Zix Corporation
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Good afternoon. Welcome to Zix's Fourth Quarter and Full-year 2017 Earnings Conference Call. My name is Andrew, 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 will be recorded and made available for replay via a link under the Investor Relations section of the company's Web site. Now, I would like to turn the call over to Geoff Bibby. Sir, please proceed.

[Geoff Bibby:]

Thank you, Andrew. Good afternoon everyone, and thank you for joining our fourth quarter and full-year 2017 earnings conference call. With me today is our CEO, Dave Wagner; and our CFO, Dave Rockvam. After the market close, we issued a press release announcing our results for the fourth quarter and full-year ended December 31, 2017. A copy of which is available on the Investor Relations section of our Web site 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, as I said, in the Investor Relations section of our Web site. Now with that, I would like to turn the call over to Dave Wagner for his opening remarks. Dave?

[Dave Wagner:]

Thank you, Geoff. Good afternoon, and thank you everyone for joining us today. We finished 2017 with a strong financial performance, delivering on our commitment to profitable growth; we grew revenue in 2017 by 9%, adjusted EBITDA by 8%, and cash flow from operations by 19% to $18.2 million. The successful introduction of ZixProtect and ZixArchive, and our cloud-based email protection bundle contributed to the strong result. And we are pleased with the momentum we're seeing in the market for these solutions. The fourth quarter delivered an acceleration of the trends that we've been seeing with our customers moving to the cloud, and often preferring a bundled offering. New first year orders from ZixProtect more than doubled sequentially, while new first year orders from ZixArchive more than quadrupled over the same period. These new solutions are increasingly being delivered as an email protection bundle enabling us to attract new customers and to sell deeper into our installed base. Quarter-over-quarter, our attach rates for ZixProtect more than doubled to almost 3%. And new first year orders of ZixProtect and ZixArchive accounted for over 20% of our total new first year orders in the quarter. These results demonstrate our ability to successfully execute on our cross-selling initiatives and validate our strategy of transitioning to a broader email security provider from our strength as the leader in encryption. In a market environment that's being driven by the migration of email to the cloud, and at the same time that is being targeted by hackers as the number one threat vector, customers are searching for an email protection solution, like Zix, that assures security and compliance in a cloud-based easy-to-use service with outstanding customer support. We're building the Zix brand and our core strengths to become one of the clear choices for a robust and fully featured email security bundle. We're still in the early stages of executing our bundling strategy, but the results are beginning to speak for themselves. Let me step back for a moment though. 2017 was about more than just launching our bundled solutions to address a significantly larger total addressable market. It was also about refining who Zix is, and more importantly what Zix can be. Leveraging more than two decades of market leadership and expertise in the email encryption space, we've successfully expanded our horizon from just email encryption to become one of the preeminent providers for a broader set of email security solutions. Our rebranding at the beginning of the year laid the foundation for our new identity and reaffirmed our commitment to our customers. We created our customer success team to better serve our customers throughout all stages of their Zix relationship, ensuring that we deliver even more value to our customers. Embracing this philosophy of driving more value, we then launched ZixProtect and ZixArchive, significantly expanding our product suite. Along the way, we boast [ph] our leadership team, enhanced our email encryption capabilities with the acquisition of EMS, and made significant enhancements to our platform, especially our multi-tenant cloud solution which grew 87% year-over-year during the quarter. With all of these accomplishments our accelerating momentum with ZixProtect and ZixArchive served as the cherry on top helping us to end 2017 on a high note. Looking ahead to the new fiscal year, we look forward to extending the 87% year-over-year revenue growth we experienced last year in our cloud-based encryption product, as well as the opportunity to accelerate that success with ZixProtect and ZixArchive. However, the excess churn due to M&A and competitive pressure is slowing our near-term revenue growth and impacting our 2018 guidance. This excess competitive churn we are experiencing is primarily from our on-premise appliance customers, which now represent about 20% of our ACV, down from 27% of our ACV a year ago. We believe the success we're seeing with our cloud-based email security solutions position us well for expanding our market position and building a foundation for stronger levels of growth and profitability moving forward. Later on today's call, I'll expand on how we're making real progress to mitigate and overcome some of these pressures. But first, I'd like to turn the call over to our CFO, Dave Rockvam, to provide more details on the financials for the quarter and the year. Dave?

