Zix Corporation
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good afternoon. Welcome to Zix's Third Quarter 2017 Earnings Conference Call. My name is Karen 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 like to remind everyone that this call is being recorded and made available for replay via a link under 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, Karen. Good afternoon, everyone, and thank you for joining our third quarter 2017 earnings conference call. With me today is our CEO, Dave Wagner; CFO, Dave Rockvam. After the market close, we issued a press release announcing our results for the third quarter ended September 30, 2017, 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 that also 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. Q3 has certainly been an important quarter in many regards. We achieved record revenues of $16.6 million, up 8% year-over-year, new first year orders $2.1 million, up a 11% year-over-year, adjusted earnings per share of $0.07 and adjusted EBITDA margins of 28%. The achievement that were most pleased with in the quarter is our continued momentum with our bundling strategy. Following our successful launches in the second ZixProtect and ZixArchive continue to perform well ahead of our internal plan. On a sequential basis, the number of ZixProtect and ZixArchive customers increased more than 25% during the quarter to 55 new customer additions. In terms of actual fees, we also saw an increase of 25%, while new first year orders increased approximately 20% quarter-over-quarter. Needless to say, we are pleased with the successful start and we believe it is validation of our strategy drive bundle product suite at a time when many customers are increasingly seeking more value from fewer vendors. In line with this trend of providing more value for our customers we also acquired the Entelligence Messaging Server or EMS technology during the quarter. EMS significantly enhances our end-to-end encryption capability and gives us an added edge when selling to new customers and upselling to existing lines. Simply put we will continue to get go to great length to ensure that we can consistently deliver the industry's premier email encryption solutions and this latest acquisition is a strong testament of that fact. We did experience two hurdles during the quarter deployment of several partner-based account sell behind schedule and could not be included on Q3 revenue results. We also experienced weakness in our customer renewals, which was driven by anomalous costumer M&A activity and to a lesser extent by competitive pressures due to customer migrations to the cloud. Our strategic decision to enter the advanced threat protection and e-mail archiving market while also strengthening our hosted solution has proven to be the right one positioning us to mitigate these pressures and drive greater long-term value for our customers. We expect these renewal challenges to moderate as we head into 2018 and we remain confident that our long-term strategy are focusing our cloud-based email protection while maintaining our longstanding track record of profitability will deliver growth and shareholder value. I'd now like to turn the call over to Dave Rockvam to provide more details on the financials for the quarter. After Dave's commentary, I will return to provide an update on the progress on the seven pillars as well as provide some more detail on where we see the market going and how we're positioning ourselves to best take advantage of it, especially with our newly enhanced products suite. Dave?

[David Rockvam:]

