Zix Corporation
Q3 2014 Earnings Call Transcript

Published: 22 Oct 2014

[Operator:]

Good day, ladies and gentlemen and welcome to the Q3 2014 Zix Corporation Earnings Conference Call. My name is Willy and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Geoff Bibby, Vice President of Corporate Marketing. Please proceed, sir.

[Geoff Bibby:]

Thank you, Willy. And good afternoon, everyone. Thank you for joining our Q3 call. You can find our earnings press release on our investor website at investor.zixcorp.com. The earnings release contains instructions for accessing a recording of this call. Our Chairman and Chief Executive Officer, Rick Spurr will provide an overview of the company’s performance in the quarter; then our CFO, Mike English, will give you details of our financial results. Later in the call, they will answer questions from analysts and institutional investors. Listeners can also submit questions during the call to our Investor Relations mailbox at [e-mail]. Rick and Mike will provide forward-looking statements on matters such as forecast of revenues, earnings, operating margins and cash flow, projections about contracts or business and comments on trend information. The company undertakes no obligation to publicly update or revise any forward-looking statements. Forward-looking statements are subject to risks that could cause actual results to differ materially from our expectations. The Risk Factors section of the company’s most recent Form 10-K filing with the SEC gives examples of those risks. Rick and Mike will refer to various non-GAAP financial measures such as adjusted gross profit, adjusted operating expenses, adjusted earnings and adjusted EBITDA. You can find in our earnings press release and on our Investor website, detailed explanations of our non-GAAP financial measures along with reconciliations of our adjusting items to the most directly comparable GAAP financial measures. Now, I am pleased to turn the call over to Rick.

[Richard D. Spurr:]

