Zix Corporation
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Zix Corporation Fourth Quarter and Full Year Earnings Conference Call. My name is Chris and I'll be your conference moderator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. At this time I would now like to turn the conference over to your host for today, Mr. Geoff Bibby. Sir you may proceed.

[Geoffrey R. Bibby:]

Thank you, Chris. And as Chris mentioned my name is Geoff Bibby. I am Vice President of Corporate Marketing for Zix Corporation. Thank you very much for joining our 2014 Q4 and full year conference call. You can find our earnings press release on our investor website at investor.zixcorp.com. The earnings release contains instructions for accessing the recording of this call. Our Chairman and Chief Executive Officer, Rick Spurr will provide an overview of the company’s performance in the quarter and 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. I am pleased to report that we ended 2014 with a strong finish, recording historic highs in new first year orders, revenue, and the size of our backlog as we entered 2015. Our fourth quarter performance reflects a rebound in new sales of our e-mail encryption, along with increased contribution from our new products. Revenue for the fourth quarter reached a record high, $12.9 million, up nearly 5% from $12.3 million in the fourth quarter last year, and the sequential increase from the preceding quarter. New first year orders for the fourth quarter reached a record $2.5 million, up 8% year-over-year from $2.3 million in the fourth quarter last year and up 55% sequentially from $1.6 million in the preceding quarter. We should note that in the third quarter of 2012 we reported $2.6 million in new first year orders, but this included a catch-up of approximately $400,000 of new first year orders from the first half of 2012 due to Google overages. Total orders during the fourth quarter were $13.8 million, down 1.9% from $14.1 million in the fourth quarter last year. Our total orders include the total contract value of all new and renewal orders, including order commitments for the second, third, and occasionally fourth and fifth years of these contracts. Accordingly, variances from quarter-to-quarter may be due to higher number of contracts being renewed in a given quarter and/or longer contracts. Our backlog, which reflects all contractually committed business that has not been recognized as revenue reached a record $69.3 million at year-end 2014. This is up nearly 6% over the same time last year, and the backlog timing is even more favorable than last year with a greater percentage of the backlog keyed up to be recognized in the ensuing 12 months, in this case during 2015. More specifically, revenue that is expected from the backlog in the 12 months of 2015 is $39.3 million, which is up 11% year-over-year from $35.4 million in revenue from the backlog that was scheduled in 2014 at the same time last year. As many of you know, our revenue for a given year is made up of revenue from the backlog, revenue from scheduled renewals, and revenue from new sales. For instance, in 2014, revenue from the backlog as of the end of 2013 comprised 70% of our full year revenue. This major contribution of revenue sourcing is up 11%. This also represents our 11th consecutive quarterly record in backlog. On the bottom line, in Q4 we achieved GAAP net income of $900,000 or $0.02 per share on a fully diluted basis. Non-GAAP adjusted net income in the fourth quarter was $2 million or $0.03 per share on a fully diluted basis, and during the fourth quarter our business generated $2.7 million in cash flow from operations. Now, let us turn to full year results. For the full year, we achieved revenue of $50.3 million, an increase of nearly 5% from 2013 and net income for the full year of $4.1 million or $0.07 per diluted share. Non-GAAP adjusted net income was $8.8 million or $0.15 per fully diluted share, in line with our guidance. For the year, our business generated approximately $13.3 million in cash flow from operations. We closed the year with a cash balance of $21.7 million, despite $16.2 million in share repurchases in 2014. Now let me share some detail on the composition of our new first year orders in the fourth quarter. I am happy to report that our enterprise sales group that sells larger accounts had its best quarter since the first quarter of 2007. We also saw strong contribution from our corporate sales team, which delivered one of its best quarters in the last five years. Our OEM business began to show a rebound and more than doubled sequentially, although from what was a very small base in the third quarter. OEM represented about 10% of the new first year orders, reflecting contributions from Symantec and the resumption of sales of Google’s resellers, which didn’t kick in until October 8th, almost half way through their reporting period. Now, I will report our new first year order results for the year. For all of 2014, new first year orders were $8.5 million. Our enterprise sales team contributed 27% of our new first year orders and our corporate group delivered 62%. As we typically do, I will now comment on sales contribution from an industry perspective. New first year orders in the fourth quarter broke down as follows; healthcare was 46%, followed by finance at 21%, government was 8%, and other was 25%. As most of you know, other for us is a category that captures new first year orders from all non-healthcare, non-finance, and non-government accounts. For the full year, healthcare was 48%, finance was 26%, government was 6%, and other contributed 20%. This relative contribution is very similar to what we’ve seen over the last few years with the exception of other, which has been growing each year and hit as we said a record 20% of our new sales in 2014. Now let me turn to an update on our new products; ZixDLP and ZixOne. We saw an increased contribution from these products, which in this quarter represented 12% of our new first year orders. We believe they will have a meaningful impact on accelerating our revenue growth in 2015 and for years to come. First, I will comment on ZixDLP, our email data loss prevention solution designed to help both new and existing ZixCorp customers address the number one data leakage problem