Zix Corporation
Q4 2016 Earnings Call Transcript

Published: 10 Feb 2017

[Operator:]

Good afternoon. Welcome to Zix Corporation's Fourth Quarter and Full Year 2016 Earnings Conference Call. My name is Diala and I will be your operator this afternoon. Joining us for today’s presentation is the company’s President and CEO, David Wagner; CFO, David Rockvam; and Vice President of Marketing, Geoff Bibby. Following their remarks, we will open up 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 in 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, Diala. Good afternoon, everyone, and thank you for joining our fourth quarter and full year 2016 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 fourth quarter and full year ended December 31, 2016, a copy of which is available in 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 also that the company undertakes no obligation to update such statement. 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 or 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 Web site. Now with that, I would like to turn the call over to Dave Wagner for his opening remarks. Dave?

[Dave Wagner:]

Thanks, Geoff. Good afternoon and thank you everyone for joining us today. Looking back at 2016, I’m extremely proud of the accomplishments and the progress we’ve made to achieve our goal of delivering profitable growth to our shareholders. We delivered 10% top line growth, 20% adjusted EPS growth and increased our full year EBITDA percentage by 90 basis points to 28%. At the same time, we made investments to strengthen the company to continue to deliver profitable growth into the future. First and foremost, we invested in our people. Beginning with the impressive talent already here at Zix and then in the new talent that we’re able to attract. In 2016, we made a significant step toward realigning and strengthening our product roadmap with the addition of Kelly Haggerty, our VP of Product Management & Strategy and Dave Rockvam, our Chief Financial Officer. Dave and Kelly joined the leadership team to boost our leading position in the email encryption market and to further define and execute on our strategy. More generally, we made key enhancements to our product management and sales teams with a clear focus on building our market-leading email encryption solutions and addressing email data protection more broadly. These additions have not only made us a stronger company but they also put us in a better position to execute and to continue delivering solutions that add value and facilitate seamless and secure business communications for our customers. As a company, we continue to execute on our strategy for both our core email encryption market and adjacent markets. Q4 represented our transition from strategy development to execution mode. Operationally, we bolstered our number one market share position for email encryption, further strengthened our core solutions and made substantial progress within our seven growth pillars. Looking back, 2016 was an unprecedented year for email vulnerability and as a result for email data protection. We continue to witness a prevailing trend for more email encryption demand regardless of industry. In fact, over 25 million Google News search results were related to email encryption in 2016 compared to just under 10 million in 2015. The Identity Theft Resource Center, which is a national resource on consumer issues related to cyber security and data breaches released its 2016 Data Breach Report saying that email and Internet exposure of information was the second most common type of data breach incident. What’s even more interesting is that the overwhelming majority of the breaches that occurred in 2016 were in healthcare, finance and government, which are our core markets. With these tailwinds, we achieved record revenue, exceeded our non-GAAP adjusted earnings guidance and delivered double-digit growth in many of our key metrics, including total orders and adjusted EBITDA. On top of that, our backlog and annual contract value reached our highest levels ever while our installed base expanded considerably both in depth and in number of customers, as we aggressively moved to a more customer service-oriented model, which I’ll explain more later on today’s call. Overall, we’re pleased with our performance for the quarter and the year. Not only did we strengthen the company with key additions to our team, we also reshaped our strategy and delivered solid results. We believe this solid progress has cemented a stable foundation upon which we can further scale our business. But before I continue, I’d like to turn the call over to Dave Rockvam, our CFO, who will walk us through our financial results for the fourth quarter and full year 2016, as well as provide our guidance for the first quarter and full year of 2017. Dave?

