Zix Corporation
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good afternoon. Welcome to Zix’s Second Quarter 2017 Earnings Conference Call. My name is Takia and I will be your operator this afternoon. Joining us for the 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 like to remind everyone that this call will be recorded and made available for replay via a line 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:]

Thank you, Takia. Good afternoon, everyone, and thank you for joining our second quarter 2017 earnings conference call. With me today is our CEO, Dave Wagner; and our CFO, Dave Rockvam. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2017, a copy of which is available in 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 of our most recent Form 10-K filing with the SEC provides examples of those risks. During the call, we’ll 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 website. Now with that, I would like to turn the call over to Dave Wagner for his opening remarks. Dave?

[David Wagner:]

Thanks, Geoff. Good afternoon and thank you everyone for joining us today. Q2 represented the beginning of new chapter for Zix. Before our acquisition of Greenview Data in March, our business focused primarily on providing the absolute best in e-mail encryption for our customers. E-mail encryption remains a core part of what we do, but our capabilities and addressable market had expanded considerably since then making this quarter one of the true inflection points in our corporate history. In a moment, I’ll talk about what Q2 meant to us at a strategic level, but before I do I would like to share just some of our results for the quarter, which Dave will review in more detail shortly. Our record revenue of $16.4 million represents a 10% increase over the same quarter last year and was our 13th consecutive growth quarter. Our GAAP net income more than doubled to $1.1 million and our non-GAAP adjusted net income increased 7% to $3.5 million. We also achieved our guidance for revenue, GAAP EPS and non-GAAP EPS. Supplementing this strong financial performance was the early traction gains in our recently launched ZixProtect and ZixArchive. During the quarter, our sales team closed 44 ZixProtect and ZixArchive transactions, with every one of our corporate and SMB sales reps generating at least one transaction for these offerings. What’s more is that nearly a third of these transactions were with new customers demonstrating the early success we are experiencing selling bundles to new accounts. Greenview Data achieved all of our integration milestones for the quarter including development milestone, service integration milestones and sales milestones. But what was most impressive was how quickly they dug in with the Zix sales team to enable the Zix team to sell our expanded suite of e-mail protection products. Overall, Q2 was another solid quarter punctuated by record revenue, healthy new first year orders, significant positive progress on our integration with Greenview Data, and strong customer adoption of ZixProtect and ZixArchive. Although it's been less than five months since we made the acquisition, we had experienced tremendous progress so far, and we've established a solid footing from which to further expand. I'd now like to turn the call over to Dave Rockvam to provide more details on the financials for the quarter, and I'll return to provide an update on our progress on the seven pillars as well as the more detail on Greenview Data and ZixProtect

[Dave Rockvam:]