[Dave Rockvam:]

Thank you, Dave, and good afternoon everyone. Building on Dave's remarks, Q4 was another strong quarter with regards to our bundling, cross-selling initiatives, and moving our customers to the cloud. As ZixProtect and ZixArchive continue to gain traction, we believe we're in solid position to expand our market share in the broader email data protection space. Turning to our financial numbers in more detail, revenue for the fourth quarter increased 8% to $16.8 million from $15.6 million in the same quarter last year. Our Q4 revenue came in at the high end of our revenue guidance range, and also represented our highest level of quarterly revenue for the 15th quarter in a row. The record revenue is primarily driven by the rapid adoption of our cloud-based hosted encryption solution and the success of our new email protection bundled offerings. We did also benefit from a partner-based account becoming current and some compliance revenue, which together contributed roughly $200,000 in Q4 revenue. Looking at fiscal 2017, revenue increased 9% to a record $65.7 million from $60.1 million in the same period last year. 9% growth from 2017 continues to demonstrate our solid subscription business performance and customer momentum. Our new first year orders for the quarter decreased 7% to $2.5 million compared to $2.7 million in the same quarter last year. As David alluded to earlier, new first year orders were up 119% sequentially for ZixProtect and up 323% sequentially for ZixArchive. While new first year orders as a whole were down year-over-year, we are pleased to see our cloud-based hosted solution and our bundled offerings making up a bigger percentage of this metric, and the new customer wins. Our adjusted gross profit for the quarter was $13.7 million or 81.4% of total revenue, which was an improvement on a dollar basis from $12.9 million or 82.7% of total revenue in the fourth quarter of 2016. 81.4% was at the high end of our adjusted gross margin outlook of 80% to 81% which we provided last quarter. Similar to the prior two quarters, our adjusted gross margin percentage for Q4 was down year-over-year. This is because we included 100% of Greenview Data's cost while not yet capturing 100% of their revenue, which is expected when purchasing a subscription-based revenue company. We continue to expect our adjusted gross margins to remain within this range of 80% to 82% in 2018 as we continue to invest to provide best-in-class customer support and operational excellence. For the full-year, adjusted gross profit was $53.5 million or 81.5% of total revenue, which was an improvement on a dollar basis from $49.8 million or 82.8% of total revenue in 2016. Our adjusted R&D expenses for the fourth quarter of 2017 were $2.7 million or 16.2% of total revenue, compared to $2.4 million or 15.4% of total revenue in the fourth quarter of last year. The year-over-year increase was primarily due to the inclusion of Greenview Data in our results versus their absence a year ago. The R&D headcount increase accounts for 100% of the overall increase in R&D as a percentage of sales. Later in the call, Dave will dive in to the exciting advancements to our platform the team has been delivering. Our adjusted selling and marketing expenses for the quarter were $4.5 million or 26.9% of total revenue, compared to $4.7 million or 30.4% of total revenue in Q4 of last year. A portion of the decrease in dollars was due to the cost cutting measures we took in Q4 to better align cost and sales opportunities in 2018. The decrease in selling and marketing as a percentage of sales is primarily however due to the increase in revenues for the year. For the fourth quarter of 2017, our adjusted general administrative expenses were $2.3 million or 13.6% of total revenue, compared to $1.9 million or 12.3% total revenue reported in Q4 of last year. Similar to the prior quarter, the year-over-year increase was primarily due to the addition of a VP of Corporate Development, our investment in new systems to modernize our business processes, and the addition of our Ann Arbor office. The systems upgrade project went live on January 5th, and we're starting to see immediate benefits from this upgrade. As we've communicated before, these investments are foundational to our plan to grow the company via our Build, Partner, Buy Strategy. Due to the 2017 tax reform legislation, which reduces our corporate tax rate as of January 1, 2018, we had to make a one-time adjustment of $12.5 million to our deferred tax asset balance during the fourth quarter. This adjustment was made to reflect the future effect of lowering the corporate tax income tax rate from 35% to 21%. In combination with the adjustment and other deferred tax expense, we recognized a net non-cash charge of $15.2 million to our GAAP net income for the fourth quarter and $18.5 million for the full-year. It's important to note however there is no change to our cash position or adjusted net income. We also don't expect this re-measurement to impact us going forward, and we believe we are still in a good position to utilize our NOLs through the late 2020s. On a GAAP basis, we recorded a net loss of $12.9 million or $0.24 per fully diluted share, compared to a GAAP net income of $1.9 million or $0.04 per diluted share in Q4 of last year. For the full-year, GAAP net loss totaled $8.1 million or $0.15 per diluted share, compared to a GAAP net income of $5.8 million or $0.11 per fully diluted share in 2016. The decrease for both the quarter and year was largely due to the one-time non-cash charge of $12.5 million that I mentioned earlier. Our fourth quarter non-GAAP adjusted net income was $4.5 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 over the amount we reported in Q4 of last year. For the full-year, non-GAAP adjusted net income was $15.6 million or $0.29 per diluted share; $0.29 per share exceeds our 2017 guidance for non-GAAP adjusted earnings per diluted share, and represents a 12% improvement over the amount we reported in 2016. And finally, our adjusted EBITDA for Q4, 2017 totaled $4.9 million, an increase of 8% compared to the $4.5 million we reported in Q4 of last