Thank you, Dave, and good afternoon everyone. As Dave mentioned, we had several positive takeaways from the quarter, most notably from the encouraging start to our bundling and cross-selling initiatives. We are very pleased that the customer momentum generated from our new bundled offerings in the second quarter continued into Q3 and we believe it has set us up to continue building on our customer success in these new markets. Turning to our financial numbers in more detail. Revenue for the third quarter increased 8% to $16.6 million from $15.3 million in the same quarter last year. While Q3 revenue came in just short of our revenue guidance range, we still experienced solid year-over-year growth and achieved for the 14th quarter in a row our highest level of quarterly revenue recorded in the company's history. As Dave mentioned, our revenue in the quarter was impacted by several deployments with our partner-based accounts that were behind on a deployment schedule and a renewal reporting. To be sure the delays are not technical but rather the result of end customers internal policies and procedures which is out of our control. We are pleased however that we have received payment and are confident that we will be to recognize its value in our financial results in the future. We also experience a renewal reporting issue with a second partner. We're confident that this issue will be fixed in Q4. Looking at the first nine months of 2017, revenue increased 10% to $48.9 million from $44.6 million in the same period last year. New first year orders for the quarter increased to 11% to $2.1 million from $1.9 million in Q3 of last year. The increase was primarily due to strong contributions from ZixProtect and ZixArchive. We are very encouraged by the rapid customer adoption of these new solutions. This strong early adoption is validating our strategic decisions to move into advanced threat protection and e-mail archiving market, where we can offer our customers more value through our bundled offerings. Our adjusted gross profit for the quarter was $13.4 million or 81.1% of total revenue which was an improvement on a dollar basis from $12.7 million or 83% of total revenue in the third quarter of 2016. Similar to last quarter, our adjusted gross margin percentage for Q3 was down from a year ago. This is because we included 100% 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 adjusted gross margins to remain within the range of 80% to 81% throughout the remainder of the year and for the early part of 2018. Adjusted gross profit for the nine month period was $39.9 million or 81.6% of total revenue compared to $36.9 million or 82.8% of total revenue in the first nine months of 2016. Our adjusted R&D expenses for the third quarter of 2017 were $2.8 million or 16.7% of total revenue compared to $2.6 million or 16.7% of total revenue in the third 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 investment in our core encrypted e-mail solution with a particular emphasis on our rapidly growing hosted service and ZixCentral platform. Our adjusted selling and marketing expenses for the quarter were $4.6 million or 27.5% of total revenue compared to $4.5 million or 29.7% reported in Q3 of last year. The increase was mainly due to the additions to our customer success team which are targeted driving renewals and add-on sales. For the third quarter of 2017, our adjusted general and administrative expenses were $2.2 million or 13.5% of total revenue compared to $1.9 million or 12.7% of total revenue reported in Q3 of last year. G&A is up over last year due to outside services associated with our investment in new systems to modernize our business processes as well as the addition of a VP of Corporate Development. As we mentioned on our last call, both investments play pivotal role to our objective of growing the company via our build partner by strategy. We estimate our effective GAAP tax rate will be approximately 37.2% for the year. Our overall tax expense is largely non-cash 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 third quarter of $1.9 million or $0.03 per fully diluted share which was up 8% on a dollar basis compared to Q3 of last year. For the nine month period, GAAP net income totaled $4.8 million or $0.09 per diluted share compared to $3.9 million or $0.07 per diluted share in the prior year. Our third quarter non-GAAP adjusted net income was $3.9 million or $0.07 per fully diluted share. $0.07 per share was consistent with our guidance for the period as well as the amount we reported in Q3 of last year. For the first nine months of 2017, non-GAAP adjusted net income was $11.1 million or $0.20 per fully diluted share. $0.20 per share was 9% higher than the amount we reported in the same period a year ago. And finally, our adjusted EBITDA for Q3 2017 totaled $4.6 million, an increase of 7% compared to the $4.3 million we reported in Q3 of last year. As a percentage of total revenue, adjusted EBITDA for the quarter declined slightly from 28.1% in 2016 to 27.7% this year. On our last call, we mentioned that our adjusted EBITDA margin would pick up from the 26% level in Q2 of this year to reach 28% which is where we are today. We expect our adjusted EBITDA margin to remain at or around 28% which is consistent with our long-term model. It's important to note that within our 2017 operating model, we do have approximately $2.4 million of depreciation. Cash flow from operations for the third quarter of 2017 was $6.7 million. $6.7 million in the quarter represents the highest quarterly cash flow from operations in the company's history and demonstrates our ability to continue to deliver strong cash flow from our subscription model. Year-to-date, we have generated $14 million in positive cash flow representing a key metric for our profitable growth company. Our strong cash flow allows us to continue to maintain a strong balance sheet with $32.8 million in cash and no debt. Turning to our share repurchase program which our Board of Directors approved in April of this year. During Q3, we repurchased 250,000 shares for an aggregate amount of $1.3 million at an average share price of $5.35. We have also bought shares in October. Under the current program, we are authorized to purchase an additional 8.7 million going forward subject to certain conditions. Along with the board, we will continue to evaluate the shareholder return of buybacks as part of our balanced capital allocation strategy to maximize returns. Our CapEx for the quarter was $500,000 which included costs associated with our business systems implementation project and normal business capital purchases. We expect CapEx for the year to be between $2.3 million and $2.5 million. Our backlog which represents the dollar value of committed contracts was $75 million as of September 30, 2017, which was down 8% from $81.6 million at the same date last year. Our decrease in backlog in total orders were due to a decrease in our renewal rate from last year's record levels as well as a shorter-term commitment associated with the new customer pricing in bundled offerings. These two factors netted to a quarter average term length decrease of 7% from a year ago. We are reducing the financial incentive for our customers to select long-term contracts in order to increase both the velocity of transactions and the number of future touch points we have with these customers. The addition of our customer success team earlier this year has us more connected than ever with our customers specific needs and requirements and is giving us greater opportunities to upsell and cross-sell our newer solutions. Looking at our deferred revenue, we expect to recognize approximately $45.9 million or 61% as revenue over the next 12 months. Similar to last quarter, you can see the impact of the shift towards shorter-term contracts when you compare the 61% of revenue recognition of deferred over the next 12 months to last year's 56%. That is to say the 12 month backlog was up 500 basis points year-over-year. At the end of the third quarter, our ACV or annual contract value totaled $66.1 million, up 10% from Q3 last year. As a reminder, because of our shift is on bundled offerings, we do not breakout ACV by individual product anymore. However from an industry perspective the breakdown of our ACV was 49% from healthcare, 28% from financial services, 8% from government, and 15% from other verticals. Shifting gears to our financial outlook for the fourth quarter and full-year ending December 31. We now anticipate revenue for the fourth quarter to range between $16.6 million and $16.8 million, representing an increase of 7% to 8% compared to Q4 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 $0.08. For the full-year, we expect revenue to range between $65.5 million to $65.7 million which represents an increase of 9% 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. Our ability to maintain our quarterly and full-year earnings target on lower revenue is due to some smaller cost cutting measures we took at the beginning of Q4. These cost saving measures will account to about $0.02 per share in our GAAP earnings in Q4. We feel these cost cutting measures will have little impact on our ability to execute and give us expense room as we align to our profitable growth objectives in 2018. 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 November 7. Dave?