[Dave Rockvam:]

Thank you, Dave, and good afternoon, everyone. I think you’ll see from our numbers Q4 in 2016 was a very successful time for Zix. Not only did we grow revenues 10% over last year and increased our adjusted EBITDA margins at 28%, we were able to invest in our future. Our solid execution, growing subscription-based model, focus on driving profitable growth and our ability to generate strong cash flow from the business has put us on a very positive trajectory for the future. Now, turning to our financial numbers. Revenue for the fourth quarter increased 9% to $15.6 million from $14.3 million in the same quarter last year. As Dave alluded to earlier, Q4 revenue was at the high-end of our revenue guidance and represented the highest level of quarterly revenue recorded in our company’s history. Revenue for 2016 increased 10% to a record $60.1 million from $54.7 million in the same period last year. For the quarter and the year, our increases were driven by new customer orders, add-on sales to existing customers and record customer renewal rates. New first year orders for the quarter were $2.7 million compared to $2.9 million in Q4 of last year. As we stated on our last call, we experienced a strong one-time uptick in new first year orders during the second half of 2015, which presented a difficult comparison from a business perspective. This was largely due to a surge of new orders received as a result of our work with Cisco to migrate their customers from the Iron Port Encryption Appliance Solution onto our Zix Encryption Appliance joint solution. Especially in light of the second half 2015 OEM uptick, $2.7 million in new first year orders was a strong number for the quarter and is evidence of the momentum we are seeing from our direct and reseller channels. Our enterprise team continued its strong traction throughout the quarter and our corporate team achieved its highest number ever in quarterly new first year orders. In fact, if you remove our OEM partners contribution for the year, new first year orders was actually even higher in 2016 than they had been in 2015. Turning to our expenses. We encourage you to reference today’s full earnings release which is posted on our Web site for further details, including our reconciliation of GAAP to non-GAAP results, which exclude non-cash tax expense, non-cash stock-based compensation expense and expenses related to litigation. Our adjusted gross profit for the quarter was $12.9 million or 82.7% of total revenues. This was an improvement from $11.9 million or 82.7% of total revenue in the fourth quarter of 2015. Adjusted gross profit for the year was $49.8 million or 82.8% of total revenue. This was an improvement from $45.3 million or 82.8% of total revenue in the same period a year ago. Our adjusted R&D expenses for the fourth quarter of 2016 were $2.4 million or 15.4% of total revenue compared to $2 million or 14.1% of total revenue in the fourth quarter of last year. The increase in adjusted R&D expenses was due to additional investment we made to our core encrypted email solution, with a particular emphasis on enhancements to our rapidly growing hosted service and centralized management platform. We expect adjusted R&D expenses as a percentage of revenue to remain within our target operating model range of 14% to 15% going forward. Our adjusted selling and marketing expenses for the quarter were $4.7 million or 30.4% of total revenue compared to $4.1 million or 28.4% reported in Q4 last year. The increase in adjusted selling and marketing expenses for the quarter was primarily due to the investments we’ve made to strengthen our brand and move closer toward implementing our improved customer retention and satisfaction program. We expect adjusted selling and marketing expenses as a percentage of revenue to be at or around 31%. For the fourth quarter of 2016, our adjusted general and administrative expenses were $1.9 million or 12.3% of total revenue compared to $1.9 million or 13.1% of total revenue reported in Q4 last year. We expect our adjusted G&A expenses as a percentage of revenue to remain at or around our 12% target operating model. Regarding income taxes, we expect to continue reporting income tax expense consistent with the amount for last year, resulting in an effective GAAP tax rate of approximately 43% for the fourth quarter and 39% for the full year 2016. This 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 recorded a net income for the fourth quarter of $1.9 million or $0.04 for a fully diluted share. $0.04 was up by more than double the