in their organization, email. During the fourth quarter we signed 16 new DLP customers representing a total of approximately 52,000 seats, which is a sequential increase of more than 265% over the number of seats added in the third quarter and increased our lifetime DLP licensed seats by 50%. Nearly all of these new DLP seats added in the fourth quarter were within enterprise accounts where the average number of seats sold was just above 7,000. In terms of customers and licensed seats we now have a total of 84 DLP customers and approximately 155,000 licensed seats, with nearly 90% of these in large enterprise accounts. The average per user subscription price for these 155,000 seats is $3.69 reflecting a large concentration in enterprise accounts. We continue to see DLP as a highly complementary offering to our core email encryption business and our sales teams, both corporate and enterprise offered us a package solution to accounts new to Zix. Slightly more than half of our ZixDLP sales have come in this manner and the other half have been upsells to the existing base. Now I will update you on ZixOne, our new bring your-own-device or BYOD solution. As most of you know this is a unique BYOD solution that let’s employees access their work related email without ever storing any corporate e-mail data on the device. This approach and its underlying patent pending technology provide the highest level of security available and have zero impact on the employee's personal device or privacy, unlike all other competitive approaches. We had an exceedingly strong quarter for ZixOne adding a record high 96 new ZixOne customers during the fourth quarter. This surpassed the previous record of 56 set in the third quarter of 2014 and represents a sequential increase of 71%. This addition of 96 new ZixOne customers grew our lifetime ZixOne customers by 57% to a total of 264. Of these 264 customers approximately 40% have been new accounts to Zix and 60% have been additions into our installed base. The average number of seats across all ZixOne customers was 68 and the new seats sold during the quarter increased approximately 120% from the third quarter with the addition of more than 7,700 new seats. This brings the total number of ZixOne licensed seats to more than 18,000 from approximately 10,000 last quarter, a 75% increase. The average price per user for year looking at all ZixOne customers at the end of the quarter was $27. I'm also pleased to note that we are starting to see traction with larger accounts. During the quarter we had two ZixOne deals in our enterprise group that exceeded 1,500 seats each, representing the largest ZixOne customers we have to-date. One of these entities has more than 60,000 employees. As we’ve said before we believe the real future growth opportunities for ZixOne are with these types of enterprise accounts that have tens of thousands of employees. At this stage the majority of the current ZixOne customers represent initial deployments, with potential to become bigger Zix Customers with further expansion in seat growth. I'd like to highlight that one of our larger ZixOne deal this quarter was through one of our enterprise distribution partners, Accuvant, which is one of the largest and well known resellers in the country that recently joined forces with enterprise reseller FishNet Security. Much of our excitement and enthusiasm around ZixOne is because we believe our approach may very well be the next generation solution, that is at the right place at the right time. With the positive market momentum we are generating and the investments we’ve made to expand our presence in this large new market segment we are now able to prudently scale back expenses associated with the initial R&D investment and the premarketing both of which have led to the successful launch of ZixOne. Mike will provide more details regarding these expense reductions in a moment. We of course remain very focused on our growth opportunities for our much larger e-mail encryption business and are particularly excited about competitive displacements. As we've noted before the announced end-of-life for the competitive Cisco product, the IronPort Encryption Appliance or IEA creates a number of potential displacement opportunities with Cisco's installed base between now and third quarter and we fully expect to get more and our fair share. So as we look at our core email encryption business moving forward the displacement opportunities at Cisco the resumption of sales at Google and our growing pipeline due to our strategic marketing investments, it gives us confidence in the potential for increased growth. In addition we also hope to benefit from the continued heightened awareness of the need for email encryption and security spend, driven in part by numerous major corporate security breaches reported over the last 18 months. These include of course Home Depot, Target, Sony and more recently Anthem. If any of these businesses had been using our desktop Zix mail all of their at-risk [ph] e-mails would have been protected. Additionally enterprises that encrypt outbound email using our technology significant reduce the tools that hackers can use to obtain sensitive information to design inbound fishing attacks and 100% of emails that are going between Zix Gateway customers are protected from that risk. To conclude we are starting the New Year in a far healthier place. We saw a rebound in sales in the fourth quarter resulting in a solid increase in our new first year orders. We are very optimistic about the opportunities we see for growth in our base email encryption business including the return of Google and the displacement opportunities with Cisco. And we are seeing increasing contribution from our new products including our new BYOD offering which we believe will have a meaningful impact on accelerating our revenue growth in the long-term. Given the $39.3 million of revenue teed-up in the backlog, the strength of our pipeline for email encryption, our growing reseller partnerships and increasing contribution from our new products we are optimistic for accelerating growth in both revenue and new first year orders in 2015. Now I will turn the call over to Mike English, our CFO to discuss our financial results in more detail and provide guidance for 2015. Mike?

