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Zix Corporation Announces Second Quarter 2008 Financial Results

Company reports second consecutive cash flow positive quarter

DALLAS, July 29 /PRNewswire-FirstCall/ -- Zix Corporation (ZixCorp(R)), (Nasdaq: ZIXI), the leader in hosted services for email encryption and e-prescribing, today announced financial results for the second quarter ended June 30, 2008. ZixCorp recorded second quarter revenues of $7.0 million and a net loss of $1.4 million for the quarter, or $0.02 per share, compared with revenues of $5.6 million, and a net loss of $3.1 million, or $0.05 per share, in the corresponding quarter of 2007. Total cash and cash equivalents as of June 30, 2008 were $13.0 million.

"ZixCorp achieved positive cash flow from operations for the second consecutive quarter in 2008 and has further solidified its foundation for growth and success," said Rick Spurr, chief executive officer for ZixCorp. "The Email business delivered impressive revenue growth and achieved another record for gross margin. With the contribution from our OEM partners expected to become increasingly significant, we believe this business is poised for continued and even accelerated growth. In our e-Prescribing business, we believe the recently passed Medicare legislation containing financial incentives for the adoption and utilization of e-prescribing will be a catalyst for the development of that market. We expect our track record of success with the smaller practices that comprise the vast majority of the physician market but where few other vendors even compete will lead to growth in this business as well."

    Corporate Highlights
  • Company-wide second quarter 2008 revenues of $7.0 million are up 25 percent over the comparable quarter in 2007
  • The Company's second quarter ending cash balance was $13.0 million, which exceeded the projected guidance for total cash of $12.6 to $12.9 million
  • The positive cash flow from operations for the second quarter 2008 of approximately $400,000 compares to $350,000 cash burn for the second quarter of last year

    Business Highlights
    Email Encryption Service
  • Email Encryption revenue for second quarter 2008 was $5.7 million, up 38 percent when compared to second quarter 2007
  • Total orders were $8.4 million, including $1.4 million in new first-year orders for the sixth quarter in a row, which in a subscription model combined with strong renewals represents strong continued growth in this business
  • The Company's renewal rate for the quarter was 93 percent of all contracts eligible for renewal in the quarter measured on a revenue basis. A cancellation by a single customer, which was a large hospital group consolidating data center functions, accounted for the 7 percent not renewed
  • ZixCorp announced in second quarter 2008 the availability of ZixDirect 3.0, which allows clients to send encrypted email using push technology through a web interface. ZixDirect 3.0 is the latest generation of the Company's push technology, which instantly sends secure messages directly to a user's inbox
  • The Company also announced in Q2 that ZixDirectory, the foundation of the Company's outsourced Email Encryption Service, marked another industry record with 11 million members
  • New Jersey Hospital Association renewed its exclusive agreement with ZixCorp after a successful five year alliance. ZixCorp and NJHA originally signed an exclusive marketing agreement in 2003 and currently there are more than 57 hospitals in New Jersey that secure their email with ZixCorp
  • ZixCorp added 80 financial institutions, as well as its 20th state banking regulator, to its growing customer base, bringing the total number of banks, credit unions, and other financial institutions to more than 700
  • ZixCorp had strong results from our OEM relationships with Google and other industry leaders for the first six months of the year. Through the first half of 2008, total orders from these channels exceeded all of 2007

    e-Prescribing:
  • e-Prescribing revenue for second quarter 2008 was $1.3 million, down 10 percent compared to the corresponding quarter in 2007
  • During Q2, ZixCorp's PocketScript(R) e-Prescribing Service reached a milestone of processing a record 20 million electronic prescriptions through the ZixData Center(TM), a SysTrust(TM) certified and SAS-70 accredited center
  • ZixCorp is participating in L.A. Care's Health IT Incentive Program, whereby eligible physicians can obtain the PocketScript e-Prescribing Service. The program rewards physicians for adoption and sustained utilization of healthcare technology, including e-prescribing
  • In May, Rick Spurr participated in an expert panel at a symposium on e-prescribing in Washington, DC, which also featured Senator John Kerry, HHS Secretary Michael Leavitt and former Speaker of the House Newt Gingrich. The goal of the symposium was to promote legislation on e-prescribing that would provide Medicare-funded financial incentives for the utilization of e-prescribing. The Medicare Improvement for Patients and Providers Act of 2008 became law on July 15, 2008

Financial Highlights

Revenues: Company-wide revenues were $7.0 million in the second quarter 2008, which was a 25 percent increase over the second quarter 2007. The Company's Email Encryption business had quarterly revenue of $5.7 million, a 38 percent improvement over the corresponding period in 2007, and the e-Prescribing quarterly revenue of $1.3 million represented a 10 percent decrease over the same period of 2007. Email Encryption's increase was due to continued demand for our service model in both healthcare and financial services. e-Prescribing revenues decreased principally due to a decline in transaction/usage-based fees and deployment-related fees. The Company's order backlog (contractually bound service contracts that represent future revenue to be recognized as the services are provided) was a record $37.0 million on June 30, 2008.