Thank you, Dave, and good afternoon, everyone. As you just heard, in the second quarter we're very focused on the integration of Greenview Data, our new product launches ZixProtect and ZixArchive, and related pricing moves, all of which had a positive impact on our customer momentum and quarterly results. Turning to our financial numbers in more detail. As Dave mentioned, revenue for the second quarter increased 10% to $16.4 million from $14.9 million in the same quarter last year. Q2 revenue came in at the high-end of our revenue guidance range and represented for the 13th quarter in a row the highest level of quarterly revenue recorded in the company's history. New first year orders for the quarter were down 13% to $2.6 million from $3 million in Q2 of last year. The main cause of the decrease was due to a significant partner deal we've won in Q2 of last year. This large multiyear partner deal distorts the meaningful year-over-year comparison for both new first year orders and total orders. If we exclude this large deal, our new first year orders would've actually been up 11% year-over-year. We are encouraged by the healthy level of new first year orders during the quarter, which included particularly strong contributions from our corporate enterprise teams, driven by new and existing customers moving to our cloud encryption and ZixProtect and ZixArchive solutions. We are also encouraged by our Q2 traction with one of our OEM partners Cisco, which Dave will talk more about. Our adjusted gross profit for the quarter was $13.3 million or 81% of total revenue. This was an improvement from $12.4 million in the second quarter of 2016. Our gross margins at 81% was down from a year ago's 82.7% mainly due to the 100% inclusion of Greenview Data’s costs while we are not yet capturing 100% of their revenue due to the nature of purchasing a subscription-based revenue company. We anticipate gross margins to remain within the range of 80% to 81% throughout the remainder of the year because of the cost associated with Greenview Data. We do expect gross margins to move back towards 81% to 82% in 2018. Our adjusted R&D expenses for the second quarter of 2017 were $2.6 million or 15.9% of total revenue compared to $2.2 million or 15% of total revenue in the second quarter of last year. The year-over-year increase in adjusted R&D expenses was due to the inclusion of Greenview Data in our results versus their absence a year ago. The increase was also due to continued investments in our core encrypted e-mail solution with particular emphasis on our rapidly growing hosted service and a Zix centralized platform. Our adjusted selling and marketing expenses for the quarter were $4.9 million or 30.1% of total revenue, compared to $4.9 million or 33% reported in Q2 of last year. This quarter’s adjusted selling and marketing expenses included cost associated with transitioning to and implementing our customer success model, as well as marketing into the broader e-mail security market with our ZixProtect product portfolio. For the second quarter of 2017 our adjusted general and administrative expenses were $2.2 million or 13.1% of total revenue, compared to $1.9 million or 12.5% of total revenue reported in Q2 of last year. G&A is up over last year over last year due to our investment in new systems to modernize our business processes and the addition of Head of Corporate Development. Both investments are integral to our strategy to grow the company via our build partner by strategy. Regarding income taxes, our Q2 GAAP expense includes the recognition of a $554,000 excess tax deficiency related to stock options exercise during the quarter as recorded by 2017 implementation of ASU 2016-09. They are not anticipated when determining our estimated effective tax rate, but are instead discrete items in their reporting period in which they occur. Due to our NOLs, this has no cash impact. We estimate our effective GAAP tax rate will be approximately 38% for the year. Our overall tax expense is also largely noncash due to our NOLs. Going forward, we expect the cash component of our taxes to remain in line with prior quarters. On a GAAP basis, we generated net income for the second quarter of $1.1 million or $0.2 per fully diluted share, which was double the amount we reported in Q2 of last year, and consistent with our guidance for the period. As I mentioned earlier, the ASU 2016-09 implementation did cause a $554,000 noncash impact to our results, which accounted for a full penny of GAAP net income in the quarter. Our second quarter non-GAAP adjusted net income was $3.5 million, or $0.06 per fully diluted share. $0.06 per share was consistent with our guidance for the period, as well as the amount we reported in Q2 of last year. And finally, our adjusted EBITDA for Q2 2017 totaled $4.2 million, compared to the $3.9 million we reported in the Q2 of last year. This was an increase of 8% from last year and would have been even higher except for