[David Wagner:]

Thank you for the financial overview, Dave. Now turning to our third quarter performance and progress as it relates to our seven growth pillars. Pillar one is new customer wins measured primarily by new first year orders which were $2.1 million. This represents an increase of 11% over Q3 2016. We continue to win new costumers during the quarter through both our direct and indirect sales channels bringing our total number of customers to almost 20,000. The new first year orders breakdown for Q3 put it 37% through direct sales, 54% through VARs and MSPs, 6% through OEM partners, and 3% from web sales. So new first year orders from direct VARs and MFPs totaled 91% from pillar one in the third quarter. Let me double click on new customer wins by sharing some brief insights surrounding the top five new customer wins this quarter. These top five new customers included three healthcare providers, one federal government agency, and one local government agency. Two of the five were not previously using e-mail encryption in a meaningful way; three of the five were competitive displacements. Two of the three displacements were driven by ease of use, the third by a migration to Google Docs. Similar to last quarter, ZixProtect delivered as a bundle, was key to securing one of these top five new customer wins. Our success was most visible in the hosted space where customers are increasingly choosing our multi-tenant cloud solutions now including ZixProtect and ZixArchive. Our core ZixEncrypt solutions delivered new first year orders consistent with Q3 of last year and we're seeing increasing momentum in our newest solutions ZixProtect and ZixArchive which delivered approximately 10% of new first year orders and were up 20% from last quarter. As we look ahead to the fourth quarter we are seeing a similar trend a stronger than expected pipeline for our new solutions and a lighter pipeline for encryption. Our second pillar focus is on our OEM partners Cisco and Google. On our last call we talked about doing a large U.S. Federal Government Agency contract with Cisco. While we are pleased with the size and scope of this win, we cautioned that the partnership is not yet in a position to deliver consistent quarterly new first year orders. Q3 was a perfect example as to why that's the case? Despite the teams working well together we did not secure a meaningful level of new first year orders from Cisco in Q3. That being said we're continuing to work a joint pipeline including a few meaningfully sized deals and we continue to expect new first year order contributions from time-to-time. Google continues to move forward and contribute a consistent quarterly order flow primarily for small and medium businesses in the healthcare segment. We do not see any large transactions in the Google pipeline at this time. Moving on to Pillar's three and four which focus on selling additional seats and additional product into our installed base. With the introduction of ZixProtect and ZixArchive these two pillars have taken on an even greater importance as a result of the significant upsell, cross-sell opportunity they present. As I mentioned earlier, if we look at ZixProtect alone, the number of seats for this solution increased 25% sequentially. We added 55 new customers for ZixProtect and ZixArchive totaling approximate 10% of our total new first year orders the vast majority of which were sold into existing accounts. One of the most exciting developments in the quarter was the success we had and introducing ZixProtect into larger customers. We had a successful proof of concept in one of our top five customers that resulted in ZixProtect being moved into production for approximately 15% of the user base with the commitment to rollout to the remaining locations representing tens of thousands of users over the next 12 months. This successful migration coupled with success in several other large accounts has given us confidence to formally launch ZixProtect and ZixArchive into our customers with over 1,000 mailboxes in Q4. This move is also supported by the introduction of sandboxing and URL redirect features in Q4. Sandboxing is now generally available and URL redirect will be available in December. These features combined with the strong layered architecture of ZixProtect have us positioned very well from a product perspective as we transition into the broader e-mail protection market opportunity. Our partnership with Digital Guardian is also designed to drive increased value into our existing customer base. The sales cycle for enterprise DLP is longer than threat protection and archiving but we are beginning to build a pipeline of DLP opportunities for 2018. The fifth growth pillar which is increasing the renewal rates has been a challenge for us in 2017. As we look in detail at the higher than anticipated turn in 2017, we are forecasting about $2 million more turn than we expected as we entered the year. When we dig through the turn in more detail there is an obvious factor driving the majority of the increase and that is anomalous M&A activity. Healthcare in particular is a consolidating industry and we had three of our largest 20 healthcare account impacted by this trend. The two largest