[Michael W. English:]

Thanks Rick. Good afternoon everyone. We achieved record revenue of $12.9 million for the fourth quarter, a 5% year-over-year increase and in line with our guidance. For the full year revenue was $50.3 million which is also a 5% increase over 2013 and in line with our guidance. From an earnings perspective year-over-year GAAP and non-GAAP net income decreased for both the quarter and the full year 2014 compared to the same periods in 2013. The lower earnings in 2014 resulted mainly from increased investment, primarily marketing investments. We made these investments to launch our new products and create market awareness with the goal of accelerating our revenue growth. We did not see accelerated revenue growth in 2014 but did grow our backlog for 2015 by 11% as compared to our backlog going into 2014. Now that our new products are successfully launched going in 2015 we have reduced our marketing and R&D expenses. We hope to return this year to non-GAAP adjusted earnings levels of $0.19 with possible upside of $0.21 per fully diluted share. I will have more detail regarding for the 2015 outlook toward the end of my remarks. Additionally the GAAP earnings comparison to the prior year was further negatively impacted by higher federal income tax expense. As previously reported beginning in 2014 we no longer recorded a tax benefit from additional reductions to our deferred tax asset valuation allowance. That resulted in higher GAAP federal income tax expense in 2014 compared to 2013. However our cash taxes in 2014 were largely unchanged compared to 2013 due to utilization of our net operating loss carry forwards. We expect this cash tax benefit to continue for the foreseeable future. Our fourth quarter ending backlog was a record $69.3 million, which is a 5% increase year-over-year. We anticipate approximately 57% of that backlog or $39.3 million will be recognized in to revenue in the next 12 months, consistent with our SaaS subscription model. The next 12 months revenue anticipated from backlog represents approximately 70% of our projected revenue for 2015 because it is business already under contract and we have a strong cash collection history, it’s virtually assured to make up this major portion of our 2015 revenue. At the end of 2014 the next 12 months revenue in backlog, which we’ll recognize in 2015, the $39.3 million I mentioned a second ago is 11% higher than the same measure at the end of 2013. Capital expenditures for the fourth quarter 2014 totaled $1.6 million and for the full year were $3.4 million. CapEx for 2014 included approximately $1.2 million associated with our Dallas headquarter office improvements, most of which were funded through lease incentives. For 2015 we expect capital expenditures to return to historical levels which have run between $1.5 million and $1.8 million annually. Depreciation expense for the quarter was in-line with our historic levels. Approximately 70% of the depreciation expense was reported in cost of sales. Cash flow from operations for the year was $13.3 million benefiting from increased cash collections compared to the prior year. We continue to have no borrowing needs and no debt on our balance sheet reflecting our strong cash generation. During 2014 we used $16.2 million to repurchase approximately 4.1 million shares of our common stock. Of this $16.2 million, $6.2 million was a result of our repurchase program announced in November 2013. The additional $10 million was the result of a share repurchase program announced in July of 2014. And in January of this year we announced another $10 million repurchase plan that is scheduled to run through July 2015. Even with those 2014 buybacks our year-end cash was $21.7 million which was down $5.8 million compared to year-end 2013. Turning now to the 2015 forecast, we have reduced ZixOne specific marketing and R&D investments following the successful launch of the new product while we continue to invest at appropriate levels in other parts of our business. These reductions totaled $2.3 million on an annual basis when compared to the 2014 exit expense run rates and the amount is approximately evenly split between marketing and R&D. Combined with our projected growth in revenue we expect these savings to improve earnings in 2015 compared to 2014. For the first quarter 2015 we project fully diluted non-GAAP adjusted earnings per share of $0.03 to $0.04 on projected revenue ranging from $12.9 million to $13.1 million. For the full year 2015 we project revenue to be between $ 54 million and $56 million and fully diluted non-GAAP adjusted earnings per share to be between $0.19 and $0.21. This represents a 25% to 35% adjusted EPS improvement compared to 2014. Additionally this guidance would yield an adjusted EBITDA margin percent in the mid-20s and adjusted operating percent in the low 20s. With that I will turn it back to Rick.