                 Revenues by Product Second Quarter 2007 - 2008

                                                          3-month Variance
                          Three Months Ended June 30,       2008 vs. 2007
                              2008          2007           $             %

    Email Encryption      $5,667,000    $4,120,000     $1,547,000        38 %
    e-Prescribing         $1,291,000    $1,435,000      $(144,000)      (10%)
    Total Revenues        $6,958,000    $5,555,000     $1,403,000        25 %


Gross Margin: The Company's gross margin was $4.4 million, or 63 percent of revenue. The gross margin contribution from the Email Encryption business was $4.6 million or a record 81 percent, while the gross margin for e-Prescribing was negative $0.2 million in the quarter or a negative 15 percent. The Company-wide gross margin for the same period in 2007 was $2.9 million or 52 percent of revenue, which was comprised of $3.1 million in Email Encryption and negative $0.2 million for e-Prescribing. The gross margin improvement for Email Encryption was driven by continued revenue growth combined with an essentially flat cost of revenues. The gross margin for e-Prescribing remained flat as a decline in cost of revenues was offset by the decline in revenues.

R&D and SG&A Expenditures: In the second quarter 2008, the combination of the Company's research and development (R&D) expenses and its sales, general, and administrative (SG&A) expenses was relatively flat when compared with the same period in 2007.

Cash Flow: Cash and cash equivalents as of June 30, 2008 were $13.0 million, which was greater than the projected guidance of $12.6 to $12.9 million. The approximately $400,000 in positive cash flow represents an improvement over the approximately $350,000 cash burn for the comparable quarter in 2007.

Outlook: The Company forecasts revenue for the third quarter to be between $6.6 and $7.0 million. e-Prescribing deployments are expected to be approximately 100 prescribers for the third quarter. The ending total cash balance for the third quarter is projected to be $13.0 million or greater.

Second Quarter Conference Call Information

The Company will hold a conference call to discuss second quarter 2008 operating results on July 29 at 5:00 p.m. ET.

A live Webcast of the conference call will be available on the investor relations portion of ZixCorp's Web site at http://investor.zixcorp.com. Alternatively, participants can listen to the conference call by dialing 617-614-2707 or toll-free 866-761-0749 and entering access code 15191720. An audio replay of the conference will be available until August 5, 2008 by dialing 617-801-6888 or toll-free 888-286-8010, and entering the access code 34586302, and after that date via Webcast on the Company's Web site.

About Zix Corporation

ZixCorp is the leading provider of easy-to-use-and-deploy email encryption and e-prescribing services that Connect entities with their customers and partners to Protect and Deliver sensitive information in the healthcare, finance, insurance and government industries. ZixCorp's hosted Email Encryption Service provides an easy and cost-effective way to ensure customer privacy and regulatory compliance for corporate email. Its PocketScript(R) e-prescribing service saves lives and saves money by automating the prescription process between payors, doctors, and pharmacies. For more information, visit http://www.zixcorp.com.

Safe Harbor Statement for ZixCorp

The following is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. The following statements by Mr. Spurr are forward-looking statements, not a guarantee of future performance, and involve risks and uncertainties: "With the contribution from our OEM partners expected to become increasingly significant, we believe this business is poised for continued and even accelerated growth,"; "In our e-Prescribing business, we believe the recently passed Medicare legislation containing financial incentives for the adoption and utilization of e-prescribing will be a catalyst for the development of that market,"; "We expect our track record of success with the smaller practices that comprise the vast majority of the physician market but where few other vendors even compete will lead to growth in this business as well." The statements under the caption "Outlook" are also forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the Company's continued operating losses and use of cash resources; the Company's ability to achieve broad market acceptance for the Company's products and services, including the Company's ability to enter into new or expand existing sponsorship agreements for the e-prescribing services offered by its PocketScript, Inc. subsidiary and the Company's ability to continue realizing acceptance of its Email Encryption business in its core markets of healthcare and financial and to achieve market acceptance of its Email Encryption business in other markets; the Company's ability to maintain existing and generate other revenue opportunities, including fees for scripts written or value added services for its payor customers from its PocketScript e-Prescription business; the Company's ability to establish and maintain strategic relationships to gain customers and grow revenues, particularly in its Email Encryption business; the expected increase in competition in the Company's Email Encryption and e-Prescription businesses; and the Company's ability to successfully and timely introduce new Email Encryption and e-Prescription products and services or related products and services and implement technological changes. Further details pertaining to such risks and uncertainties may be found in the Company's public filings with the SEC.