actually have their merger fall through but the consolidation planning process resulting in cancellations or expected cancellations at two of our top five customers. The third largest consolidation loss was actually too apparent that is an existing Zix customer. We had enough licensed users to absorb the consolidation of this past 20 customer resulting in a revenue loss despite the fact we retained the customer and their seats. These three reductions account for approximately 80% of the excess churn we are forecasting in 2017. With respect to our sixth pillar which is investing in our core e-mail encryption solutions we experienced another solid quarter for our ZixEncrypt hosted customer base which grew by 87% year-over-year. The growth of our hosted solution is central to our growth strategy. As we continue to enhance ZixCentral our management platform that integrates the Zix and Greenview Data platforms, we are building toward a multitenant solution with a single pane of glass for all of our services. A current deliverable is integrating access to all of the administrative and reporting capabilities for ZixEncrypt into the consolidated ZixCentral control panel framework. This will not only help us simplify the selling, training, and operation of the bundle but will also help us drive stickier relationships with our customers. I'd like to spend a moment talking more about our recent acquisition of the Entelligence Messaging Server technology and how it relates to our build strategy. As many of you know, we acquired EMS Technology from Entrust Datacard in the third quarter to bolster our already strong e-mail encryption capabilities. EMS offers rich enterprise centric capabilities like high availability on-prem architecture, FIPS validated cryptography, and advanced message tracking. As we integrate EMS into our core offerings, it will allow us to accommodate an even broad array of used cases. This acquisition, in particular, expands our gold standard status for e-mail encryption and allows us to accelerate our product roadmap for the future. In addition we added another trusted partner to our ranks in Entrust Datacard who will be a Zix value-added reseller going forward. We look forward to delivering on the many ways this acquisition will enable us to secure more enterprise, federal, and international customers. With the investments we made in 2017, we are in a stronger position as a company than we were at the start of the year. Looking ahead the position of strength will enable us to expand our offerings and create more values for our customer which will help us achieve our growth targets over the short and longer-term. Last but not least our seventh pillar relate to exploring English speaking international markets the present us with attractive opportunities to drive profitable growth. With the addition of EMS we already added one of the top five Canadian banks as a Zix customer in September and with the opportunity to renew several additional international accounts with the newly acquired EMS product in the coming quarters. We expect that the on-premise and act mind capabilities we added with EMS will be particularly helpful in international sales opportunities. With that background in place, I'd like to finish my prepared remarks by providing an overview of the macro environment today with particular attention to how we are positioning ourselves to close out the year and enter 2018 on a strong note. It's clear that Microsoft pushes e-mail to the cloud with Office365 is driving the macro environment for e-mail security. This is happening at the same time when e-mail is being exploited as the number one threat factor by attackers. With a successful addition of ZixProtect and our ability to sell it to both large and small businesses Zix is in a stronger position to support our customers through this transition with a cloud-based bundle that provides an industry-leading gold standard e-mail encryption experience with threat protection that is appeared to Microsoft EOP and archiving that is truly independent second source for redundancy and availability. All at a lower cost and delivered with our superior customer service and support. Recent attack highlights the importance of not only providing encryption for e-mail in transit but also the importance of encryption for e-mail data at rest. Encrypting e-mail can ultimately make a difference between having a superior defense against a cyber attack and being at risk for a ransomware attack or a data breach. We acquired EMS for just this purpose knowing that it would give us a much stronger capability by providing a broader range of encryption delivery options including more options for end-to-end protection. In summary data breaches are not going away and at Zix we are always striving to introduce innovative solutions to our build partner buy strategy that can help drive significant value for our customers and shareholders. We're positioning ourselves into a cloud-based e-mail data protection space, right at the time when it's most beneficial to our customers. We're excited about the transition we're making as a company and the opportunities ahead of us. Now with that we're ready to open the call for your questions. Operator?