recognizing a full quarter of Greenview Data expenses, but only partial revenue for this period. As a percentage of total revenue, adjusted EBITDA for the quarter declined from 26.3% to 25.9%. On our last call, we emphasized with our adjusted EBITDA margin, though higher at that time, would move closer to 25% in the second quarter. Looking ahead, however, we reiterate that we expect adjusted EBITDA margin to move back to 28% in the second half of 2017, which is in line with our longer-term model. Within our 2017 operating model, we do have approximately $2.5 million of depreciation, which is adjusted out of our adjusted EBITDA calculation. Cash from operations for the second quarter of 2017 was $3.1 million. We continue to maintain a strong balance sheet with $29.5 million in cash and no debt. The increase in cash from the prior quarter amount of $23.4 million was largely due to $3.1 million in cash flow from operations and $3.9 million gained as a result of company insiders, exercising certain stock options that were close to expiring. In April of this year, our Board of Directors approved a share repurchase program that allows us to purchase up to $10 million of our common stock, subject to certain conditions. One of those conditions includes a strike price under which our share repurchase program activates. Although, we intended to repurchase shares, the price remained above the threshold through June 30. However, we have purchased shares between the end of the quarter and today. Along with the Board, we'll continue to evaluate the shareholder return of buybacks as well as organic and inorganic investment opportunities to balance our capital allocation to maximize return. CapEx for the quarter was $800,000, which included additional capital to stay in that Greenview Data capabilities in our Dallas facility. Cost associated with our business systems implementation and normal business capital purchases. We expect capital for the year to be between $2.4 million and $2.7 million. Our backlog, which represents the dollar value of committed contracts, was $77.8 million as of June 30, 2017, which was down slightly from $80.9 million as of the same date last year. Our decrease in backlog in total orders reflects the shorter-term commitment associated with our new customer pricing in bundled offerings, a large number of multi-year renewals last year that weren't available for renewal this year. And we have experienced a couple hundred basis points reduction in our renewal rate from last year's particularly strong year. From our deferred revenue, we expect to recognize approximately $46.4 million or 60% as revenue over the next 12 months. You can see the impact of shorter-term contracts when you compare the 60% of revenue recognition of deferred over the next 12 months to last year's 55%. Meaning that 12-month backlog was up 5% year-over-year. We also saw an increase in total billings for the quarter over last year. At the end of the second quarter, our ACV or Annual Contract Value totaled a record $65.2 million, up 10% from Q2 of last year. As a reminder, because of our shift to selling bundled offerings, we will not be breaking out our ACV byproduct. However, from an industry perspective, the breakdown of our ACV was 50% from health care, 28% from financial services, 7% from government and 15% from other verticals. ACV by vertical is for Zix-only customers and does not yet include Greenview Data. Shifting gears to our financial outlook for the third quarter ending September 30. Our continued industry leadership at email encryption, coupled with our bundled email security solutions and solid execution on the Greenview Data acquisition has us positioned well for the second half of the year. We currently anticipate revenue in Q3 to range between $16.7 million and $16.9 million, representing an increase of 9% to 10% compared to the Q3 of last year. We are forecasting fully diluted GAAP earnings per share to be between $0.02 and $0.03 and fully diluted non-GAAP adjusted earnings per share to be $0.07. We are reiterating our revenue guidance for 2017 to range between $66.2 million and $66.7 million. This represents an increase of 10% to 11% compared to revenue in fiscal 2016. We are also reiterating our fully diluted GAAP earnings per share guidance to be between $0.10 and $0.12. And our fully diluted non-GAAP adjusted earnings per share to be $0.28 for fiscal 2017. The combination of our strong ACV growth, increasing revenue recognition from our deferred revenue, and our success entering new markets this quarter, continues to demonstrate the strength of our business and our ability to execute as a leadership team. Our 100% subscription-based revenue model provides us with quarterly predictability that affords us the ability to focus on customer needs and invest – customer needs and investments necessary to continue to drive probable growth into the future. 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 August 8. Dave?

