Zix Corporation
Q3 2015 Earnings Call Transcript

Published: 21 Oct 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Zix Corporation Third Quarter 2015 Earnings Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later we’ll be conducting a question-and-answer session, instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the call over to your first speaker for today, Geoff Bibby. You have the floor, sir.

[Geoff Bibby:]

Thank you, Andrew. Good afternoon everyone I am Vice President of Marketing for Zix Corporation and thank you for joining our 2015 Q3 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 CEO, 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 measure. Now, I am very pleased to turn the call over to Rick.

[Richard Spurr:]

Thank you, Geoff. I am excited to report the best quarter in Zix’s history. These quarterly results include record new first year orders, record revenue, record adjusted EBITDA; record adjusted earnings per share, record backlog and record cash flow from operations. It’s important to point out that we achieved these record results without significant contribution from our new partnerships with Cisco and Intel, which we believe is yet to come. Our new level of achievement this quarter is due primarily to a new corporate spotlight on security resulting in increased customer focus and investment in email security and the resurgence of Google as the Zix reseller. Here are the results. Revenue for the third quarter was a record $14 million, which is above the high end of our guidance for the quarter and is a 10.3% increase from $12.7 million in the same quarter last year. Our new first year orders for the third quarter were a record $2.7 million up 67% from the third quarter last year. It is significant to note that we achieved this record in the third quarter, which we would typically expect to be one of our seasonally weakest quarters. Our new first year orders for the first nine months of 2015 totaled $7.2 million, which sets a new record for the company for that period. Our backlog which reflects all contractually committed business that has not yet been recognized as revenue also reached a record of $74.3 million at quarter end. On the bottom line, we achieved GAAP net income of $1.9 million or $0.03 per share on a fully diluted basis. Non-GAAP adjusted net income in the third quarter was $3.8 million or $0.07 per share on a fully diluted basis, another record and well above our guidance. During the third quarter, our business generated $6.6 million in cash flow from operations again another record. Now, let me share some detail on the composition of our new first year orders in the quarter. Our enterprise sales group that sells to large accounts contributed just over $670,000 in new first year orders approximately 25% of this quarters total and 48% higher than their contribution in the third quarter last year. Our corporate sales team also had a strong quarter and achieved $1.4 million in new first year orders 50% of our total. This $1.4 million is up 33% from the same quarter a year ago. You can see from this growth 48% in enterprise and 33% in corporate, our core business is up significantly. The strong performance from these two sales engines highlights the growth that we are achieving due to the new spotlight on security in corporate America resulting in increased focus and investment in email security. We are also very pleased to report a much stronger contribution from our OEM business this quarter predominantly driven by Google. Our OEM business produced over $600,000 in new first year orders, 23% of our total. This is an increase of 565% from the OEM contribution in last year's third quarter. Google represented over two-thirds of this total. The rate of Google orders has been picking up nicely since we announced our new GAME product in the fourth quarter of last year. In Q1 of this year, we received 25 orders from Google. In Q2, 36 orders, and in Q3, 53 orders including a very large one from the State of Iowa that represented approximately half of the Google new first year orders this quarter. New first year orders due to the Cisco partnership began in Q3 but represented only a relatively small contribution less than $200,000 in new first year orders. And the Intel partnership we announced in late September as expected is just getting underway and did not contribute to Q3. From an industry perspective new first year order success in the third quarter was across the board, reflecting historical distribution across sectors. Healthcare represented 40% followed by finance at 32%, government at 7% and other at 21%. Now, let me turn to an update on our new products, ZixDLP and ZixOne. As mentioned earlier, our strong performance this quarter in new first year orders is due to increased customer focus and investment in email security generally and was not due to unusually strong performance from our new products. It certainly contributed nicely, but growth in the core email encryption suite of products was the major driver. During the third quarter we sold over 11,000 new DLP seats and signed 19 new DLP customers, the second highest since we introduced the product. The price per seat in Q3 was higher than our average at more than $7 per seat bringing our lifetime price per seat up to just over $4.20. In terms of customers licensed seats we now have a lifetime total of 136 DLP customers and 197,000 licensed seats. During the quarter we added 56 new ZixOne customers, the third highest since we introduced ZixOne. These customers added 3,500 new seats which brings the total number of ZixOne licensed seats to more than 29,000. It’s important to note that 15% of these new ZixOne seats were add-on seats in existing accounts. So we are starting to see growth from initial installations. The average price per user per year looking at all ZixOne customers at the end of the quarter was slightly more than $32 per seat. Earlier I mentioned that in this quarter we did start to see for the first time new orders as a result of our Cisco partnership, announced earlier this year in March. We believe this is just the beginning and as the result of the Cisco IEA replacement product we launched in June called ZEA. We expect to see more orders for this IEA replacement product in Q4, but more importantly we are very excited to have announced last week the release of our new combined product with Cisco which was developed by Zix and is called ZCT or ZixGateway with Cisco Technology. We believe sales of this new product will begin in Q4, but its real impact will be in 2016. Now I want to transition from the discussion of Q3 results and talk more about our future. As many of you know ZCT represents the second phase in our partnership with Cisco where we are bringing a brand-new product to market that incorporates the best of both architectures. ZCT includes features from ZixGateway including our unique ability to send and receive encrypted