?

[David Rockvam:]

Yes. So, we believe our offering is really compete and I will say compellingly complete with respect to compliance buyers when you look at the capability that we bring around e-mail encryption and archiving for compliance. Our capability stands really, really strong. And so we are pleased with where we are. On the build, partner, buy strategy, we have been able to achieve a couple of really nice acquisitions that are on track to deliver really strong returns. So as Dave mentioned in his prepared remarks, yes, we are looking as we allocate capital to continue to be balanced to continue to look for high return opportunities for our shareholders for M&A and at the same time be in a position to buyback stock as our cash balances allow for that as well.

[Eric Des Lauriers:]

Okay, great. Thanks for the help.

[David Rockvam:]

Thanks Eric.

[Operator:]

Our next question comes from Michael Kim with Imperial Capital. Your line is now open.

[Michael Kim:]

Hey, good afternoon guys. Can you talk about the opportunity up-sell or cross sell into the Erado customer base and whether you see the most opportunities from ZixEncrypt or ZixProtect and where – how we should see that rollout over the balance of the year?

[David Wagner:]

Yes. So, that’s one of the things that as we get to that bundled offering late in the year, but really start to be able take advantage of. What the Erado leadership team was seeing from their customer base was the earlier stages of what we were seeing with the desire to reduce number of vendors, consolidate cloud-based services and so they had an encryption offer as a part of what they provided. So, that’s something that will certainly have a much more robust encryption offers we integrate for that customers to help to add encryption there. And then when you look at the broker dealer segment, there are a lot of small financial organizations that have these SEC, FINRA requirements and also need to protect their small family offices from advanced threat and deliver e-mail securely. So we see our cloud based bundle being a really nice fit for many of their – many of their existing customers. The full integration of that though as I adjusted won’t be complete until late in the year. So this year, it’s really about driving the existing market motion forward with those investments I talked about on the call.

[Michael Kim:]

And is this new MSP program, something you can leverage or accelerate your penetration into that customer base or do you envision serving most of the customers directly?

[David Wagner:]

It’s a huge opportunity that they were using very, very little in the terms of partners and so the building out the partner channel this year for their existing – for the existing capability is an opportunity and that again as the integration completes right the year we will be able to deliver the full set of capability to both sides of customers.

[Michael Kim:]

Got it. And with regards to the on-premise appliance customer base, should we just expect that sort of a decline in considering ACV over a longer period of time or do see sort of a natural base to that part of your business?

[David Wagner:]

So we are being very, very intentional as we talked about last call with every renewal of an on-prem clients of making sure that we understand why they continued to have an on-prem appliance. And through those interviews, we are successful in moving increasing number over. But we are also finding that many customers are at this time are not seeing a need to move. So we saw 1% decline in ACV quarter-over-quarter, that’s kind of the pace that I perceive we will see. We are in the instances when our customers believe that they are going to stay on-prem for a longer period of time. We are offering 3 year renewals and so we are starting to see an up-tick in our term renewal length as we are looking to lock those customers and those on-prem customers in for 3-year times.

[Michael Kim:]

Got it. And then lastly with regards to some of the competitive displacements you highlighted three of the more notable vendors Microsoft, Proofpoint and barracuda, did – were those competitive displacements for the same reasons or different reasons or any context for why some of those customers moved to Zix?

[David Wagner:]

That can fit in context would be the encryption lag part the binder where they see superior value in our part of the bundle and are looking to consolidate vendors. We then talked to our largest customers, they are still very much staffed to support our best in breed and operating Zix encryption right next to a competitive, but it’s more of the mid-market buyers are the consolidating vendors are finding us to be a really good choice if they got their compliance oriented requirements vis-à-vis the competition.

[Michael Kim:]

Got it, great. And thanks very much.

[Operator:]

Our next question comes from Zack Turcotte with Dougherty. Your line is now open.

[Zack Turcotte:]

Hey, guys. Zack Turcotte on for Catharine Trebnick here.

[David Wagner:]

Hi Zack.

[Zack Turcotte:]

So you guys said ZixProtect and ZixArchive were over 20% in new first year orders, again pretty similar to last quarter, is this kind of a general level you expected to stay at or is this still some of the mix shift going on where you think these will contribute a higher percentage in the future?

[David Wagner:]

We are expecting to contribute higher percentage going forward. That 20% in – the more than 20% in Q4 that was up pretty markedly from Q3 and in Q1 that presented kind of a stabilization, but we would expect to be 20% and moving probably more to 25% as we move through the year. There is still lots of opportunity to attach into our base. We are at 4%, a little bit 4% almost 5% on the ZixProtect attach and just over 1% on Archive and with the added packaging bundles there in the year, early next year that will help us a lot. So we definitely expect to see that continuing to increase as a percentage of our new first year orders. The other thing I just want to emphasize that Zix Partner MSP program will also help to drive that and I have talked about this on the last call, but that gives us the opportunity for our partners to not have to sell encryption first, they could displace our existing advanced threat vendor with ZixProtect and not take advantage of the other pieces of the bundle. So putting that platform out in the market this past month in April we think will also be an accelerating opportunity for the newer parts of our protection bundles.

[Zack Turcotte:]

Okay. That was pretty much my next question, are you still kind of leading the majority of sales with Encrypt and then trying to add those on? So in that same thing kind of, if you are seeing more bundling sales through the channel, it’s just bringing you into larger mailbox sizes seeing different competitors going toward the 1,000 mailbox or north of that kind of size?

[David Wagner:]

So, we can feel that we have had increasing success with what we call enterprise the last several quarters and we are increasingly on the larger customers, we got a couple of new wins, we are seeing more existing in the larger 10,000, 5,000 customers, ZixProtect and ZixArchive are more often being sold to an existing encryption customer who is very aware of our service quality as it less risk in the decision. But as I said, ZixProtect and ZixArchive are no longer new products. We have hundreds and hundreds of customers all performing extremely well and so we will continue to see that rotation throughout this year and into next where the newer parts of our bundled have performed increasingly well.

[Zack Turcotte:]

Got it. Thanks.

[David Wagner:]

Thanks, Zack.

[Operator:]

At this time, I am showing no further questions. I would like to turn the call back over to Mr. Wagner for his closing remarks.

[David Wagner:]

Well, I would just like to thank everybody for taking a little bit of your time to get an update from Zix this evening and wish you all a great evening. Good night.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.