year. As a percentage of total revenue, adjusted EBITDA for Q4 was 29%, which was consistent with the same quarter last year, and above the previous guidance that we would end the year at 28%. For the full-year, our adjusted EBITDA was $18.2 million, up 8% from 2016, and matching last year's 28% of revenue. Cash flow from operations for the fourth quarter of 2017 was $4.2 million, up 108% from $2 million we reported in the same quarter last year. For the full-year, we generated $18.2 million operating cash flow, up $2.9 million or 19% from 2016. As a profitable growth company, we are focused on building on a strong cash flow generation, which has made possible due to the 100% subscription nature of our business. Because of our ability to consistently generate the strong cash flow, we maintained our robust balance sheet with $33 million in cash and no debt. During the quarter, we also reached a licensing agreement settlement with respect to the IT infringement litigation, which should help free up even more cash flow going forward. Turning to our share repurchase program, which the Board of Directors approved in April 2017. During Q4, we repurchased 500,000 shares for an aggregate amount of $2.5 million at an average share price of $4.95. Under the current program, we are authorized to purchase an additional $6.2 million worth of shares as of January 1, 2018, subject to certain conditions. Along with the Board, we continue to evaluate the shareholder return of buybacks as part of our balanced capital allocation strategy, which we believe should drive higher returns for shareholders both now and in the future. I will add, we have repurchased shares in January and February of this year. CapEx for the quarter was $1.3 million, which included cost associated with our business systems implementation project and normal business capital purchases. We expect CapEx for 2018 to be between $2.3 million and $2.7 million. And we expect to have approximately $2.7 million of deprecation in 2018. Our backlog, which represents the dollar value of committed contracts were $72.6 million as of December 31, 2017, which was down 11% from $81.7 million as of the same day last year. The decrease in backlog in total orders was due to a decrease in our renewal rate from last year's record levels, as well as the shorter-term commitment associated with the new customer pricing and bundled offerings. As we've mentioned before, we are reducing the financial incentives for customers to select longer-term contracts, which helps us increased our transaction volume and future touch points with these customers. Looking at our deferred revenue, we expect to recognize approximately $45.1 million or 62.2% as revenue over the next 12 months. Similar to the prior two quarters, you can see the impact of the shift towards shorter-term contracts when you compare with 62.2% of revenue recognition of deferred over the next 12 months to last year's 57.3%. In other words, the 12-month backlog was up 5% year-over-year. At the end of the fourth quarter, our ACV or Annual Contract Value totaled $67.3 million, up 9% from Q4 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 2017 acquisitions. Before shifting gears to our financial outlook, I would like to touch on the new accounting standard revenue from contracts with customers, ASC 606, which were adopted at the start of the fiscal year, starting January 1, 2018. The guidance on today's call and all future calls will confirm to the new ASC 606 planning standard. While we are still in the final stages of accessing the impact, our current work would suggest that for the full-year 2018, the new standard will not have any impact on revenue as Zix's recognized revenue for a number of years as a subscription, which is in compliance with ASC 606. In terms of operating expenses, we expect ASC 606 to have a favorable impact of sales and marketing expense of approximately $1.5 million to $2 million for 2018. As we start to amortize commissions in both new and add-on business over the average length of customer life. The result of this change will be lower sales and marketing expenses in current periods by shifting that expense in the future periods. And note that the new standard had no impact on calculation and reporting of cash flow. Zix's point to adopt ASC 606 under the modified retrospective standard, and as such, we do planned to publish the details regarding historical impact of this new standard as part of our 10-Q that will be filed in connection with our first fiscal quarter of 2018 reporting period. Now, for our first quarter and full-year 2018 financial guidance; we currently anticipate revenue for the first quarter to range between $16.6 million and $16.8 million, representing an increase of 4% to 6% compared to Q1 of last year. We are also forecasting fully diluted GAAP earnings per share to be between $0.04 and $.05, and fully diluted non-GAAP adjusted earnings per share to be $0.08. For the full-year, we expect revenue to range between $67.5 million and $69 million, which represent an increase of 3% to 5% compared to revenue in fiscal 2017. We are also forecasting our fully diluted GAAP earnings per share to be between $0.17 and $0.19. And our fully diluted non-GAAP adjusted earnings per share to be $0.32 for fiscal 2018. With the impact of ASC 606, we are targeting a 2018 adjusted EBITDA margin of approximately 30%, versus 28% in 2016 and 2017. Our full-year revenue guidance reflects the excess churn we experience in 2017, and the go-forward impact that it's as having on our 2018 revenue. As we've not fully included through all the additional churn in our on-premise appliance customers, our 2018 growth rate is somewhat dampened. However, we continue to be optimistic on our growth potential as we migrate in drive growth from new customers in our hosted and bundled offerings. Both of these solutions performed extremely strong in 2017, and I was excited about the future as we continue to execute on our profitable growth plan. This completes my financial summary. To more detail analysis of our financial results, please reference our Form 10-K, which we plan to file by March 12. Dave?