email transparently without the use of passwords. Along with the Cisco capability that allows for the storage of encryption keys and encrypted messages on-site at the client, which is a feature that high-end security conscious customers find especially attractive. This new solution uses Cisco's proprietary PXE delivery mechanism to store encrypted messages on-site and to push messages directly to recipients. Beginning Friday the solution will be generally available in the market through Cisco direct sale and Cisco's network of resellers. A more detailed description of the product can be found on Cisco's website under the tab “products and services" and again it's called ZixGateway with Cisco Technology. In joining forces with one of the largest, if not the largest, enterprise security vendors in the world Cisco. We are combining the strength of Cisco’s world-class distribution and our leading-edge unparalleled technology. All of the sales from this new combined product will become part of the Zix network of customers and as Metcalfe's law states, the value of our Zix encryption network will grow exponentially as these new users are added. As a result, all of our existing customers and all of the new customers will benefit from a larger network of users. Transparency will increase dramatically and the need for passwords will continue to dissipate. This new product will be distributed worldwide and done predominantly through Cisco's sales teams and their massive partner network. While Zix has built a solid network of around 300 resellers, Cisco's distribution network include 68,000 resellers and obviously provides us far greater reach in distributing the new product, including into international markets. We believe the second phase of our partnership with Cisco can take Zix to a new level. We are very excited about the high level of commitment and substantial resources that Cisco is bringing to this partnership to support a successful launch of ZCT. Earlier this month Zix was featured at Cisco's SEVT, Systems Engineer Virtual Team gathering in San Jose, which is a training session of several hundred Cisco sales engineers and Cisco partners. So unusual for a vendor name to be used in these sessions and yet the Zix brand was prominent. Even more unusual that the partner began an opportunity to present to this group and yet we were given multiple primetime slots. This gathering marked the beginning of what would be a very exciting quarter of sales and marketing activities around the product launch. Starting October 27, we will be joining Cisco to begin a road show that will cover 18 major cities across the globe on various dates that extend through December. Locations include major metropolitan areas in the United States, as well as London, Paris, Hong Kong, Singapore and Sydney. Cisco describes these meetings as Boot Camps and Zix has been given a primetime morning slot in each of these cities. In addition to the global training and education, they are also benefiting from Cisco's world-class marketing machine. The Zix brand is being promoted globally through Cisco's various sales briefings, sales newsletters, partner newsletters, Cisco TV, social media and many of Cisco's web resources both internal and external. All sales enablement including various products collateral and selling tools is available and ready for distribution. To say this partnership is in a healthy place would be a bit of an understatement. We are extremely excited about the opportunity we have with Cisco to expand our footprint as leading provider of email encryption. We believe the launch of our combined product offering ZCT will be a significant growth driver for Zix for years to come. During the quarter we also announced the second major partnership with McAfee and Intel, which is the major partnership that we alluded to on our last quarter's earnings call. We believe this partnership further validates our position as the leader in email encryption and will drive increased adoption of our transparent email encryption solution and the quarter and years to come. Joining Intel’s security innovation alliance represents a significant new sales partnership agreement with yet another large world-class security vendor. This program is designed to integrate industry-leading solutions to detect threats, reduce risk and improved compliance. We are delighted that Intel has identified Zix as the industry-leading email encryption solution and wants to make it available to all their customers to deliver an even greater level of email security. Under this agreement, Intel Security sales team, which numbers more than 3,400 and now recommends Zix Email Encryption, which interoperates with Intel McAfee Email Gateway. The referral agreement is designed to provide a more complete email security suite of solutions for Intel by adding ZixGateway email encryption to their offering. Our offering is significantly greater sales coverage and lead flow to Zix. After leads are registered by the partner, the Zix sales team will do the selling and close the sales on Zix contracts and then pay Intel McAfee a referral fee. Intel in turn will provide full compensation to their sales team that generated the lead. Since the announcement, we are off to a good start with the process of working with the Intel to build awareness and visibility in the marketplace. Including sales training, developing marketing materials and participating in their largest security conference of the year called FOCUS that takes place later this month. We believe our new agreement with Intel McAfee and our strategic partnership with Cisco are game changers for Zix. We replaced formally competitive relationships with mutually beneficial partnerships that will provide a very large broad-based U.S. and international sales coverage for our leading-edge emails encryption product. We have yet another exciting partnership that we expect to announce before the end of the year to extend our ZixOne story and to generate ZixOne sales. This will be a referral agreement with the leading telecommunications provider. We look forward to providing details on this new ZixOne partnership in the months ahead. To conclude with the increased momentum and customer activity we are seeing, we believe we are starting to see the benefit of the increased focus and investment that corporate America is placing on email security. We ended the fourth quarter with a very healthy backlog and significant opportunities for growth not only this year, but for years to come. With the strength of our pipeline for email encryption, the growth in orders from our OEM business, expanded sales through our partnerships with Cisco and Intel and continuing contribution from ZixDLP and ZixOne. We have confidence in continued momentum and accelerating growth into 2016 and beyond. Now, I’ll turn the call over to Mike English, our CFO, to discuss the third quarter financial results and our guidance for 2015.