amount we had in Q4 of last year. For the full year, GAAP net income totaled $5.8 million or $0.11 per fully diluted share. $0.11 was up 23% compared to the same period a year ago. Our fourth quarter non-GAAP adjusted net income was $3.7 million or $0.07 per fully diluted share. $0.07 per share was higher than our guidance for the period and equal to the amount we reported in Q4 of last year. For all of 2016, non-GAAP adjusted net income was $14 million or $0.26 per fully diluted share. $0.26 per share was up 21% compared to the same period a year ago. And finally, our adjusted EBITDA for Q4 2016 was $4.5 million which was in line with the amount we reported in Q4 of last year. As a percentage of total revenue, adjusted EBITDA for the quarter declined from 31.4% to 29.1%. Looking at the full year of 2016, adjusted EBITDA increased by 14% to $16.9 million from $14.9 million in the same period a year ago. As a percentage of total revenue, adjusted EBITDA for the year increased from 27.2% to 28.1%. We also expect our adjusted EBITDA margin, though higher in recent quarters, will move closer to 25% in the first half of 2017 and moving back towards 2016 levels in the second half of 2017. This includes approximately $2.5 million of depreciation as part of our operating model for 2017. Cash flow from operations for the fourth quarter of 2016 was $2 million. For 2016, cash flow from operations was $15.3 million compared to $15.6 million in 2015. We continued to maintain a strong balance sheet with $26.5 million in cash and no debt. CapEx for the quarter was $364,000 and was $2.1 million for the year. Our backlog, which represents the dollar value of committed contracts, was a record $81.7 million as of December 31, 2016, which was up $7.5 million or 10% compared to the same date last year. Of this record amount, we expect to recognize approximately $46.8 million or 57% as revenue over the next 12 months. At the end of the fourth quarter, our ACV or annual contract value totaled a record $61.7 million, up 8% from Q4 of last year. From an industry perspective, the breakdown of our ACV was 50% from healthcare, 28% from financial services, 7% from government and 15% from other verticals. Now breaking down ACV by product. Zix Email Encryption, our flagship product accounted for $59 million of the total ACV, which was up 6% from Q4 of last year. ZixOne, our bring-your-own-device security product, accounted for nearly $1.2 million of our ACV and was up 33% year-over-year. And finally, ZixQuarantine and ZixInsight, our data loss prevention products, accounted for more than $1.5 million of ACV, which was up 79% from Q4 of last year. As you can see from our strong numbers across the board, both the fourth quarter and the year, our team generated impressive results on our companywide objectives which led to our overall success for 2016. Shifting gears to our financial outlook for the first quarter ending March 31. We currently anticipate revenue to be in a range between $15.6 million and $15.7 million, representing an increase of 9% to 10% compared to Q1 of last year. We are forecasting fully diluted GAAP earnings per share to between $0.02 and $0.03 and fully diluted non-GAAP adjusted earnings per share to be $0.06. For all of fiscal 2017 and based on our operational momentum and current pipeline of business, we anticipate revenue to range between $64.5 million and $66 million, which represents an increase of 7% to 10% compared to revenue in fiscal 2016. The range in our 2017 full year guidance is predicated on our ability to continue to win new customers and maintain healthy renewal rates. It’s important to point out that our low-end estimate in fact takes into account our OEM partners lower than expected 2016 new first year orders and the potential for a continued modest ramp throughout 2017. Dave will discuss the steps we have taken to improve our OEM results later in the call. We forecast fully diluted GAAP earnings per share to be between $0.10 and $0.12 per share and fully diluted non-GAAP adjusted earnings per share to be $0.28 for fiscal 2017. This completes my financial summary. For a more detailed analysis of our financial results, please reference our Form 10-K, which we plan to file by March 16. Finally, we have entered 2017 with great prospects; a great team and a strong market position. Not only are we demonstrating continued success in executing on our strategy of driving profitable growth but we’re also showing that we’re committed to expanding our opportunity to protect all business communications in general. Dave?