Thank you, Geoff. Good afternoon, everyone and welcome. Let's back to the numbers. Revenue for the third quarter was $12.7 million, up from $12.2 million in the same quarter last year, but slightly below the low end of our revenue guidance for the quarter. Our new first year orders for the third quarter were $1.6 million, compared to $2.2 million in the prior year quarter and $2.4 million in preceding quarter. The quarterly results for revenue and new first year orders were certainly below what we expected to achieve. While the third quarter was always impacted by the summer months, we experienced an exceptional slowdown in Q3 of this year more specifically in September. We do not think this slowdown is due to any systematic issues and are seeing return to normal activity. Although new first year orders were down, total orders during the third quarter were up, specifically $13.4 million compared to $13 million in the same quarter last year. And our backlog which reflects all contractually committed business that has not yet been recognized as revenue was $68.8 million at quarter end, which is up 7% over the same quarter last year. Absolute revenue that is expected from the backlog in the next 12 months is $38.7 million, up 12% year-over-year from $34.6 million in absolute revenue that was scheduled from the backlog at this time last year. On the bottom line, we achieved GAAP net income of $1.2 million or $0.02 per share on a fully diluted basis. Non-GAAP adjusted net income in the second quarter was $5.5 million or $0.04 per share on a fully diluted basis, which was at the high end of our guidance for the quarter. During the third quarter, our business generated $4.7 million in cash flow from operations, compared to $6.2 million for the same period last year. However, our year-to-date cash flow from operations in 2014 is ahead of last year, specifically $10.6 million as compared to $9.8 million last year. Now, let me share some detail on the composition of our new first year orders in the third quarter. Our enterprise sales group that sells large accounts contributed 28% of our new first year orders, while this is down sequentially from the very strong Q2, we did have a big win during the quarter displacing Cisco, IEA, IronPort Encryption Appliance and very a prestigious Blue Cross Blue Shield company in the Northeast. Our corporate sales team achieved just over $1 million in new first year orders, and did not benefit as they did last year from a strong performance in the government sector. Our OEM business was essentially flat to the previous quarter, reflecting the continuation to Google order slowdown associated with a transition to Google apps message encryption or GAME. While we reported last quarter that GAME had been introduced to Google’s direct sales force, we didn’t understand the degree to which Google had shifted almost all of its sales to its reseller channel. And as we said in our last call, we have been in the process of getting Google's resellers engaged with GAME and we're pleased to report that effective October 8, Google has enabled the reseller channels to begin selling GAME and to be fully compensated for. Although we can't quantify it, we know there is demand in the reseller channel, but we don’t know how quickly this would take hold in terms of sales, its obviously positive to have the thousands of Google resellers active, enabled to sell GAME and we believe we'll start to see some meaningful sales in this quarter, Q4 and in the coming quarters. As we typically do, I will now comment on sales contribution from an industry perspective, our new first year orders in the third quarter broke down as follows. Healthcare was 50%, followed by finance at 25%, other was 19% and government was 6%. We continue to see a significant number of competitive displacement opportunities in our base e-mail encryption business. Through September of 30 of this year, we’ve almost doubled the number of users that we’ve captured from competition as compared with last year. This includes the Blue Cross Blue Shield opportunity in Q3 where we displaced Cisco. As we’ve noted before, the announced end-of-life of the competitive Cisco product, the IronPort Encryption Appliance or IEA creates a significant number of potential displacement opportunities with Cisco’s installed base between now and next summer. We remain acutely focused on this very large opportunity and fully expect to get more than our fair share. As I noted on our last call, in June we announced the Zix Encryption Network. This is a growing community of businesses that leverage our patent tending technology for scalability, to enable the automatic exchange of encrypted e-mail for all messages between members in the network. Between members, all e-mails are encrypted and decrypted with zero impact on users, thus addressing data security threats without impacting work flow for employees or partner organization. There is no send encrypted buttons, no keywords in the subject line, no passwords. It’s all under the covers, transparent, seamless and secure. In Q3, the number of companies in the network grew to more than 11,000 at quarter end, up 500 new customers since the end of June. We are optimistic that our revolutionary Zix’s Encryption Network, with unparalled ease of use will drive growth at our base business. So to wrap up the review of our core e-mail encryption business, I want to highlight that despite the weak third quarter and new first year orders, our e-mail encryption revenue continues to grow, and moving forward the significant displacement opportunities at Cisco, the resumption of sales at Google through thousands of resellers and their growing pipeline through our marketing investments give us confidence in the continued help of our e-mail encryption business and the potential for increased growth. Now, let me turn to an update on our new products. First I’ll comment on ZixDLP, our e-mail data loss prevention solution designed to help both new and existing Zix’s [core] customers, address the number one data leakage problem in their organization e-mail. As most of you know we introduced new ZixDLP functionality in April of this year. The new version of ZixDLP includes major enhancements and functionality that were most frequently requested from prospects and customers since we initially launched the product. During the third quarter, we signed 10 new DLP customers representing a total of over 14,000 seats. The 10 new customers signed is higher than any previous quarter, excluding last quarters record performance. Although 