[Michael English:]

Thanks Rick. Good afternoon everyone. From the third quarter we achieved revenue of $14 million, which exceeded the high end of our guidance range of $13.6 million to $13.9 million and was 10% higher than the same period last year. Contributions from strong new first year orders and renewals as well as contracted revenue in the backlog were the primary drivers of the revenue performance in the quarter. Additionally, we received revenue contributions from a couple of sources that were anticipated in the guidance, but exceeded our estimates. Specifically, Google successfully renewed customer contracts that have been on hold due to Google's transition from the GME platform to the new game platform. This freed-up revenue that have been on hold. Also revenue contribution from ZixGateway customers who had surpassed their licensed seat maximum exceeded our forecast. Revenue from these two sources that exceeded our forecast totaled about $200,000. We also exceeded guidance and adjusted earnings for fully diluted share. For the third quarter, adjusted earnings per fully diluted share was $0.07 making it our best adjusted EPS quarter ever exceeding our previous best of $0.06 in the fourth quarter of 2013 and exceeding the high end of our guidance range of $0.04 to $0.05. The high end of the adjusted EPS guidance range of $0.05 equated to approximately $3.2 million of adjusted net income. This compares to actual adjusted net income of $3.8 million or approximately $600,000 better than the high-end of our guidance. That $600,000 resulted from strong revenue performance just discussed plus lower costs. These lower costs included approximately $300,000 of marketing expenses that were forecast as third quarter expense, but have now shifted the fourth quarter. Additionally, we were able to reduce legal expenses saving approximately $150,000 compared to assumptions we made in building our guidance. The remaining savings came from other sources including lower bad debt expenses resulting from recovery of previously reserved unpaid customer invoices and lower employee related expenses, including recruiting fees and timing of new hires. Sequentially, third quarter adjusted net income of $3.8 million was $1.6 million better than second quarter 2015 adjusted net income of $2.2 million. This $1.6 million improvements was the result of approximately $700,000 of revenue improvement quarter-over-quarter and almost $900,000 of lower adjusted expenses. Comparing adjusted expenses to the prior sequential quarter, we reduced our marketing spending by about $400,000, $300,000 of which were pushed into the fourth quarter as previously mentioned. Also discussed earlier, we are able to reduce legal expense by about $150,000. The remaining expense reductions in the third quarter compared to the previous sequential quarter came from other sources including travel expense and travel accruals, bad debt expense and bonus accruals. It is important to note that the accrual adjustments are non-recurring. These one-time adjustments totaled approximately $250,000 in the current quarter. Total orders for the third quarter were $14.7 million up 10% compared to the prior year and resulting in a record backlog of $74.3 million, up 8% compared to the same time last year. Over the next 12 months, based on scheduled revenue and backlog, we expect to recognize as revenue approximately 56% of the backlog or $41.9 million. At the same time last year, the backlog was $68.8 million, and we expect it to recognize revenue of approximately 56% or $38.7 million over the ensuing 12 months. Considered by itself this translates into 8.3% year-over-year revenue growth and/or 99% of this revenue was recurring. Operating cash flow for the quarter was $6.6 million compared to $4.7 million in the same quarter last year 39% increase. Cash from operations included record cash collections in the third quarter made possible by the first year component of record second quarter total bookings. For the first nine months of 2015 cash flow from operations of $12.2 million was up 15% compared to $10.6 million for the same period last year reflecting the cash flow benefit of year-over-year new first year order growth and strong renewals. Capital expenditures of $347,000 for the third quarter were in line with our expected CapEx run rate. As we indicated in our last quarter's call, we anticipate lower CapEx in the second half of the year and estimate returning to approximately $400,000 to $500,000 per quarter on a run rate basis. This is down from the first half of the year when CapEx averaged approximately $700,000 per quarter. Moving now to an update on our stock purchase. In May of this year, we announced that our Board of Directors had approved a $15 million stock repurchase plan. Under this plan in the third quarter we purchased approximately 2,223,000 shares at an average price of $4.80. From the inception of the plan in May of this year through September we purchased approximately 2,502,000 shares also at an average price of $4.80. In October we purchased approximately 683,000 shares at an average price of $4.39. With the October purchases, we have completed the plan. For the entire plan we used $15 million to purchase approximately 3,185,000 shares at an average price of $4.71. Moving on to our 2015 forecast, for the fourth quarter we forecast revenue of $14.1 million to $14.4 million and adjusted fully diluted earnings per share of $0.05 to $0.06. The fourth quarter revenue forecast yields full-year 2015 revenue guidance of $54.5 million to $54.8 million. For the full-year we are revising our guidance for adjusted fully diluted earnings per share from $0.19 to $0.21 to $0.20 to $0.21 per share. With that, I will turn it back to Rick.