[Richard D. Spurr:]

Thank you, Michael. I think we should take questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Mike Malouf with Craig-Hallum Capital. You may proceed.

[Mike Malouf:]

Great, thanks guys for taking my questions.

[Richard D. Spurr:]

Sure.

[Mike Malouf:]

Can we focus a little bit on email encryption growth? I think in the pre-release that you guys did about a month ago, you said you are very optimistic about the opportunities. I think today you kind of reiterated that. In the past, you had said that you felt that it could grow at double-digits. Can you sort of just talk a little bit about what you mean by optimistic, where do you think the growth is on email encryption looking out over the next couple of years? And then maybe just a comment on how big you think both the Cisco opportunity and the Google opportunity could be for you looking out? Thanks.

[Richard D. Spurr:]

Yes, I think that what we have said in the past still holds true. We think that the email encryption business, the base business can grow in the double-digits. We don’t know whether that’s -- call it 10% to 15%, and we have that same outlook going forward. In terms of the contributions from those two they're likely to behave differently. The Cisco opportunity since there is a large displacement opportunity, which if we’re successful will get us into a lot more enterprise size accounts. We have our internal projections on the size of that opportunity, but we chose not to share that publicly for a variety of reasons. I have given some generalized estimates for it. The Google opportunity is massive in the long-term since our attachment rate at Google is exceedingly low right now. We are the encryption opportunity or encryption offering for all of the Google apps users, and those number in the tens of millions. But our attach rate now is quite small, and we’ve made some estimates for both of these which is baked into our 2015 guidance but I'm not willing to get granular with the components of the guidance at this point, but we feel good about both those opportunities.

[Mike Malouf:]

Okay great. And then on the ZixOne, it sounds like pricing seems to be settling out in the mid-20s. Is that a number you feel comfortable with longer term. $27 is your average price now. What or where do you think it can move over the next couple of years?

[Richard D. Spurr:]

Yes, Mike again we don't see any change in that, in pricing. What I've said in past calls is $21 over the long-term. That assumes significant penetration into enterprise accounts where the volumes drive the price down, right now to just under $20. We're at $27 because of the mix of corporate and enterprise. So I don't see any changes to that. We're not feeling competitive pricing pressure at the level we're at right now. So that’s the outlook for the future right now.

[Mike Malouf:]

Okay, and then one real quick housekeeping, maybe a question for Mike. On the gross profit for the fourth quarter that was in the low-end, it's actually the lowest that's been since 2012. Is there something going on there or just can you add some color on that.

[Michael W. English:]

Yes, absolutely Mike. So we see -- we generally operate the adjusted gross profit between 83% and 84%. Sometimes, it dips a little bit higher. Depending on the timing of expenses, there is not anything going on in Q4 that is worth mentioning, but like just for instance, small increases in expense. The expense might hit in the quarter through support, let's say in cost of sales you are talking about. It will support the introduction of new products; it will support the addition of new customers. So we may have to add some costs, but overtime as that revenue was recognized from those orders, it will tend to level set somewhere around 84%. And that's really where we think we can operate long-term with sometimes dipping below the 84% sometimes dipping above -- going above it.

[Mike Malouf:]

Okay, thank a lot. Appreciate the color.

[Richard D. Spurr:]

Sure, thank you.

[Operator:]

The next question comes from the line of Fred Ziegel with Topeka Capital Markets. You may proceed.