12,000 of the 14,000 new DLP seats added in the third quarter were within enterprise accounts. The average number of seats sold was just over 4000. In terms of customers and licensee seats, we now had a total of 68 DLP customers and 103,000 license seats, with over 80% of these seats in large enterprise accounts. The average per user subscription price for these 103,000 seats is $4.13 reflecting large concentration in enterprise accounts. We continue see DLP as a highly complimentary offering to our core e-mail encryption solution and our sales teams both corporate enterprise can offer it as a package solution to accounts new to Zix. Half of our sales have come in this manner, and the other half have been up sells to the existing base. Now I’ll provide an update on ZixOne. Our new Bring-Your-Own-Device or BYOD solution that we launched last September. As most of you know this is a unique BYOD solution that lets employees access the work related e-mail without ever storing any corporate e-mail data on the device. This approach in its own underlying patent pending technology provides the highest level of security available and have zero impact on the employees personal device or privacy, unlike the competitive approaches. We continued to generate positive momentum with ZixOne including a growing pipeline of opportunities. During the quarter we added 56 new ZixOne customers, up 24% from the 45% that we added last quarter with pilot deals in large enterprises doubling in the quarter. At the end of the third quarter, we had a total of 169 ZixOne customers reflecting a balance of new and existing accounts. The existing defined as the customer who already uses our core e-mail encryption solution. The average number of seats across all ZixOne customers remained at 61 and the total ZixOne license seats grew to more than 10,000 from approximately 6,800 last quarter. As we have noted before, at this stage most of the current ZixOne customers have rolled out ZixOne to a small subset of their employees with the potential to become bigger customers with further expansion in [seat] growth. The average price per user per year looking at all ZixOne customers at the end of the quarter was $36. We continue to be very excited about the potential for ZixOne and the increasing interest we are seeing in our unique cloud based approach. Our pipeline of qualified leads continues to grow nicely. With corporate leads up 35% sequentially and enterprise leads increasing 65% sequentially from last quarter. Another important development is that almost 30% of our ZixOne pipeline is outside of our core verticals giving us exposure to different markets where we often find that we can cross sell e-mail encryption. We believe this positive trash is not just a result of the increasing awareness we are generating with our marketing spend, but is also being driven by the reality of the competitive environment and the frustration that customers are experiencing with competitive solutions. We frequently hear stories from potential customers about the frustration they are feeling of the competition. For example, one perspective customer which is a very health organization said they had been trying to deploy one of these competitive BYOD solutions for over a year with no success. And upon learning of ZixOne’s unique approach, we wanted to get it in from of their IT team right away. All of these competing solutions require the download of a product that runs on the employees personal devices. [SMB] home based BYOD products require the employee to sign a waiver, allowing their company to take certain actions, including the ability to wipe the phone. In many cases, the employees find this to be invading their privacy and a risk to their own personal data. This product on the phone approach also means that our competitors have to deal with the many different device manufacturers and multiple operating versions. Trying to keep ahead of these ever changing devices and software changes is a technical nightmare for our competitors and a risk for their customers. ZixOne takes a completely different approach to solve the BYOD security problem by never storing corporate e-mail data on the device; instead, we stream the information to the device through ZixOne’s servers that access the information directly from customer Microsoft exchange servers. This unique architecture lends itself to a much higher level of control and easy to use. Using this approach, customers do not loose control of their corporate data, e-mail or attachments, and employees maintain full control over their personal devices and their privacy. There is no requirement for an employee to sign a waiver. Additionally we as a BYOD solution provider are not concerned with the ever changing sea of mobile devices and the operating systems that employees might be using, since our solution can be deployed under any device as an app in less than one minute. We believe our marketing with respect to the unique nature of our solution is starting to take hold. We are increasingly hearing from potential customers who are looking for a solution that puts no corporate data on their employee’s device. We invented this approach; it’s unique to Zik’s. Enterprises are starting to realize that there is a way to protect their data in an easy-to-deploy and easy-to-maintain manner while at the same time being non intrusive to their employees personal devices. Much of our excitement enthusiasm around ZixOne is because we believe our approach may very well be the new generation solution that is at the right place at the right time. We are staying very focused on this huge opportunity. In closing, we had an abnormally slow September, however the good news is that as we stated in our earnings press release today, we believe the level of activity for e-mail encryption will rebound in the fourth quarter. Our base e-mail encryption and DLP business we see numerous opportunities for increased growth. These include the Cisco displacement opportunities, the resumption of sales at Google through the reseller channel and a growing pipeline due to our increased marketing investment. And with ZixOne we have entered a very large new market segment BYOD where the addressable market is larger than the rest of our business combined. And now, after a little more than one year, we already have 169 customers where we had the potential to expand and are adding to that list at a rate of almost one per day. Now I’ll turn the call over to Mike English, our CFO to discuss our third quarter financials in more detail. Mike?