[Richard Spurr:]

Thank you, Mike. And let’s open it up to questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mike Malouf from Craig-Hallum Capital. Your line is open.

[Michael Malouf:]

Great, thanks for taking my questions and great quarter guys.

[Richard Spurr:]

Thank you, Mike.

[Michael English:]

Thank you, Mike.

[Michael Malouf:]

Question on the Cisco opportunity at least for the first phase, I think in the past you had said that you expect $1 million to $3 million in new first year order's and that was going to be pretty concentrated in the back half of the year, it looks like that slipped a little bit from the second quarter to the third quarter because I think you are expecting it to be in that second – sorry, the third quarter to the fourth quarter. Is that now going to all come in this fourth quarter do you think and if so is that $1 million to $3 million still a correct guess?

[Richard Spurr:]

Yes, good question Mike. When we first – I’m going to give a little history, when we first announced the partnership we had an intense focus on ZEA the first product and I originally said that we thought we get $1 million to $3 million from that replacement effort, but it was difficult to determine we didn’t know how many remaining IEA customers there were et cetera. Then in subsequent updates throughout the year I expanded the $1 million to $3 million to apply to Cisco more generally because I knew that we had heightened the focus on the second product and I figured that would dilute as it did that ZEA success. As we now exit the third quarter and we – what we know about the fourth quarter I think and I want to underline think, I think the $1 million to $3 million is aggressive. It could happen in the fourth quarter, but if it did it would be as a result of really fast start with ZCT, which is possible given all the resources and investments that’s being made. But I am less confident than I was earlier in the year in the tight timeframe you’re referring to. Longer-term I feel much better about the relationship and the opportunity for the business with all resource they are plowing into the ZCT.

[Michael Malouf:]

Okay great. That’s helpful on that first phase. So definitely a little bit less than we had previously looked for, but on the ZCT, which sounds like it's off to a fast start even I think released earlier than you had previously thought several months ago. Can you talk a little bit about what you’ve learned with regards to the opportunity with ZCT over the next couple of years looking out I mean how big of an opportunity is this for you?

[Richard Spurr:]

Yes, we are not prepared to give any forecast, but I can tell you is that the level of excitement, inside of Cisco and their security team and which is large very, very, very large is far beyond what we had anticipated and tells me that as they interface with these enterprise customers around the world and they told us outright that this has been a gaping hole in their offering and that they are excited and proud to now have this solution to go back to those clients and now proudly say they’ve filled the hole, so they are the largest enterprise security vendor in the world. And as I said they are now proud to have this new offering. So I don't know how to gauge that, but certainly big is obvious.

[Michael Malouf:]

And then just one follow-up quick question on the succession plans obviously with you leaving just to get a sense of how that's progressing and any timetable on that will be helpful? Thanks.