[Dave Rockvam:]

Thank you for the financial overview, Dave. Beginning with this call, we are changing our reporting framework to focus on three main growth drivers that more concisely consolidate the seven pillars we've been using for the past seven quarters. The three growth areas are (1 New customer acquisition, (2) Sales to existing customers through adding on and cross-selling, and (3), reducing churn and increasing retention. I'll now spend the remainder of the call going overall financial performance and progress with respect to each of the three growth areas. In terms of new customer acquisition, we're continuing to secure new customers through our direct sales teams, VARs and MSPs and OEM partners. In the first area, we'll also cover international customer acquisition efforts. So, new customer acquisitions was previously addressed by pillars one, two, and seven. Our primary measure of new customer acquisition is through our new first year orders metric. As Dave mentioned earlier our new first year orders for the quarter were $2.5 million. Although down 7% from the same quarter last year, this healthy level of new first year orders was once again driven by our success in winning new customers versus the competition particularly with our cloud-based solutions. In fact, 89% of our direct ZixEncrypt deployment in 2017 were hosted. This is up from 67% in 2016, 42% in 2015 and 9% in 2014, demonstrating the rapid adoption of our cloud-based encryption product. This cloud adoption is especially important as it is where we can best attach additional services, and it is where our retention rates are the highest. As previously mentioned, a key part of our sales success in Q4 was the increasing momentum of ZixProtect and ZixArchive, new first year orders for these products more than doubled and quadrupled respectively on a sequential basis. As a percentage of total new first year orders ZixProtect and ZixArchive accounted for more than 20% and $2.5 million compared to 17% of the $2.1 million in Q3. In terms of our core encryption product, we did see a year-over-year decline due to reduced contribution from our OEM partners and the changes we made to our pricing and bundling strategy. Looking more specifically at new first year orders from new customers, $1.3 million or 54% of our new first year orders in Q4 came from new customers. Three of our top five new customer wins during the quarter were for our core ZixEncrypt best-of-breed solution demonstrating that customers continue to value our core encryption solution. Of course, that means two of our top 5 new customers in the quarter refer a bundle. We're especially pleased with this traction and the fact that we displaced key Gartner Magic Quadrant providers in these accounts demonstrating the strength of our bundle in competitive displacement scenarios. Taking a step back and analyzing our new first year orders during the quarter, 52% came from our direct sales effort, 41% through VARs and MSPs, 5% through our OEM partners and 2% from web sales. Only 5% from our OEM partners means that we experienced another light contribution from that channel. With regards to Cisco we're still not in a position where we can expect consistent new first year order contributions from them as a channel, and we're working with Cisco to find a new and fresh approach to optimize our work together. With Google, we continue to move opportunistically and see a stronger opportunity to engage Gmail, G-suite customers through Google's channel partners than with Google's direct sales force. For the full-year of 2017 new first year orders from our OEM partners decreased to 9% of our new first year orders from 17% in 2016, more than accounting for the year-over-year decline in total new first year orders and the majority of the year-over-year decline in encryption orders. In 2018, we will be continuing to work with our existing OEM partners to optimize our work together. But we will be placing increasing emphasis on our MSP and VAR routes to market