[Michael W. English:]

Thanks Rick, good afternoon everyone. As I typically do always I will begin with our GAAP revenue and earnings results and then cover our non-GAAP metrics and conclude with the fourth quarter outlook. As a reminder, the non-GAAP measures exclude stock-based compensation, non-cash tax expense or benefit and if applicable other non-recurring expenses. As mentioned at the start of the call, we include a reconciliation of our non-GAAP measures with our financial statements in our earnings press release. This reconciliation is also available in the Investors section of our website. Beginning with our GAAP results, third quarter revenue was $12.7 million, up 4% year-over-year and slightly below our guidance. Net income for the third quarter was $1.2 million or $0.02 per fully diluted share, down $0.03 compared to the prior year due primarily to increased investment in sales and marketing and non cash federal income tax expense. Gross profit of $10.6 million improved $320,000 compared to the prior year and on a percentage basis remained flat at 84%. Sales and marketing expenses were up $1.5 million compared to the same period last year and GAAP federal income tax expense was up $609,000, both in line with expected increases in these areas. Moving on now to our non-GAAP metrics, for the third quarter of 2014, adjusted net income was $2.5 million or $0.04 per fully diluted share, down $0.02 compared to the prior year and meeting the high end of our guidance. Adjusted gross profit was $10.7 million; this represented an 84% gross margin and was flat compared to the prior year. We continued to maintain high gross margins in the third quarter of 2014, in line with the prior year while expanding deployment of our two new products ZixOne and ZixDLP. We anticipate maintaining comparable or slightly improved gross margins for the foreseeable future. Third quarter 2014 adjusted operating income was $2.6 million compared to $3.8 million in the same period last year, down $1.2 million due to increased investments in sales and marketing in the quarter which were up 49% compared with the prior year. On a year-to-date basis sales in marketing investment was up 31% compared to the same period last year. The other components of year-to-date adjusted operating expense mainly cost of sales, R&D and G&A |were down slightly in the aggregate compared to the prior year. Third quarter 2014 adjusted EBITDA was $3.1 million or 24% of revenue. This compares to $4.2 million or 34% of revenue for the same period last year. Ending backlog was $68.8 million, up 7% compared to the prior year. Renewals remained strong and as discussed in the past we continued to encourage contract terms of three or more years which contributed to the backlog growth and solidify our future scheduled revenue. We expect to recognize 56% of the Q3 ending backlog or $38.7 million into revenue in the next 12 months. During the quarter we generated $4.7 million cash from operations and used $940,000 to purchase capital equipment and upgrade our offices in Dallas. This $940,000 of split approximately evenly between computer and networking equipment and these office improvements. Free cash flow for the quarter was $3.8 million. Ending cash at September 30, 2014 was $20.3 million compared to $26.2 million at the end of Q2 2014. During the quarter we announced that our board of directors had approved a share repurchase plan of $10 million. We completed the repurchase plan in September having repurchased 2.7 million shares at an average price of $3.75. The third quarter GAAP tax provision was $768,000 and of this amount 609,000 was non-cash tax expense. As I’ve stated in the past, we have a large deferred tax asset which offsets Federal income tax liability, so our cash taxes remain low even though we continue to be profitable. These non-cash taxes are excluded from non-GAAP net income. Turning now to our revenue and adjusted EPS outlook for the fourth quarter. We expect Q4 2014 revenue of $12.8 million to $13.1 million. This revenue guidance is expected to generate Q4 adjusted earnings per fully diluted share of $0.03 to $0.04. For the full year 2014, we expect revenue of $50 million to $51 million in adjusted earnings per fully diluted share of $0.15 to $0.16. With that, I’ll turn the call over to Rick.

[Rick Spurr:]

And with that, we’ll turn it over to our audience to see if we have any questions.

[Operator:]

(Operator Instructions) our first question comes from the line of Mike Malouf of Craig-Hallum Capital Group. Please proceed.

[Mike Malouf:]

Great, thanks guys for taking my question. Can you talk a little bit more on September, what do you think happened in September and if you could give us when you look back on the end of quarters, how much of the quarters revenues or maybe a better way to look at it is how much of the new first year orders are done in the last month of the quarter?

[Richard D. Spurr:]

Yeah so the real answer to that is that, I’ll answer you what we think happened in September last. So in terms of the skew of our business, we think of our SMB a corporate business does about half of the sales in the last month of the quarter. The enterprise business is not as consistent. It does have a tendency to be loaded in the last month, but once a while you'll get a large transaction that could scale it. So it’s not quite as predictable. In terms of what happened in September, we don’t know, there are no obvious issues that we can point to. There is certainly no indication of any competitive losses, generally certainly not beyond what we would normally see, and we can't point to any internal issues that surprised us. So the only thing that we've even speculated about is that there was the – in middle of September there was the shellshock bash for us and we know it’s very disruptive to companies and certainly people focused on security. And we have just anecdotal instances where that was a problem, because as you know when those kind of – when those things occur or may be as you all know, everybody drops what you are doing in and focuses on basically patching their infrastructure to prevent any breach, while it does with the same people that are working with us to process orders I can't say. The second thing that we've again speculated about is that, meaningful use in the healthcare industry requires in order for providers to get their bonus, requires 90 day's of reporting on electronic healthcare record activity. And so the October launch to 12/31 period is the last time that a provider can provide that information to the government to get their bonus. And again, we know a couple of instances where you know, a customer said look, I'll totally get this solved, we're not going to be paid attention to this particular problem. So, again, I did want to say those are reasons because we don’t know, but we do know that September was a surprise to us and those are couple of things we thought about.