[Richard Spurr:]

Sure, I think it’s progressing just as we had planned and announced, which is we announced that we would initiate the search in July, third-party resources people that are expert at these things say on average these things take about nine months. We’re beginning the process, we’re interviewing candidates and I would say distilling the options, but there's still no clear candidate or clear date in sight.

[Michael Malouf:]

Great. Thanks for all the color.

[Richard Spurr:]

Sure, when I say there is no clear candidate what I mean by that is it’s not like we’re settling in on some in particular, we’ve got great candidates and it's progressing nicely, but timing is hard to determine. In the meantime I’m excited to be here.

[Michael Malouf:]

Perfect, thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Fred Ziegel from Topeka Capital Markets. Your line is open. Mr. Ziegel, please check your mute button.

[Frederick Ziegel:]

Rick.

[Richard Spurr:]

Hey, Fred.

[Frederick Ziegel:]

Hey, so talk to me about the Cisco, two things, talk to me about Cisco and can you frame this if you think of, well, probably after you retire, but couple of years from now what it might look like and McAfee?

[Richard Spurr:]

Yes. Again Fred, I hesitate to try to give guidance or outlooks about two years from now. It’s just can only start to get me in trouble I think, but…

[Frederick Ziegel:]

You’ve been in trouble before don’t worry about it.

[Richard Spurr:]

I think I’ve done a pretty good job of avoiding it. I guess if I were trying to get a sizing on the thing, I start with, if I were you guys analysts trying to figure this out I’d start with looking at enterprise presence in finance and healthcare where this sophisticated solution that we’re bringing to market is relevant. And I’d start taking some estimates of market share that we could capture given McAfee’s presence and Cisco's presence in those markets. You won’t [get me] [ph] be any more detailed than that right now.

[Frederick Ziegel:]

Yes.

[Richard Spurr:]

Anything else Fred?

[Frederick Ziegel:]

That’s it.

[Richard Spurr:]

All right, thanks sir.

[Operator:]

Thank you. Our next question comes from the line of Michael Kim from Imperial Capital. Your line is open.

[Michael Kim:]

Hey, good afternoon, guys. Just starting on ZixOne, maybe you could talk a little about where you see that product competitively if you need to continue to evolve the product or is there an issue of market demand and with the new telecom provider partnership if you’re maybe fine-tuning your go to market for that particular product?

[Richard Spurr:]

Sure. You can always be adding features to the product. In terms of the competitiveness I wouldn’t say we are finding it. I don't see any significant change other than the fact as you know, we all know BlackBerry picked up good technology. We don't know where that's going, it’s confusing given that BlackBerry has also announced now some hardware. So I don’t know how that’s all going to play itself out. The market at the high-end is still evolving, the market at the low end is where we have found success most readily and the evolution of the new relationship has always been part of our longer-term plan for ZixOne but when you announced this I am sure you know, when you announce a new product like this it's unlikely you are going to get the big boys to the table until you've proven yourself and got your brand and your reputation and some proof points with customers and installations that you can reference to give them confidence in partnering with us which we’ve done now. So that’s a very meaningful and significant next phase of our go-to-market and we are happy to be able to talk about it today.

[Michael Kim:]

Okay, great and then just turning to the Google reseller relationship, it sounds like that's making some good progress. I mean do you see that returning to maybe the levels that we had seen historically for GME and maybe your timeframe I know you are hesitant to start to put that in precise terms should we expect that sort of ramp through 2016 and maybe approach where we were historically?

[Richard Spurr:]

Unfortunately Michael for the first time I can tell you we have achieved the levels that we were reaching before. So we’ve estimated that the Google contribution used to be around on average 300K per quarter and in this quarter we just closed that they actually did 400K. That it was one very large deal in there which contributed markedly to this quarter. I wouldn't expect we see that repeat each and every quarter, but it could. But the ramp rate for this sort of lower end business that is generating the vast majority of the orders just in terms of new clients has been close to 50% every quarter. So even if you take the 200K out for the biggest hit I would think, we are still at 200K and if you see that ramp at 50% that’s get you back to that 300K. I am not saying it’s going to be 300K in the fourth quarter, I’m just saying that the underlying growth rate now with the three data points on the sheet are pretty good.

[Michael Kim:]

Great, that’s encouraging. And then one quick question for Mike, you mentioned a shift in marketing spend were about 300K from 3Q to 4Q or we to take that as sort of a one-time expenditure in that when we think about Q1 next year that it move sequentially lower, is that a sustain level of marketing spend on go forward basis?