as we believe that they represent a better go-to-market set for our expanded solution set. More specifically, on April 2nd, we will launch a new managed service provider program that will allow our MSP partners to access our complete bundle from a single interface including the ability for tiered access to ZixCentral and self administration of their end users. We are also introducing monthly billing for our MSP partners that move to new expanded offering. We're excited about the strong, early reception of this new offering by the partners who are previewing it, and we're optimistic about the potential increase to our business, particularly in the sub-50 mailbox space and Gmail space that has been historically underrepresented in our base. Turning quickly to our progress on the international front, on our last call we talked about penetrating the Canadian market through our acquisition of EMS, which helped us secure three of Canada's largest banks. Our on-premise and act-mind capabilities have been particularly effective in this regard and we look to leverage these capabilities to expand our business outside the U.S. Last but not least we also signed a distribution agreement and our first reseller in United Kingdom as we look to take advantage of the growth opportunities in this market with the rollout of GDPR later this year. Now, turning to our second main growth area, which is additional sales to exiting customers, which was previously referred to as pillars three and four; in the fourth quarter, approximately 44% of our new first year orders during the quarter came from our install base, which is just above our average of 40% and totaled approximately $1.1 million. In the fourth quarter, we focused heavily on penetrating our install base with ZixProtect and ZixArchive and as a result saw a decrease in our add-on sales for our core encryption offering, which was down from Q4 2016. On the other hand we had strong success selling ZixProtect and ZixArchive to more than 70 existing customers totaling approximately $400,000 or 35% of our add-on sales. Looking to the rest of 2018 and beyond selling additional value to our existing customers will remain a focus. We're pleased with the fact that ZixProtect was nominated as the best e-mail security product by SC Media awards, a great validation of the strength of our offer, which combined with our growing list of reference customers would help us continue to expand our add-on sales as well as addressing new customer opportunities. The third and final growth area is reducing churn and increasing retention which effectively summarizes pillars 5 and 6, pillar 5 being customer retention and pillar 6 being ongoing investments in our products. Looking back at 2017, we achieved a 100% renewal rate on a new EMS solution, which bolstered our already robust e-mail encryption capabilities. Retention of our cloud-based customers was also well above 90% contributing to our 87% growth in our most important strategic customer segment. However, retention of our on-premise legacy gateway customers is lagging as legacy customer's transition to Office 365. In spite of the on-premise headwind, we did achieve 90% total dollar renewal rate for 2017 but we were a couple of 100 basis points below historical level. As we have stated, the 2017 shortfall was largely due to M&A activity for 3 health care customers and the impact of Office 365 migration on our on-premise customer base. We're working diligently to address the excess churn. In addition to the roadmap delivery that I will describe later, we have armed our customer success team with best-in-class data driven tools to help us better understand our customers' current usage to better assess and predict risk of non-renewal. Where the risk of non-renewal is highest we've given customer success team tools to address customer concerns by

[Operator:]

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

[Mike Malouf:]

Okay, great. Thanks for taking my questions guys.

[Dave Wagner:]

Hi, Mike.