[Mike Malouf:]

Okay. Thanks for the color. And then, with regards to ZixOne, you know, you're at 169 clients with an average to just over 60. What is the size of some of these companies with regards to employees? I mean, do you have a sense of the average fully penetrated number on this. And then secondarily, as you look back because I remember you were talking about this on previous calls, as you look back on some of these initial sales, two or three, four quarters ago, have they started to implement this corporate wide? Thanks.

[Richard D. Spurr:]

Yeah. So, Mike, I can't give you an average, there is obviously a couple ways you could approach that. One is you know, if you look at all the companies we sell to, what's their average number employees, I don’t know that, I probably had, I could go get that data. But, let me give you – of the customers that we have, the 169 customers the majority of those are small medium businesses. So there is upside growth typically in a smaller medium business, don’t go by what they need for the number of employees that are currently using their own device and have a justified need to have access to their email in off hours. But when they introduced the solution, our customers tell us they expect other employees will then want to have that capability as well. So that’s why we say there is expansion opportunity. I am not ready to quantify there and put numbers around it. Some of the customers we have are enterprise customers, you know, with tens of thousands of users and the upside there is of course a lot more exciting. We've been in the marketplace for just a year. The sales to the enterprises, the large customer’s takes longer as you would expect, lot more people involved, a lot more testing required but the future expansion opportunity is exciting.

[Mike Malouf:]

And one of the things that you talked about previously that you expect the average price to, I think you said last quarter to come down to that sort of $20 level from the level that its currently at now. If we were at that $20 level, what do you think would be sort of the average size that would be reflective in that new price?

[Richard D. Spurr:]

I don’t know what you mean by the average size reflecting the new price?

[Mike Malouf:]

The average client size, meaning the number of employees?

[Richard D. Spurr:]

Are you saying how many – what sorts of volumes would get us to that level of pricing?

[Mike Malouf:]

Now what – at that level of pricing if you were average price was $21, what would be the size of the company's, you know, would they, instead of 61 would that be 1000 or would be 200?

[Richard D. Spurr:]

Okay. I understand what you're asking now. The pricing ultimately in our estimates are going to range – is going to range from 12 to 40. And so the 21 reflect some blend of that. If you're talking thousands of devices, you're going to be in the $15 range and that’s a specific as I think I'd choose to be right now.

[Mike Malouf:]

Okay. Thanks a lot for the help.

[Richard D. Spurr:]

Thanks, Burt.

[Operator:]

(Operator Instructions) Your next question comes from the line of Michael Kim with Imperial Corp. Please proceed.

[Michael Kim:]

Hi. Good afternoon, Rick, Mike.

[Richard D. Spurr:]

Hello, Michael.

[Michael W. English:]

Hello, Michael.

[Michael W. English:]

So, first on displacement in Cisco and IronPort Encryption Appliance, can you perhaps here spend a few moments just scaling the opportunity, when you might see that start to ramp closer to I think July of next year and if you are satisfied with the pipeline that you are building in 15' acceleration in those potential displacement opportunities?

[Richard D. Spurr:]

Yeah, as we've said before, we believe there is 100 to 200 customers that have this IEA Appliance installed and majority of those being in the US not all of them in the US, but the vast majority being in the US. And as we've said before, we believe the average number of users is certainly in the thousands, let's call it 2500 to 7500. We have been winning those deals, some of them we get permission to announce via press release and you've seen some of those. Frequently you'll win the deal but not get permission for a client to announce it. The deadline as I said is in July. So we're starting to get down, well, do the math, that’s a nine month, nine months, 10 months widow here. We're happy with the progress we're making in terms of capturing as I said more then our fair share and you – there is now way that any – that's got to accelerate just given the reality.

[Michael Kim:]

And is it your sense that, a lot of customers would probably wait pretty closer to end of life in July or is it probably more linger than that?

[Richard D. Spurr:]

I don’t know Michael, but I think it’s a bell curve with a high point of the curve being in the second quarter, some people are going to get out in front of it and some are going to get messed up and trying to repeat and miss the date.