[Dave Wagner:]

Thanks for the financial preview, Dave. Throughout 2016, the marketing team and I spent a lot of time evaluating what has made Zix the leader in email encryption in order to identify the core values responsible for our competitive advantages. In June, we began researching the four groups that impact our day-to-day operations and overall strategy, those being our customers, our competition, our corporate culture and our internal stakeholders. And of these groups, it was the Zix’s customer base that spoke loudest and clearest. They spoke not only as customers but as fans of Zix values. It’s their own enthusiasm that drove the decision to rebrand the company. From our name and brand image to our corporate Web site, we want to approach customers with reinvigorated commitment. The new Zix will be singularly focused on delivering the absolute gold-standard and email data protection for our customers. So it’s our brand and our focus on customer success efforts are all designed to maximize shareholder value. With that focus, you will see us simplify the essential aspect of the seven growth pillars, which distill into procuring new customer wins, selling new products to existing customers and generating even higher retention rate. This simplest framework we call our customer success model is already bearing fruit. I’d now like to take a few moments to talk about the fourth quarter in relation to each of our seven growth pillars. The first pillar, as many of you know, is securing new customer orders through our direct and indirect sales channels. One way of tracking this metric is by looking at our new first year orders. For the fourth quarter, the breakdown of our new first year orders were as follows; 37% were delivered to our direct sales efforts, 53% through VARs and MSPs, 8% through our OEM partners and 2% from Web sales. As Dave mentioned earlier, both our enterprise and corporate teams have done an incredible job this past year with the latter achieving its highest quarterly number of new first year orders in our company history in Q4. Our enterprise team also achieved great traction during the quarter landing a six-figure contract from a top five U.S. bank. To help us continue this success in our direct and go-to-market strategy, we’re expanding our sales personnel for both teams. Most recently, we hired and enterprise vice president of sales to help us build deeper relationships to secure an even stronger presence in our enterprise customer segment. I’d now like to take a moment to highlight some of the key wins we secured during the quarter. A quick review of our top five new customer wins will give you some insight into what’s driving pillar number one. Our top five new customers included one large biomedical device manufacturer, two healthcare companies, a regional bank and a title company. All of them in our core vertical markets, each with sensitive patient or consumer data to protect. Three of the five were not currently using email encryption in a meaningful way. Two of the five were competitive displacements. Ease of use was the primary reason we were able to displace the competition and end user experience was the most important driver in the buying decision for the new opportunities as well. We continued to be the preferred email encryption solution for firms who care about their patients and consumers’ data and about their end user experience. These and many other new customer wins demonstrate the continued success we’re having in our direct and channel go-to-market strategy. On the other hand, we continued to experience some challenges during the quarter as it relates to our second pillar, which is to accelerate our growth with channel partners; Cisco and Google. As I mentioned earlier, the new first year order contribution from our OEMs was only 8% for Q4. This compared to 25% in the same period a year ago. With Cisco, in Q4, we integrated our Cisco sales team with our enterprise sales team to better align Zix’s resources and to better encourage our enterprise sales teams to sell side-by-side with Cisco’s security account managers. Our expectation is that this strategy will enable us to target a select group of enterprise customers more effectively and nurture these important relationships to convert them into paying customers. It’s also, however, an admission at the leverage we had initially helped to achieve with Cisco was not materializing. We continue to see some positive signs and continue to collaborate with Cisco. However, our expectation has matured from where it was a year ago. We do remain committed to the relationship and we continue to believe that over time we will be in a position to drive more meaningful results from this partnership. Google’s new first year orders on the other hand increased prospectively compared to the last couple of quarters but it was also down compared to the same period last year. Now to our third pillar, expanding use of our products in existing accounts. To demonstrate the progress in pillar three, I’d like to share another major success. This win was with the top five U.S. bank I mentioned earlier. This bank has been a customer of ours for a small segment of its users for secure