[Mike Malouf:]

Hi. A couple of things, just wondering if you could just talk a little bit more about the churn, specifically as it relates to the Office 365 [ph] and just give us a sense of where. I know you had a number of initiatives that were attacking that. And I'm just wondering if you could just drill down a little bit more on that. And then second of all, with 8% growth in this quarter, 4% to 6% next, and sort of 3% to 5% for the year, sort of suggests continuing decreasing in growth. And I'm just kind of wondering as you look through the churn risk that you see this year, when do you think that you'll get through that and potentially get some reacceleration in the numbers? Thanks.

[Dave Wagner:]

Great. Those are great questions, Mike. So first of all, talk about the churn. So we had the healthcare M&A that we talked about, and the churn in the Office 365 is -- we're seeing it primarily in, as we said, the on-prem appliance offer, and those customers are ones -- some of them are on-premise for good reasons and don't plan to change, some of them haven't been paying as much attention to their email environment as perhaps they should be. And so when the new leader comes in or they look at the cloud they're ticking everything at once and moving typically to the Office 365 solution in those instances. So typically when a customer does that they'll -- the email manager that we typically deal with would say "That decision was made by my boss, I didn't have any, even awareness that it was happening." And that's what we're working to get ahead of so that those customers know that we have an offer, they know that when they move to the cloud with us it makes the Office 365 migration easier when it happens. And so everything we're doing is focused on getting ahead of that trend. And then you could see just how quickly we're able to do that with the increase to 89% cloud deployments this year to where we're making with 200 migrations. We're making that transition quite rapidly. When you look at the growth rate more specifically, the larger healthcare accounts that we talked about, even though we're aware of a cancellation they're moving out at different times, which is what's contributing to that kind of change in the growth rate throughout the year. And last but not least, I think you asked about when will this turn. And so, what we're really excited about is how quickly we're moving the business and intercepting this customer migration to the cloud. And we gave you lots of numbers to evidence how well we're doing that. With 89% of our new encryption orders being cloud-based, you can see from a new orders perspective we're largely through that curve. So if the cloud migration continues at the pace at which it's going then we should see this turn sometime in 2019.

[Mike Malouf:]

Okay, great. And when you take a look at the overall growth of the market, I know there are some industry analysts out there that have their opinions. How are you looking at it as far as growth of the whole email and protected archives wherever you participate, how fast is that growing?

[Dave Wagner:]

Well, so it's really a transition from on-prem to cloud. And so that Gartner would have the secure email gateway growth in the low single digits. Our perception is that the encryption part of that is growing in the mid single digits. And the opportunity that we're taking advantage of is that rotation and being positioned to capture more and more of that cloud migration, which is why that 87% growth we're seeing in our cloud offer is clearly way above market. And that's because we're coming at small, number one. And two, we're moving customers -- we have the opportunity to move customers from on-prem to the cloud that's accelerating that. But that's really the piece that we're excited about, that we're leaning into, and we think there's a lot of room left still in this migration to capture share for these compliance-oriented customers, and particularly in the mid-market segment.

[Mike Malouf:]

Okay, great. Thanks for the help.

[Dave Wagner:]

Sure thing. Thank you.

[Operator:]

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

[Michael Kim:]

Hi, good afternoon guys. With the growth in ZixProtect and ZixArchive hoping you could shed a little more light on where you're seeing the earliest traction, especially on customer verticals. And how is that impacting overall deal sizes with the bundled sale?

[Dave Wagner:]

So that's a great question, Michael. So ZixProtect and ZixArchive, we're seeing it where you'd expect it, in healthcare with half our installed base there, you saw the great numbers, 35% of our orders into the base were ZixProtect and ZixArchive. Actually our largest transaction in the quarter was a complete sale full bundle offer which was right up the ASP in that account nicely. So that's where the real opportunity is. We're exceeding our plan in new customers. So the attach rate is going a little bit better than we expected, but it's the new customer opportunity that we're really excited about. The trend in the market we've talked about is to a bundle offer. And we're competing very effectively in certain segments of the total email protection offer. So that's been really good for us.

[Michael Kim:]

Got it. And I think you cited a competitive displacement in a couple of your larger deals -- bundle deals. Without going maybe into too much detail, but can you talk about what led to those competitive displacement, was it pricing, efficacy, did you put your system behind the competitors and catch just more malware, any context on those displacements?