                               ZIX CORPORATION
                    CONDENSED CONSOLIDATED BALANCE SHEETS

                                                 June 30,       December 31,
                                                   2008             2007
                                                (unaudited)      (audited)
    ASSETS
    Current assets:
      Cash and cash equivalents                 $13,007,000      $10,524,000
      Marketable securities                               -        1,734,000
      Receivables, net                              697,000        1,119,000
      Prepaid and other current assets            1,341,000        1,545,000
        Total current assets                     15,045,000       14,922,000
    Restricted cash                                  25,000           25,000
    Property and equipment, net                   2,131,000        2,297,000
    Goodwill and other assets                     2,203,000        2,230,000
        Total assets                            $19,404,000      $19,474,000


    LIABILITIES AND STOCKHOLDERS' DEFICIT
    Current liabilities:
      Accounts payable and accrued expenses      $3,067,000       $3,295,000
      Deferred revenue                           13,588,000       12,606,000
        Total current liabilities                16,655,000       15,901,000
    Long-term liabilities:
      Deferred revenue                            3,334,000        3,497,000
      Deferred rent                                 345,000          365,000
        Total long-term liabilities               3,679,000        3,862,000
        Total liabilities                        20,334,000       19,763,000
        Total stockholders' deficit                (930,000)        (289,000)
        Total liabilities and
         stockholders' deficit                  $19,404,000      $19,474,000



                               ZIX CORPORATION
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (Unaudited)

                                 Three Months Ended      Six Months Ended
                                      June 30,                June 30,
                                  2008        2007        2008        2007
    Revenues                  $6,958,000  $5,555,000 $14,157,000 $10,942,000
    Cost of revenues           2,542,000   2,647,000   5,122,000   5,500,000
    Gross margin               4,416,000   2,908,000   9,035,000   5,442,000
    Operating expenses:
      Research and development
       expenses                1,381,000   1,343,000   2,926,000   2,642,000
      Marketing expenses         805,000     938,000   1,690,000   1,857,000
      Sales expenses           2,281,000   2,225,000   4,553,000   4,535,000
      General and
       administrative
       expenses                1,521,000   1,486,000   3,181,000   3,057,000
      Customer deposit
       forfeiture                      -           -           -  (2,000,000)
      Loss on impairment of
       operating lease                 -     100,000           -     100,000
        Total operating
         expenses              5,988,000   6,092,000  12,350,000  10,191,000
    Operating loss            (1,572,000) (3,184,000) (3,315,000) (4,749,000)
    Other (expense) income:
      Investment and other
       income                    222,000     139,000     338,000     294,000
      Interest expense                 -     (56,000)          -    (106,000)
      Loss on extinguishment
       of debt                         -           -           -    (178,000)
        Total other income       222,000      83,000     338,000      10,000
    Loss before income taxes  (1,350,000) (3,101,000) (2,977,000) (4,739,000)
    Income taxes expense               -     (34,000)    (77,000)    (37,000)

    Net loss                 $(1,350,000)$(3,135,000)$(3,054,000)$(4,776,000)

    Basic and diluted loss
     per common share             $(0.02)     $(0.05)     $(0.05)     $(0.08)

    Basic and diluted
     weighted average
     common shares
     outstanding              62,903,431  60,338,839  62,803,638  60,110,662



                               ZIX CORPORATION
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)

                                                   Six Months Ended June 30,
                                                       2008          2007
    Operating activities:
      Net loss                                    $(3,054,000)  $(4,776,000)
      Non-cash items in net loss                    2,517,000       (22,000)
      Changes in operating assets and liabilities   1,680,000     4,810,000
        Net cash provided by operating activities   1,143,000        12,000

    Investing activities:
      Purchases of property and equipment            (544,000)     (543,000)
      Restricted cash investments and
       marketable securities, net                   1,734,000    (1,665,000)
        Net cash provided (used) by
         investing activities                       1,190,000    (2,208,000)

    Financing activities:
      Proceeds from exercise of stock options         150,000             -
      Payment of short-term notes payable                   -      (151,000)
        Net cash provided (used) by
         financing activities                         150,000      (151,000)

    Increase (decrease) in cash and
     cash equivalents                               2,483,000    (2,347,000)
    Cash and cash equivalents, beginning
     of period                                     10,524,000    12,783,000
    Cash and cash equivalents, end of period      $13,007,000   $10,436,000

SOURCE Zix Corporation

CONTACT: Farrah Corley, Public Relations, +1-214-370-2175,
publicrelations@zixcorp.com, or Peter Wilensky, Investor Relations,
+1-214-515-7357, invest@zixcorp.com, both of Zix Corporation