and transparent email communication with banking regulators. However, this top five U.S. bank was now looking to displace their existing internal encryption solution with a more comprehensive, easier to use enterprise solution both internal users and external customers and partners. As is the case at all of the large banks, this bank employs a world-class team of both email and information security experts. They performed a comprehensive review of our email encryption services, our data center as well as our personnel and processes. They completed this review, as I expected they would, with a very positive view of the team execs and of our solutions. This purchase represents one of the very first instances where this bank is trusting a cloud provider with production data. Looking beyond a particular customer, this is an exciting trend that we are seeing. That is the ongoing movement of data from on-premise to our cloud-hosted environment. Our 15-year history of hosting sensitive customer data gives us a big advantage as the preferred provider with the best-in-class security and privacy for our customers and for their customers’ data. Pillar four is selling new product into our existing customer base. ZixOne, ZixQuarantine and ZixInsight all have solid quarters as Dave reported. We experienced a significant amount of success in upselling ZixOne with selling 33% year-over-year increase in ACV mainly due to higher retention rates and the fact that the solution is now occupying a growing role in our customers overall email data protection strategy. Customers’ feedback for ZixOne is very positive and we’re seeing good growth in this solution as more customers look to address mobile device security for email. ZixOne is developing into a small but profitable business for us and we’re encouraged to see it becoming bundled as a more integral part of our total email data protection package, especially among our SMB customers. As one of our new customers recently commented, ZixOne sealed the deal. Moving to the fifth growth pillar, increasing our renewal rate, I talked earlier about a new customer success model which focused on including customer satisfaction, reducing churn and ultimately driving higher renewal rate. To-date, we’ve seen lots of success on the front. As an example, during the quarter we signed a three-year contract renewal for our email encryption solution with BankPlus who’s now been a customer of ours for almost 10 years. BankPlus is one of the fastest growing banks in Mississippi and they continue to rely on Zix for all their email encryption needs because of a reliable customer support and our solutions seamless and user experience. We’ve been hearing similar feedback from many of our current customers, which reaffirms to us the significant benefit of our customer success focus. Our sixth pillar is to invest in our core email encryption solution. During 2016, we completed most of the development work on our OEM and ZixOne solutions, which enabled us to put a renewed focus on our hosted email encryption solution and centralized management platform. Our hosted customer base grew by 113% during 2016, which demonstrates the strong customer reception this platform has been receiving. It’s important to note that this move to our hosted environment not only builds our stickiness but helps accelerate our attach rate for new products. In the nine months that ZixQuarantine has been available as part of our hosted environment, we’ve already been able to attain an 8% attach rate. And finally, our seventh and last pillar relates to exploring English-speaking international markets that present us with attractive opportunities to continue driving profitable growth. In November, I had the pleasure of joining our South African based partner LAWtrust for a three-city roadshow in South Africa where we’ve jointly demonstrated Zix solutions to many of LAWtrust customers and prospects. We launched DLP filters for ZixGateway that are specifically designed to deliver immediate POPI compliance for outgoing email. We also completed training of LAWtrust’s technical and sales teams in the quarter. In summary, we are very pleased of how we ended the year. Our growth initiatives have led us to another period of financial success while at the same time providing us with a platform to expand our business further. At our core we are a very predictable, high margin, cash flow generating subscription company with opportunities around us to accelerate our growth. In addition, we’ve invested in our team and have built a strategy to enable profitable longer-term growth. As we look to remainder of 2017, we will be focusing on leveraging our new corporate rebrand as well as our customers success model, get closer to our customers and generate even higher retention levels and more add-on sales. We will be working to improve contributions from our OEM partners but our primary focus will be leveraging the momentum gained by our direct and channel sales teams to continue to profitably grow Zix. Now with that, we’re ready to turn the call over to the operator for your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Michael Kim with Imperial Capital. Your line is now open.