[David Wagner:]

Thanks Dave. Now turning to our second quarter performance and progress as it relates to our strategic framework, which we refer to as our seven growth pillars. Q2 saw another strong performance for pillar one, which is securing new customer orders through our direct and indirect sales channels. Our corporate and enterprise teams led the way for another period of healthy first year orders, which was driven by ZixProtect, ZixArchive and ZixHosted. Greenview Data also had a solid quarter of New First Year Orders. Greenview Data’s New First Year Orders combined with the contribution from ZixProtect and ZixArchive, caught New First Year Orders from Greenview Data’s solutions to more than double on a sequential basis. Looking at our New First Year Orders breakdown for the quarter, 44% were delivered through our direct sales efforts, 35% through borrowers and MSPs, 18% through our OEM partners, and 3% from web sales. We continue to win new customers versus the competition as we enhanced our capabilities and presence in the cloud. A quick review of our top five new customer wins for the quarter will give you some insight into what's driving pillar one. Excluding our largest transaction with Cisco that I’ll cover when I discuss pillar two, our top five new customers included two non-profit organizations, a financial institution, a medical equipment and supplies company, and a healthcare consulting firm. Four of the five are not previously using e-mail encryption in a meaningful way; one of the five was a competitive displacement. The displacement was driven by our solution’s ease-of-use, coupled with our Lexicons for compliance filtering and in-depth reporting capabilities. Importantly, the introduction of ZixProtect and the new bundle pricing associated with it were also instrumental to landing a couple of the top five wins. Our second pillar is to accelerate our growth with our OEM partners; Cisco and Google. As I mentioned earlier, OEMs contributed 18% of New First Year Orders during Q2, up from 5% in the year ago period. The increase was predominantly driven by a large transaction with Cisco, while the other OEMs remained on track. During Q2, we secured a large U.S. federal government agency contract with Cisco. This is by far our biggest win with Cisco adding over 100,000 mailboxes on ZCT or ZixGateway with Cisco technology. We're extremely pleased with this win, the momentum it’s generating within Cisco and the opportunity for additional business in the U.S. federal market. Total orders for Cisco exceeded $1 million this quarter as their New First Year Orders increased more than six-fold year-over-year. It's further encouraging that we have several other six figure deals in the pipeline with Cisco. Although we're still in the early phases of this partnership and we still can't count on consistent quarterly first year orders contribution, we are encouraged with the steady progress we're making and the overall pipeline our side-by-side selling efforts are building. With Google, our partnership remains on track with New First Year Orders consistent with prior quarters and the same quarter a year ago. We launched an updated offering with Google in March and we're rolling out the existing base – further improve our win rates and retention with Google and customers. Pillars three and four focused on selling additional fees and add-on products into our installed base. I mentioned on our prior call that the launch of ZixProtect expanded our capabilities, enabled us to bundle our offerings to provide one comprehensive platform e-mail security solutions for our customers. Q2 was a strong validation of our strategy and the sales potential of these new offerings. As I mentioned earlier, we closed more than 40 ZixProtect and ZixArchive transactions during the quarter. Approximately 70% of transactions were add-on to existing Zix customers. Interestingly, all, but one of the new customers also purchased ZixProtect as a bundle with one or more additional products. Overall, we are encouraged with the attach rates we're seeing for all of our products, and we'll continue to expand further into our installed base with our bundled offerings. Moving to the fifth growth pillar, which is increasing renewal rates. Our renewal rate was back over 90% in Q2, which is consistent with our long-term trends. We are, however, on a year-to-date basis experiencing renewal rates that are lower than last year, which was exceptionally strong. The year-over-year decline is due to a couple of anomalies like the large non-renewal last quarter, a large M&A this quarter and some pricing pressure in select account. Nevertheless, we achieved a 90% plus target in Q2, and we expect to stay over 90% for the rest of the year. Our sixth pillar is to invest in our core e-mail security solutions, building off strong momentum generated last quarter, our hosted customer base grew by 92% year-over-year, evidencing our advanced into the cloud. A noteworthy investment in Q2 was made in Zix Central. Zix Central is a management platform that integrates the Zix solutions with the Greenview Data offerings to create a single view for centralized administration and reporting. We are also working on several additional capabilities for Zix Central, which will allow us to create even stronger customer relationships and drive even higher attach rates, while maintaining our gold standard experience. Leveraging our agile development model these advancements will be ongoing incrementally deliver. Investments in innovation like these position us well to further build out our capabilities to create value-add opportunities for our customers and to expand our market position in the broader e-mail security space. And finally, our seventh pillar relates to exploring English-speaking international markets that presents us with attractive opportunities for profitable growth. As we mentioned on our last call, our international efforts are moving slowly due in part to delay of the enforcements of the PoPI Act in South Africa. As a result of the slower international progress and the expanded North American opportunity presented by a broader solutions that we will be adopting a more opportunistic approach international expansion for a time, while we focus on our highest return opportunities. So now that we walked through seven pillars, I would like to spend a moment or two further discussing the progress we're making as a team on our first acquisition. As I’ve been saying since I joined, the biggest opportunity we have at Zix to create additional value for our shareholders is in pillar four, providing additional services to our existing customers. The planning report did with customers and prospects confirmed a strong preference the purchase a broader range of e-mail protection services from one vendor. As the absolute gold standard for end-user experience, compliance, security, service and availability, Zix is uniquely positioned to deliver exceptional customer value to a meaningful subsegment of the market. The leadership team and I could not be more pleased with the early progress we're making with the Ann Arbor team, the acquired technology and the adoption of our expanded solutions by the market. Delivering exceptional customer value and, therefore, shareholder value always starts with people. And we are pleased with the contributions of the new Zix team members in Ann Arbor and the way with our colleagues in other locations have embraced them. The team worked tirelessly, not only to dramatically increase sales, but also successfully training the entire sales engineering team to further expand our ability to stay on the solution to more customers in future quarters. Our model anticipated 16 ZixProtect transactions in our first quarter post-acquisition and didn't anticipate getting to 40 transactions until Q4, which demonstrates just how meaningfully the team has exceeded our early expectations. The teamwork demonstrated while building a consolidated product roadmap has also been exceptional. Zix Central, our single web interface administrating all of the customers Zix services is being accelerated with core elements of the Greenview Data offering. We also completed an independent benchmark test of the capability of ZixProtect against many of the leading brands in the Gartner Magic Quadrant. The independent lab and ZixProtect to be as effective as any of them, as a testing and stopping advanced malware attacks, which again goes well for our opportunity with the expanded solution. As a final example, the rapid progress we're making on integrating the Ann Arbor team, we successfully completed the replication of Greenview Data cloud service in our Dallas Data Center and are now routing traffic through our primary data center. This will improve availability and scalability to service as we continued to scale and expand to more of our customers. I share these details to help you as shareholders the evidence of the impact or strategic transitions having on the business. The leadership team and I are the proud of the team and we're excited about the opportunities that lie ahead. Our growth strategy for the second half of the year remains focused on executing on our seven growth pillars. Q2 was a pivotal quarter for us in terms of igniting the customer adoption of our newer solution and making notable headway in our expanded total addressable market. While we are still in the early phases of our next stage of profitable growth is nice to be executing ahead of our plan and had a solid strategy in place to build on our consistent track record of generating profitable growth. We will also be investing in initiative beyond organic growth, including share repurchases and acquisition as part of our balanced capital allocation strategy. We believe this approach not only positions us to succeed in the near-term, but also over the course of next several years as we continue to elevate the Zix brand across the broader email security landscape. And with that, we’re ready to open the call to your questions. Takia?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Mike Malouf of Craig-Hallum. Please proceed.