[Fred Ziegel:]

Hi, guys. A question on scaling back in the marketing and R&D for ZixOne. It would -- two part, I guess, one is it seems like that’s still an awfully nascent business, so I’m curious what the thought process is in terms of the spending cut back. And just from the numbers, it would look like you're further along in DLP than ZixOne’s all up, I would have guessed, if you are cutting back, it might have been in DLP. So talk to me about the thought process on that.

[Richard D. Spurr:]

Sure, well the most -- the easiest one, the most logical one is R&D, where Mike said half of the cuts were there. And that's just because we loaded up to get a new product out the door and for all of 2013 and all of 2014 we spent a lot of money to get the product fully featured and acceptable, scalable, into all size accounts, and we have achieved that. And so the need to continue to spend, to add new features here and there, I call them bells and whistles isn’t clear. We got a product that’s successful and is being accepted in the marketplace. So we can cut back on adding new features in. The new things that are coming forward from the marketplace today are exceedingly small, represent a small portion of the overall user population. So it just didn’t make that investment sense to continue at that level. The marketing -- we still feel very good about our marketing programs and our marketing spend around ZixOne. It’s -- so it really was, we said look going into 2014, nobody knows what this is, nobody knows who we are, nobody knows anything. And so, we spent a lot of money as is evidenced by the facts by what’s published in the record to get it launched. But now you know with 265 customers and lots of marketing material awareness and programs already in place we were able to cut back on that but it’s still a meaningful investment, so that we can capitalize on the opportunity.

[Fred Ziegel:]

On both the DLP and ZixOne products, is it one product fits all regardless of size of customer or is there is some or it is more of our product portfolio?

[Richard D. Spurr:]

No, either products -- both products Fred, DLP the same version is used for the very smallest customers up to the very largest customers and the same with ZixOne. The same version of the product is used for the very smallest customer up to the very largest customers. What makes the difference is the -- particularly as it relates to DLP, is to the extent to which those customers may exercise available functionality in the product but they buy the same product and they can choose to invoke features at their will and desire but they are buying the same thing for the same price, based on the number of seats of course. More seats they buy that’s the lower unit but no it’s the exact same product. The same with ZixOne, if you think about it ZixOne is an end user product and the back end has got a scale to millions but the product that a guy uses in a single person shop versus what somebody uses in half of million is the same to the individual users, so the products are same.

[Fred Ziegel:]

Thanks.

[Richard D. Spurr:]

Sure.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Michael Kim with Imperial Capital. You may proceed.

[Michael Kim:]

Hi, Rick, hi, Mike. Just going back to email encryption, a while back you talked a little about the extension in additional verticals outside of banks and hospitals and a couple of customer and retail type companies. Have we seen an increase in encryption interest or pipeline outside your core verticals and curious on what kind of color you can provide around that.

[Richard D. Spurr:]

So as I mentioned in the script last year we got 20% of our new sales from other. So the verticals you are talking about outside of finance, healthcare, and government and that’s the size it’s ever been. So that been increasing as a percentage contribution for the last three to four, five years I would say and so to the point where it’s now 20, which is pretty healthy, I think if you look at more global security spend. So we are seeing that opportunity present itself because of two dynamics; one is increasing awareness across the board for any companies, be they private but even more importantly public. Boards are starting to get involved in what are we doing to make sure that we don’t get exposed from a cyber-security point of view and that extends beyond just the legislated compliance focus verticals to any and everybody. And that in combination with our third party outreach, through third party distribution is what’s caused that number to continue to grow. And there are -- I mean there are all kinds of companies, you’ve heard me talk about them before. We joke about Yankee Candle, they build candles but they care about their brand and U.S. Steel, Bed, Bath and Beyond, Star Bucks, we’ve got three or four sporting teams, Green Bay Packers, I don’t know if we have to mention all this. So we have some good non-finance, non-healthcare people who care about security of their email exchanges for a whole variety of reasons beyond just legislative and compliance related.

[Michael Kim:]

Great. And then just turning back to ZixOne, I’m not sure if I missed this but a lot of the new customer adds are new to Zix or are they traditional email encryption customers that you have cross sold to or can you provide any color behind the mix or the balance between those?

[Richard D. Spurr:]

Yes, I believe this -- I’m pretty sure I remember this accurately, 40% were brand new customers that we didn’t have before, they joined the fold because of ZixOne and the other 60% is where we sold ZixOne into the existing installed base of email encryption users. Now those 40% new customers aren’t necessarily ZixOne only customers, sometimes they will buy both. If they buy both products, or potentially all three products at the same time they would still be measured in that new customer category.