[Michael English:]

So that expense certainly is the plant expense that we just moved to the fourth quarter whether or not will sustain that level going forward in 2016, we are still working on that so I don't know if I can give you any guidance right now on how to model your expense, but I think we are going to continue investing in marketing at the level we've done in 2015 at least and probably that’s about the best thing I can give you right now Mike.

[Michael Kim:]

Okay, fair enough.

[Richard Spurr:]

And sort of back to the Mike’s comments I mean just there's nothing unusual about that 300K wasn't some big thing we had to fund just our normal marketing run rate that we choose not to deploy necessarily in a straight line.

[Michael Kim:]

And just to clarify that mostly around the new Cisco partnership or is that for the overall business?

[Richard Spurr:]

I would say it’s generally around the overall business, some of which of course is now Cisco for sure.

[Michael Kim:]

Okay, got it. Great, thanks very much.

[Michael English:]

Thank you, Mike.

[Operator:]

Thank you. Our next question comes from the line of Joe Maxa from Dougherty & Company. Your line is open.

[Joseph Maxa:]

Thank you. Congrats on a nice quarter and all the records.

[Richard Spurr:]

Hi, Joe?

[Joseph Maxa:]

Yes, looking at the Cisco one more time the initial thought of $1 million to $3 million at mid-year you are not going to get there, but clearly with the ZCT product are ramping early you got to feel pretty good about that $1 million to $3 million maybe being at least double that number next year, is that a fair way to think about it without given any specific guidance?

[Richard Spurr:]

It seems to me that would be specific guidance. I do want to echo your commentary though that you can tell we are excited this is a big deal the product is going to be a product that’s never before been offered anywhere in terms of the flexibility and functionality that it offers and it's been taken to market by the biggest security provider in the industry, so it’s sure feels big but I'm not ready to say double, triple we’ll see how it evolves.

[Joseph Maxa:]

Okay that’s good. And then for Mike looking at the guidance this help us out again with this non-cash tax expense that you add back - what are you – in your non-GAAP guidance what are you including in 4Q for that line item?

[Michael English:]

If you look, yes sure Joe, if you look at historically this year for the first three quarters, our effective cash tax rate is 5% to 6%. And I would recommend that using that going forward. It will start inch up as the business continues to grow. Some of that tax is based on sales but for now when you are looking at non-cash or when you looking at the cash taxes I think that 5% to 6% ranges are right.

[Joseph Maxa:]

Okay. And then just on the GAAP base as a 40% number or I guess if you take an average that looks 39% for the year?

[Michael English:]

Yes, I think that’s pretty accurate, yes.

[Joseph Maxa:]

Okay. So that’s all I have right now. Thank you.

[Richard Spurr:]

Thanks Joe.

[Operator:]

Thank you. And we have a follow-up from the line of Fred Ziegel from Topeka Capital Markets. Your line is open.

[Frederick Ziegel:]

So if I think about your addressable market and I think about Proofpoint which is $200 million to $300 million of revenues. How do you think about that?

[Michael English:]

Well, the way we think about that is the Proofpoint has a much broader suite of offerings and so their addressable market is of course much larger than ours.

[Frederick Ziegel:]

Right.

[Michael English:]

A lot of that is sort of age old anti-spam, antivirus stuff which is as you know is commoditized and has scrappy margin. So it is necessarily a market that's you know it’s certainly not apples-to-apples when you start to look at margin. We overlap obviously in email encryption and we are much larger than they are in that sub-segment and we’re making a lot more investment now have broadened partnership. So our share in that smaller market segment already exceeds theirs and I anticipate will grow even greater.

[Frederick Ziegel:]

So you are the larger market share in your town?

[Michael English:]

Correct. Yes, we have good survey data on what percentage of customers are using us versus them versus Cisco versus Google et cetera. And they are in the email encryption space significantly smaller than we are.

[Frederick Ziegel:]

All right, thanks.

[Michael English:]

Sure, thank you. End of Q&A

[Operator:]

Thank you. That’s all the time we have for questions for today. So I like to turn the call back over to Mr. Spurr for closing remarks.

[Richard Spurr:]

We are excited hope you are too, call us if you have got the additional question we’ll be on the road over the next coming weeks and be happy to visit with people or as I said if you got specific questions or you want clarification or color. You're free to call in and we almost always take calls and we’ll continue to do so. Thanks for your participation.

[Operator:]

Ladies and gentlemen, thank you again for your participation in today’s conference. This now conclude the program. And you may all disconnect your telephone lines at this time. Everyone have a great evening.