[Unidentified Analyst:]

Hey, guys. This is Eric on for Mike. Thanks for taking my questions and congrats on a solid quarter.

[David Wagner:]

Thanks Eric.

[Unidentified Analyst:]

So with those new products with the Greenview acquisition, I think you said that there was a 70-30 breakdown between current and new clients. I was wondering if you guys expect that ratio to continue or just how you see new clients being a part of those new products.

[Dave Rockvam:]

That's a great question. 60-40 new – existing is our typical mix so this was really weighted toward the installed base, which is what we expected. And so we expect to continue to penetrate our base. I’m actually quite pleased with the very first quarter having as much as 30% net new and interesting as I said, one of those net new transactions within a bundle, which to me really reaffirm our strategy of getting higher value from each customer transaction in a broader solution.

[Unidentified Analyst:]

Okay, great. And then that new win with the U.S. federal government agency was that a direct result of your renewed effort to sell side-by-side with Cisco or does that kind of – has that been in the works for a bit just kind of wondering the momentum that's coming off that new renewed effort with Cisco.

[Dave Rockvam:]

Yes. That's a great question Eric. And that’s one, we would not have won that account outside of this relationship with Cisco, but it's one that both teams work together with Cisco in the front and the sales engineering team at Zix and the sales team – Zix side-by-side making sure that the value proposition for the ZCT solution was well understood by the customer. So yes, that's one that was side-by-side and worked on for several quarters.

[Unidentified Analyst:]

Okay, great. And then I know you touched on your pipeline with Cisco a bit. Is there any other color you can add to that in terms of – number of deals or timing involved with them?

[Dave Rockvam:]

I’d just add that, we’ve been working more deliberately and intentionally in the side-by-side modes – probably last November and the pipeline is building – you can tell from the results it's not yet consistent which is where we’ll be when we're ultimately successful by – the teams are working really well together and the pipeline building as I said in the script, we have a few six figure deals in the pipeline going forward and we’re seeing some pockets at Cisco begin to get adapt in the technology where they may be able to begin to do repeatable deals on the round. But we're still – we’re still in the early stages and still focusing on engaging with them to lead larger account through the buying process and winning account.

[Unidentified Analyst:]

All right, great. Thanks guys.

[Dave Rockvam:]

Thanks Eric.

[Operator:]

Thank you. Our next question comes from Joe Maxa of Dougherty & Company. Please proceed.

[Dave Rockvam:]

Hi, Joe.

[Joe Maxa:]

Hi. Thank you very much for taking the questions. On the ZixProtect and ZixArchive transactions – it was included in two of your top five, which is sound’s pretty promising. I'm wondering about the others, 44 transactions were they typical size transactions or smaller customers – who is really adopting it so far?

[David Wagner:]

They're typically sized in our corporate accounts. So we're really initially focusing on account for 2,000 mailboxes and below. Not that their solutions are great, but we’re wanting to scale and structured – in a structured manner. So we're not being as much in our large accounts at this time, because we’re not focused there. And other than that, it's right across our base, as I said, guys got really about excited about its every single wrap in the – what we call the corporate team that focus 2,000 mailboxes and below. Every single one of them had a sale of couple several of them have five or six. So if we’re really finding out – what we hope to find which is a real natural synergy with broader bundle across all of our base.

[Joe Maxa:]

You did have it in the two large accounts of that. Correct?

[David Wagner:]

We did interestingly having an archiving it in over 2,000, to over – into the large accounts, as I’ve said in the top five.

[Joe Maxa:]

Okay. How much of the decline in your backlog is related to the shorter length contracts you've been talking about?