[Michael Kim:]

And based on your visibility you see sort of a similar mix into 2015?

[Richard D. Spurr:]

Yes, I don’t see any reason why that would change.

[Michael Kim:]

Okay, great. Thank you very much.

[Richard D. Spurr:]

Thank you, Michael.

[Operator:]

Our last question comes from the line of Joe Maxa with Dougherty & Company. You may proceed.

[Joe Maxa:]

Thank you. Back on the ZixOne you talked about a couple of larger customers, 1,500 plus seats. I am wondering if these customers, the opportunity -- what’s the opportunity, the total opportunity you see with these customers. Are those 1,500 just a trial, I think you mentioned maybe a trial or is it a subset that they would use more likely to use the security of ZixOne versus just traditional email?

[Richard D. Spurr:]

First of all in sizing, one of them I mentioned in the script was actually a 60,000 total employees. So 1,500 then is a relatively small subset and represents -- I would like to think it’s a trial but obviously if they are going to distribute it to the highest priority 1,500 users they have got that defined as a Phase I. It’s hard to say when and if that will expand but it just naturally seems to me logical that people want this. Everybody -- all the employees want easy access with no expense [ph] and no intrusion. And so it would make sense to us that it’s spread and that’s the case in, as we said the majority of these accounts, although the bigger one obviously, the 60,000 users your upside is much higher, much bigger.

[Joe Maxa:]

So I mean, are you getting any feedback from some of these customers, that they are just looking at it as trials and they’ll look to expand if does what they -- if they are happy with it or is it more just kind of black box, you really not sure?

[Richard D. Spurr:]

Customers usually don’t want to show their hand. They don’t have the power typically -- we are not talking of the CEO, here we are talking about the IT mobility management group and they don’t have the power or authority to say we’re going to expand this to everybody. They say look we’ve got funding for 1,500. This is how we’re going to do it and we’ll see how it goes.

[Joe Maxa:]

I see, okay. I was just going to ask a question just jumping back to the gross margin, are you expecting a bounce back to that 84% or up 83% level in the Q1 or it will take time to get back up there?

[Michael W. English:]

Yes I would say it will take time, Joe.

[Joe Maxa:]

Okay.

[Richard D. Spurr:]

It’s not too much below that now, right?

[Michael W. English:]

No, it’s not. It’s going to operate within 83 to 84 but I wouldn’t -- it depends on the timing of rev rec and other things like that it may jump up in a quarter but I would not expect it to jump around.

[Joe Maxa:]

But I think historically the Q1 had been your low point of the year except for of course this last year. And I thought it had to do, due to additional spending and what not on your datacenter and maybe there was some others that were involved there. Would that be in the path that, that’ll happen more in a Q4 event? You did give some color on the call and maybe I'm not clear on it.

[Michael W. English:]

Yes, no the gross margin, what I mentioned in the call was that it's going to end up in 83% to 84% and it shouldn’t jump around, like I'm not expecting to see 80% or 88%. It's generally going to sit in that range. If we do make investment for instance if we exchange out a bunch of equipment and the depreciation goes up which we did last year. We brought some ZixOne infrastructure type equipment or the year before I think it was, and that caused the depreciation expense to go up, but it was so small and spread across so many months that it's a blip that I see but it's not something that you're going to see moving that percent the whole lot. But something as small as hiring somebody and incurring recruiter fees or something like that, because our cost of sales number is so small, a small increase will impact that percentage, but again we don't anticipate huge expenses. We're not going to hire 20 people. Hopefully we do. But right now the guidance we're giving indicates that the revenue was going to grow. We have a view of that revenue so we don't have to plan those expenses. So I don't expect the gross margin percent to deteriorate. I expect it to improve but I expect that improvement to be steady and slow.

[Joe Maxa:]

Okay, very good. Thank you.

[Richard D. Spurr:]

Thank you Joe.

[Operator:]

We have no further questions at this time. I would like to turn the call back over to Mr. Rick Spurr for any closing remarks.

[Richard D. Spurr:]

We got to go sell out the stuff. We had a great quarter but we can't rest and thanks for your time and attention. We're going to stay at it. Thanks everybody.

[Operator:]

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