[Michael Kim:]

And when you talk about capturing your fair share, I mean, who are you finding yourself competing against most often and what are some of the puts and takes between a Cisco customer coming to you versus one of those competitors?

[Richard D. Spurr:]

Well, as we've said before [proof pointers] I mean, for competitor in the high end and they unlike lot of other competitors seem to pay attention. A lot of the data guys still about seem to be very much focused to this area and the smaller competitors don’t really – aren’t significant in our view at this high end. Our benefits vis-à-vis proof point are clear and well understood and they relate to our ease of use some transparency in the Zix's network with a unique offering that can't be – can't be touched. And our mobile offerings are richer as well. And we're bigger, I mean, bigger, we've been around along – a lot longer. So, all those things were to our advantage.

[Michael Kim:]

And then just gears to Google, and the reseller channel, what's your expectations on how long it will take to train the channel and enable at least a core grouping to kind of get back to the sort of booking levels, I think somewhere around 300,000, that you are historically seeing maybe couple years ago prior to the transition?

[Richard D. Spurr:]

Yeah, I had said at the end of Q2 that I'd hope to get back to that level by year-end. This second delay related to the reseller launch was not anticipated. So, I don’t want to be aggressive about that. But you know, so the reseller launch is about a quarter later then we expected. So that’s starts to say that we'll – as I said in the script, we do expect to see volume in Q4, I am not ready to say it will be at the level that was – we reached in the – at a height in 2012. But there is every reason to believe we'll get back on track next year.

[Michael Kim:]

Okay. And then lastly on guidance, especially at the low end, is there a fair amount built in conservative because I guess, it sort of implies new first year orders a little better here than 3Q, but if we include a ramp in the new products ZixDLP, ZixOne, some of the resellers, Google resellers ramping and then you will sort of rebound in activity in the base e-mail encryption business. It feels like maybe the revenue guided, at least low end looks pretty conservative. Is there something more that we should read into it?

[Michael W. English:]

No, this Mike over here. You know our subscription model, the Q4 orders will have a relatively minor – excuse me, impact on the Q4 revenue, excuse me. So, really in Q3 new orders that what is impacting the Q4 revenue. So as far as whether the low end is conservative or aggressive or the high end is aggressive or conservative, I don’t really want you read too much into that. We get a pretty fair view of what we think the years is going to be at this point and we think 50 to 51 is about the best view at this point.

[Michael Kim:]

Okay. Fair enough. Great. Thank you very much.

[Richard D. Spurr:]

Thanks, Michael.

[Operator:]

Our next question comes from the line of [indiscernible] with Sidoti & Company. Please proceed.

[Unidentified Analyst:]

Thank you. Good afternoon. Question on the slowdown in September again , can you, I may have wrote, miss the numbers that you break out with the one area that you saw more so when the other healthcare or others impacted more?

[Michael W. English:]

Healthcare was down about 30%, but the – but there was an across the board impact, was quite as dramatic. But, again we speculated about what might be the causes but we don’t have any evidence that I can point to. What I can say is that, we don’t have any issues that are ours. We don’t have anything occurring internally at Zix that came as a surprise. We didn’t, as I said earlier didn’t have any competitive surprises. It was just slow, very slower than it’s been in the past. And it wasn’t, you know, as I said it wasn’t shockingly slow in July and August, our summers are always slow, so they were kind of on par, but September was a surprise.

[Unidentified Analyst:]

So Q4 it sounds like it started back off more normal, do you have a similar linearity in the December quarter be in 50% or given the holidays is that a bit different as we look into you know, the next year?

[Michael W. English:]

Yeah, you think about the – again, I said the enterprise thing can be a little lumpy. But in terms of – the majority of our business comes from our smaller, medium business and it’s, that skew is pretty consistent.

[Unidentified Analyst:]

Okay. All right. I understand that. On the ZixOne, I am sorry, I won't talk about the Cisco displacement, 102, 100 large enterprise opportunities. Can you give us an idea of what you've captured, is it like in the single digits or you up to 10s of customers, give us a – any sense you can give us on any color as far as how that’s tracking?

[Michael W. English:]

Yeah, more than 5 less than 20.

[Unidentified Analyst:]

Okay. So lot of opportunity yet?

[Michael W. English:]

Yeah, lot of opportunity.