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Mike Malouf with Craig-Hallum. Please go ahead.

[Mike Malouf:]

Great. Thanks guys for taking my questions.

[David Wagner:]

Certainly. Hi, Mike.

[Mike Malouf:]

Hi. Can I just explore little bit on the renewal rates we talked about you identified about 80% of that how long do you think that's going to impact you as you look out over into 2018.

[David Wagner:]

Yes. So what we see obviously is there are larger one year contracts and have been occurring throughout the year as I mentioned the one is a forecasted loss in Q4, so we would expect that to be an impacted -- or I guess would start through the beginning up in Q3, Q4 and then into 2018. As we look at the pipeline for renewals going out, we definitely see 2018 returning to more historical levels and again outside those anomalous three, our renewal rates are within couple hundred basis points of our record renewals last year.

[Mike Malouf:]

Okay. And then when you talked about that sort of identifying 80%, what's the other 20% that's --?

[David Wagner:]

So the other 20% are more generally competitive throughout with this Office 365 migration customers moving from an on-prem exchange server typically to the cloud exchange server and bundling different kind of services when they make that decision.

[Mike Malouf:]

Okay. And that was sort of that your comment about competition moving to the cloud that was specifically tied to the Office 365?

[David Wagner:]

Yes.

[Mike Malouf:]

Okay. And then when you commented that the pipeline for the bundling looks very promising and strong, but the pipeline for the encryption did not look or looked a little lighter I think that's what you use, can you talk about as you look into just sort of typical email encryption is that a business that you think is going to continue to be under pressure as you look out over the next year or two?

[David Wagner:]

No absolutely not, the underlying trends for e-mail encryption are exceptionally strong especially at large accounts we are seeing more and more interest for end-to-end encryption which is driving that EMS acquisition or build pipeline on the end-to-end solutions. I think that the pipeline transition is one of our focus as an organization on launching the bundle and really get behind ZixProtect and ZixArchive and managing that transition on internal micro basis.

[Mike Malouf:]

Okay, all right. That's helpful and then just one last question, given the cash that you have on the balance sheet and really the success I think you had with bundling so far, as you look at the bundle that you're offering to your clients right now, how complete is that bundle now and as you look out over the next 12 or so months, are there some significant additions to that bundle that you think through the M&A markets that you can add to it?

[David Wagner:]

Yes, so that's a great question Mike and that's really the highlight of this past quarter is a demonstrated improved capability of the ZixProtect Solution that we acquired. The more we have it in with the clients, the more we are aware or convinced that its effectiveness against malware and advanced threats as good as anybody in the space and the roadmap that we're building out there with our sandboxing capability and our URL direct redirect features, they are different than anybody else in the market, I think many ways for many customers were best-in-class implementations or advanced threat protection. So the technology is super on the archiving side. What we have is an S3 backended cloud-based solution for giving a true transparent second source with elastic search engine that's really fast and has some real exceptional features. So the technology piece that we're really excited about is really about as we think about M&A is really about how we get scaled faster, so we can continue to make investments and build out the suite. So we're looking at things that bring scale and then we're also looking at adjacencies that might add technology to primarily scale focus as you look at our M&A roadmap.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Michael Kim with Imperial Capital. Please go ahead.