[Dave Wagner:]

Yes, it's in customers that -- it varies by competitor, obviously, so. But the customers who really know the Zix brand value service would be a common thread throughout all of them. Yes, prices really have not been the driver; it's been service and customer stealing. Like, Zix has done a great job for them for a long time, and trusting our brand and our capability with the full suite.

[Michael Kim:]

Got it. And then just to expand on the MSP strategy, maybe you could talk a little about what you need to do to investor-enable the MSP, to drive that business? Sort of your expectations as we go through the second-half of the year, and the need to either establish or build upon your existing MSP relationships?

[Dave Wagner:]

Yes, so that's a great question. The MSP part is one of the areas that we're most excited about. It's the first place for the full bundled offer is going to be accessible easily in a single pane of glass with the very rapid deployment with automated key generation, et cetera. So that will roll out on April 2nd. We've been talking to partners that have literally hundreds of thousands of mail boxes under management that see particularly adding Protect and Archive to existing encryption is an opportunity. And then similar to what we've been seeing directly, we're having new MSP partners that weren't previously considering Zix because we only had best-of-breed. They're now looking at Zix as a very attractive option for the full suite. So I think we're going to see a pickup with our existing MSPs, but probably actually more quickly with new MSPs that we've not yet done business with. So it'll be sides that one, Michael.

[Michael Kim:]

And is that also part of the international growth strategy that leverages the MSP channel?

[Dave Wagner:]

So, internationally we're still focusing on ZixEncrypt opportunities. So the first reseller in the U.K. will be they're own MSP, they will be putting old terminologies, ZixGateway or ZixEncrypt into their datacenter leveraging our ZixPort in the U.K. to have a solution that will integrate over there with DLP standard that they already are using to address GDVR.

[Michael Kim:]

Great. Well, thank you very much.

[Dave Wagner:]

Good talking to you, Michael.

[Operator:]

[Operator Instructions] Our next question comes from Zack Turcotte with Dougherty. Your line is now open.

[Zack Turcotte:]

Hey, guys, Zack Turcotte on for Catherine here. Just a couple of things real quick, so first, you kind of touched on it, but are you still mainly targeting the less-than-1,000 mailbox segment or smaller than that? And do you think that with the success you've been having with resellers and strategy going forward to focus on the channel even more, is that going to bring up market a little bit and see some bigger competitors and deals there?

[Dave Wagner:]

Great question. The transition to over 1,000 mailboxes really started in October. Prior to October we were not encouraging enterprise sales team to sell ZixProtect and ZixArchive. With the success we had in our first four months we then opened up that to the enterprise sales team. And we had good success in landing several customers with, I guess, typically less than 20,000 mailboxes. None were higher than 20,000 mailboxes but in that greater than 1,000 mailbox space. And where we work really well is when, again, when customers value ease of use and customer support. We're seeing that extending depending on the kind of customer up into the tens of thousands of mailboxes. On the reseller side, I see that as being about three-quarters behind our direct sales team. We focused obviously on -- maybe not obviously, but we focused on training up our direct sales reps first. We've been leaning in to training VARs more aggressively since the fall. And we saw a little bit of contribution in Q4, we would expect that to be increasing. So those are the areas, the MSPs and the VARs that we're seeing good opportunity. I'm not sure that that will take us up so much into bigger deal sizes, but getting deeper penetration into that mid-market segment that we're really focused on.

[Zack Turcotte:]

Got it. And the only other thing, I know it's still pretty early in the bundling strategy, but do you continue to still have a strong -- you still have a strong balance sheet, so do you continue to look for M&A opportunities to expend even further in the product line and push even harder into the bundling strategy right from the beginning?

[Dave Wagner:]

Yes. I mean, we're going to continue to be balanced, and we're obviously really pleased with the momentum of ZixProtect and ZixArchive, and we are definitive to work on opportunities to generate our increased growth of returns to that partner strategy.

[Zack Turcotte:]

Got it, thanks.

[Operator:]

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.

[Dave Wagner:]

Well, thank you everybody for joining us today. We look forward to 2018, and continuing to drive aggressively forward on our strategy. Andrew?

[Operator:]

Thank you for joining us today for Zix's fourth quarter and full-year 2017 earnings call. You may now disconnect.