[Unidentified Analyst:]

Got it. And the just lastly, the going to market with ZixOne. I am just wondering, how you are generating your leads, I mean, is it more, is it a lot of, just your advertising and reaching out to customers, are you getting lot of proactive, these ads generally leads coming into your – to your offering?

[Michael W. English:]

So we increased our marketing non-content related marketing spend in 2014 to $3.3 million, $3.4 million that’s up to $1.2 million. So, a very large 200% increase in spend and lot of that increase is around ZixOne. And we have employed that investment across a whole variety of our reach. And as I said, so some of those are actually being much, much more active at the events, for instance participants in the Annual Gartner event in Orlando, how many people there Geoff?

[Geoff Bibby:]

12,000

[Michael W. English:]

There are 12,000 people, CIO, CISOs and other folks; just a massive outreach and we got dedicated time with a number of those people and talk to them about ZixOne. There are other programs that you can do where you get face-to-face contact and then there is marketing campaigns and outreach, as well as our typical press release cycle and some of the media that we participate in. All of those have generated a large number, an exceeding large number of inbound leads which then need to be qualified. I mentioned in the last earnings call that we went there and authorized three new hires to do nothing, but basically go after these leads and get them to the stage, figure out which ones are right and get him over the sales people. And we feel very, very good about that investment and feel like its having a sort of impact or will have the sort of impact that we'd hope for.

[Unidentified Analyst:]

In these larger enterprises where you have ZixOne, I know you have some bunch of pilots going on the way it sound. I mean, are you sitting down and are you seeing like head-to-head competition with these, the other MDM players?

[Michael W. English:]

No, there I assuming being take offs of sorts and no.

[Unidentified Analyst:]

Okay.

[Michael W. English:]

Our solution is so different that its not – that’s where thing doesn’t make sense and fortunately for us in the enterprise space the competitors, I say fortunately it sounds odd, they've been out there already for a couple of years the reason that’s fortunate is that they've – they're having a very, very difficult time. So instead of having to un-seek competition which is what you might do if you are late or a couple years behind, we're finding that customers are quite receptive to taking other look at a different product.

[Unidentified Analyst:]

So many of these customers already know of the MBM solutions and are looking at you as an alternative, is that fairly that somewhat that you said?

[Michael W. English:]

Yeah, It’s a safe generalized statement that even where our competition is installed there are very, very, very, few instances of where their enterprise was. They have gotten some pilots in and they just have had a difficult time expanding those and getting the level of satisfaction that’s allowed them to expand and that’s an opportunity for us.

[Unidentified Analyst:]

Okay. Lastly on the gross margin Mike, Q4 tends to be – has tended in the past to be – actually Q3 and Q4 a nice sequential increase and back-off in Q1. Are we looking at it not seen that as much this year?

[Michael W. English:]

Historical trend that will probably continue, but I don’t know if I can – I certainly can't give you the extent that it’s going to continue. You will probably see a better movement, but I am not expecting it to move a whole lot. In Q4 we probably are little bit harder last year, but yeah, you'll probably see that again to some extent, but I think its going to be relative minor.

[Unidentified Analyst:]

So in the first quarter, do we see it drop back off?

[Michael W. English:]

Yeah, it will come down a little bit in the first quarter that was generally what you see.

[Unidentified Analyst:]

Should we think about last years number, I mean it was – well last couple of years around 83.5, is that a reasonable number?

[Michael W. English:]

I have no idea I don’t know if its going to be right either, if it’s going to be 83.5 or 83.7, it could be 83.9 it really doesn’t just generally speaking that if you are thinking about modeling I would model the first quarter a little bit lower than the fourth quarter.

[Unidentified Analyst:]

Yeah I understand you have more – you bring in some more CapEx and you are off-settted by some increased volumes, so to seal the price out I guess.

[Michael W. English:]

Yes.

[Unidentified Analyst:]

All right, thanks guys.

[Richard D. Spurr:]

Thank you, Joe.

[Operator:]

That concludes today’s Q&A. I will now turn the call over to Mr. Spurr for closing remarks. Please proceed.

[Rick Spurr:]

I just like to thank everybody for participating today. We feel great about the upcoming quarter and the future quarters to all the items we have mentioned and thanks again for participating and we look forward to dealing with you guys, with your questions and interactions over the coming months. Thanks so much.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.