[Michael Kim:]

Hi. Good afternoon, guys. First off, could you talk a little bit about the evolution of the brand and modernizing it and what kind of feedback you received from some of the stakeholders and customers? And you might be able to better position your differentiation?

[Dave Wagner:]

Well, thanks for that, Michael. We did a very data driven exercise in our rebrand. As part of that we interviewed over 900 customers and specifically a smaller segment, we had a professional brand interviewer talk to our customers. And what they came back to us with is that they made the decision to purchase and to continue using Zix, because they perceived to be the gold standard in email encryption. And gold standard to them represented user experience and how it takes care of the customers that represent it, the customers we keep and it represents our leadership position. The second thing they told us was interesting to me. They said they chose Zix because it was the most secure solution available. And that security doesn’t come from encryption algorithm strength. It comes from the filters that automatically assure compliance at the gateway. So our customers really strongly came back to us with these real strong value propositions. So when you see that rebrand with the gold highlight, that’s to subtly remind our customers their belief in us as a gold standard. It’s been really powerfully received internally as our colleagues are re-internalizing and getting reinvigorated around how important their everyday interaction is with customers and delivering this gold standard in. I’d remind shareholders how important that is that being our replication, our brands and our user experience to keep us in this strong position to providing the very best solution to our customers. So that’s what we’re up to with the rebrand, Michael.

[Michael Kim:]

And does that open – as the non-regulated verticals outside of kind of the installed base expand your opportunity to penetrate new logos?

[Dave Wagner:]

That’s what we’re seeing in kind of the Google search data. We’re seeing an increasing interest in email security in all verticals. As you can see our numbers, the healthcare, finance, title remain the big pieces. But the trends that we see that we like are the bigger enterprise bank. It’s coming back and really readdressing encrypted email, because they really care about their customers and consumers’ data. Those are the kind of trends we really like that we’re seeing.

[Michael Kim:]

In the OEM channel, you talked about some of the specific steps you’re taking to enhance the Cisco relationship. Can you expand similarly on the steps that you’re taking with the Google relationship?

[Dave Wagner:]

So the Google relationship, we’re working with the product manager. We have a roadmap on how we might enhance that. But we have collaborations to do before to roll that out. But along the way they’re continuing to do a nice job in attaching the Zix solution in with gain [ph]. So it’s going well and we see opportunities going even better.

[Michael Kim:]

Great. And then lastly, I know international is still early days but could you talk about some of the progress they have made so far in the South African market, and what are some of the regulations that are driving incremental demand?

[Dave Wagner:]

Yes, it was really exciting. As I said, I went to three cities. They had 40 or 50 customers [indiscernible] in each city. In Pretoria, which is the government capital in South Africa, it was great. One of the authors of the POPI regulation was in the audience and he talked about the 10-year journey that they were on to get POPI passed and talked about the powerful position there is and now again, the enforcement of the regulation and reinforced the Zix solution as a way to address that requirement. So it was a really positive interaction with the customers. The commitment that we’re seeing from LAWtrust, they sent two people here in Dallas for two weeks or 10 days I guess over the weekend to get fully trained on installation and support of the product, fully trained the sales force. And now we’re into the part of the relationship that we’re doing the [indiscernible] pipeline reviews and getting deals into the pipeline. So that partnership is progressing as well as I’ve ever seen a partnership get off the ground. So we think that is in a good place.

[Michael Kim:]

Great. Thank you very much.

[Dave Wagner:]

Thanks, Michael.

[Operator:]

Our next question comes from Mike Malouf with Craig-Hallum. Your line is now open.

[Mike Malouf:]

Great. Thanks, guys.

[Dave Wagner:]

Hi, Mike.

[Mike Malouf:]

Hi. How you’re doing? If I could just get a sense of the guidance, the guidance of 7% on the low end and then 10% on the high end. If you look at that 7%, you said something about if we don’t get the OEMs going again. Is that sort of what is reflective in that 7%? Can you just give a little bit color on it?

[Dave Wagner:]

That’s exactly right. So the way Dave described and he can speak up too, but the underperformance in the new first year orders for 2016 puts the ACV and backlog in a position that it’s a little – it’s good but not what we had hoped from that piece. So as we build out our 2017 guidance, we wanted to make sure we weren’t building in big growth projections from those channels. The thing we’re most excited about and what we’re planning on for this year is the discontinued momentum we’re seeing in our direct and indirect sales channels. We’re not giving us on the OEMs. I wanted to make sure that our guidance incorporated like you guys actually call it the more mature view of how those are progressing.