[Michael Kim:]

So just specific on the Digital Guardian partnership, could you expand a little bit on that selling motion and a joint marketing opportunities and how does that complement or as a plan B DLP capabilities that you currently offer with ZixEncrypt?

[David Wagner:]

That's a great question Michael and it's very, very complementary with our current approach with ZixEncrypt as you know our Lexicons are really well suited for outbound e-mail protection. We've increased recently modified the platform to have a lot better X-Header support to integrate with enterprises to use enterprise DLP. So that classification and their loss prevention can be provided consistently across entire enterprise and so we work with our most of our larger customers to the different DLP solution or an enhanced beyond just the e-mail session that we provide. So we really providing one source with this partnership with Digital Guardian whereas you know Gartner right hand quadrant vendor there and as to my understanding, we're the only partner that's doing subscription licensing of their products that gives us a differentiated value proposition but it's really about extending a broader set of value to our customers as they're looking to consolidate vendors. As we look at build partner by that DLP faces is one where we're very pleased that partner with a great vendor like a Digital Guardian for that value for our customers.

[Michael Kim:]

Got it. And then just switching gives the OEM inside. I know you have been focusing on your side-by-side selling efforts with Cisco. How are you seeing the pipeline conversion overtime stabilizing on the six of your deals and when you envisioned sort of consistent contribution every quarter and not to get too specific but do you see opportunities that may be close three to five of these opportunities every quarter.

[David Wagner:]

So the side-by-side is working fine. I guess been really frank, we're going to I think the inconsistent in delivering orders with Cisco until we can get enhancements to the structured relationship. And we're virtually open direct and Cisco is open direct but it will require some adjustments to the way the current relationship is structured to get a upload that's really consistent and there's a great opportunity there but that's something we will be -- we will be working on with Cisco and of course they are a big partner in this partnership to make that happen.

[Michael Kim:]

Got it. And then one quick one for Dave Rockvam and this is going back to the time that you acquired Greenview, you outlined some level of revenue contribution in cash flow initial impact. Any update on how that's progressing given that these transactions that have been closing at better than your internal plan.

[David Rockvam:]

Yes. We -- on the Zix side the team is having very good success in selling and is ahead of plan. We are 100% subscriptions so we started the selling motion really mid-April so, we're starting to see that coming into the model but it takes a while as to build up a subscription model like that. So as Dave said, the team did 10% of this quarter's $2.1 million so that's $200,000 spread over a year so you see that kind of puts $50,000 of revenue into Q4 based on that. And then if you look at Greenview Data they're performing at that plan about $1.5 million for the year in revenue and running write at cash flow neutral.

[Michael Kim:]

Got it. And then just on these expense assumptions for Q4 guide where do you envision begin to have more leverage in the model with some of these expense efficiencies.

[David Rockvam:]

They're pretty much across the board. We -- it was just a few people and a few expenses were able to turnaround so, I think you'll kind of see it net out across the board maybe a little bit in sales but it wasn't unnecessary like sales headcount as it was some additional expenses we were able to turnaround that may be where you might see some expense savings in Q4. See, I think that’s probably the closest one I mean there I said a little bit in cost sale a little bit in R&D but we're talking little bit G&A. We're talking tens of thousands of dollars.

[Michael Kim:]

Okay. So no significant change in sales capacity.

[David Rockvam:]

No, obviously not have anything to do with sales capacity, right.

[Operator:]

Thank you. [Operator Instructions]. And with no further questions I would now like to turn the call back over to Mr. Wagner for his closing remarks.

[David Wagner:]

Well, thank you all for attending our Q3 earnings call. We look forward to the fourth quarter call sometime in February.

[Operator:]

Thanks for joining us today for Zix's third quarter 2017 earnings call. You may now disconnect.