[David Wagner:]

We think almost all of it. When we – we’ve done two things. One is we’re looking to increase the velocity of the transaction and so we've adjusted when we made the major adjustment to the price when we've adjusted it. So that there's not as much incentive to go longer term and that's really that the change, we’ve seen a movement from the low 20’s to high teens in terms of our average contract length of over the last couple of quarters.

[Joe Maxa:]

Do you said, low teens?

[David Wagner:]

I'm sorry. Low 20’s to high teens. That’s what I said.

[Joe Maxa:]

Maybe, I heard it wrong.

[David Wagner:]

Yes. And then Dave went through some of – David will help you with that in terms of the number we disclose of our 12-month revenue from backlog which is up 5% year-over-year.

[Joe Maxa:]

Okay. And you reduce your pricing on the shorter-term contracts to get use of that – to get you that more rapid turnover?

[David Wagner:]

That's right. We decreased the incentive to go to three years. So we pay a combination of lower in the frontend and raising the three-year price.

[Joe Maxa:]

Okay. Understood.

[David Wagner:]

We have last discount on three years leasing that.

[Joe Maxa:]

You want more touch points so that you can hit him with more stuff every year versus three years.

[David Wagner:]

Exactly.

[Joe Maxa:]

Okay. Sounds, good. Last thing, how should we be thinking about new first-year orders for Q3. What’s the pipeline look like today?

[David Wagner:]

We're expecting a good quarter. Q3’s tend to be lower than – Q2’s and Q4’s are higher – Q3’s tend to be lower. Just following the trend we’re expected to be up year-over-year. We’d expect to see continuing strength in ZixProtect and ZixArchive driving through. Yes, things are looking good.

[Joe Maxa:]

All right. Thank you.

[Dave Rockvam:]

Thanks, Joe.

[Operator:]

[Operator Instructions] Our next question comes from Michael Kim of Imperial Capital. Please proceed.

[Michael Kim:]

Hi, good afternoon, guys. Just going direct to the ZixProtect bundles, are we need to takeaway most of the new and existing customers who were taking the plus bundle? And can you comment on the take rate for the premium bundle?

[David Wagner:]

I can’t. We had – premium bundles remained very strong. So almost everybody continues to pay – I’m trying to remember the exact number, I hope we had 28%, three or four not paid premium bundle as per the DLP, where the vast majority are continuing to keep the compliance oriented data risk solution and the strong Lexicons were in the vast majority of the sales.

[Michael Kim:]

Got it. And were these typically head-to-head evalues or were you displacing incumbent are on balance for the majority of the customers migrating from an on-prem appliance?

[David Wagner:]

So it was a mix. As you know, almost everybody has some sort of email protection advanced threat, anti-spam service in place. So we would have been displacing somewhere, everyplace. Lot of times the customer was very reinforced, and we had known from our surveys that the single vendor for the solution was something they were looking for until it’s really them looking at their core service. One of big opportunities is not everybody was on a renewal cycle, obviously, for their archiving or advanced theft fees when we contacted them. And so if that remains an opportunity as renewals come up to hit more accounts. So good across-the-board in terms of just general in place because I wouldn't – definitely working for non-prem necessarily, I wouldn't call that and it was kind of broadly across competitors that we are picking on.

[Michael Kim:]

Got it. And then just on the renewal rates. I think you mentioned, you called that a couple of hundred basis headwind. Do you think maybe something has changed in the market or do you continue to sort of view it as sort of unusual events, whether it's customer bundle or an M&A? Should we kind of see the renewal rates kind of move back to normalize or historical levels next year?

[David Wagner:]

We are on historical levels. Last year was exceptionally strong and we would have liked to retain that exceptional strong performance. We think this year will be more around our Q2. Q2 was over the 90% and not yet back until last year. And there are several anomalous factors, some larger M&As. We’ve got a couple we think that would come through yet. Later in the year, when we know companies have come together, we would expecting them to be breaking their Zix renewals together later in the year. So we’re expect to stay around our Q2 for the rest of the year, and then I think we would be push out from there – what appear to be more anomalous M&As that clear all the way.

[Michael Kim:]

Okay, great. Thank you very much.

[David Wagner:]

Thanks Michael.

[Operator:]

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

[David Wagner:]

I just want to thank everybody for taking the time to join us today and for your support to Zix. Have a good evening.

[Operator:]

Thank you for joining today for Zix' second quarter 2017 earnings call. You may now disconnect.