[Mike Malouf:]

Okay, all right. And then when you take a look at the market, usually especially when you get software that’s growing at – it’s up 20%, even it’s up 15%. There was a pretty good opportunity for some consolidation and I’m just wondering if you could comment a little bit on the opportunities out there? Because you have a pretty good set of customers out there that as you said selling them more things is pretty leverageable on the model. And I’m just kind of wondering what kind of opportunities are to maybe do some tuck-in acquisitions and then perhaps broaden the product offering?

[Dave Wagner:]

Yes, thanks for that. We are increasingly working on pillars three and four, increasing licenses into our customer base, increasingly building up that centralized management platform for our core hosted operating and increasingly working to bundle – ZixQuarantine it more DLP features, bundle ZixOne with a more comprehensive email protection for devices. And so I think there are opportunities to build around that where you have organic opportunities and inorganic if they were consistent with our profitable growth margins and consistent with our strategy, our phase that we’ll be continuing to be looking for.

[Mike Malouf:]

Okay. And then maybe just a question on margins. So you said that margins are going to dip down a little bit in the first half and then recover to sort of where they were in 2016 and the back half. So does that mean that basically EBITDA margins are going to probably be down year-over-year and then perhaps rise from there, or is that how we should look at it?

[Dave Rockvam:]

I think it’s looking pretty consistent. We had 28% this year. Our model is profitable growth. It will dip down in the first half but we expect it to come back in the second half and bring us to that 28% EBITDA margin on the average when you look at it when we get to the end of the year.

[Mike Malouf:]

Okay. So we could be pushing 30 obviously with the math on that in the back half?

[Dave Rockvam:]

Yes, we’d probably be just short of that. We’d be pushing hard there.

[Mike Malouf:]

Okay. Thanks for the help.

[Dave Wagner:]

Thanks, Mike.

[Dave Rockvam:]

Thanks, Mike.

[Operator:]

Our next question comes from Joe Maxa with Dougherty & Company. Your line is now open.

[Joe Maxa:]

Thank you. Just wanted to touch on the renewal rates, I didn’t hear a number. Were you above 90% again like last quarter?

[Dave Rockvam:]

We’re right there and we had a record year which put us right over 90%. We did not give out the official number. Just too many ways to judge it and look at it and figure – so we’re right at that 90% level for the year, which was up 1 point over last year. So that equates to about $500,000 of ACV that we created this year with that increase and we’re looking to do better in this year coming up.

[Joe Maxa:]

Okay, that’s helpful. Also wanted to touch on the guidance. Another way to look at it or maybe how you’re thinking about it through the year, how much conservatism you might have dealt in, especially on the low end. Now as I look at – first your orders were down year-over-year but your total orders were up about 12% year-over-year and up 10% the year prior. So it suggest you should be starting to – some of that should start to be coming through and perhaps not be quite down at that 7% level in the low end and just any thoughts on those line would be helpful?

[Dave Wagner:]

I would just reiterate from the script. We took a careful look at the 2016 OEM contribution and at that low end, it’d be on a more cautious on the OEM side. And we also are comfortable with the high end of that range. We’re entering into the year with great momentum in both the enterprise and our corporate teams which they do both, the direct and indirect and we feel really good about that.

[Joe Maxa:]

And just lastly, what is the pipeline for new first year orders look like going into Q1 now that you’re --?

[Dave Wagner:]

Joe, you’ve watched the company for a while. Q2s and Q4s are up and Q1s and Q3s are down. The pipeline is a little bit better coming for this Q1. Last year we had our Q1, I was just getting started. But I would expect to see an increase year-over-year especially in our direct and channel sales team where we’re seeing the best momentum.

[Joe Maxa:]

Okay. Thank you.

[Dave Wagner:]

Thank you, Joe.

[Dave Rockvam:]

Thanks, Joe.

[Operator:]

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

[Dave Wagner:]

I would just like to thank everybody who’s listening but particular our shareholders for your continued interest in Zix. Thank you very much. Have a good evening.

[Operator:]

Thank you for joining us for today for our presentation. You may now disconnect.