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Zix Reports Third Quarter 2019 Financial Results

Enhanced Cross-Selling Efforts Drive Another Quarter of 15% Organic Revenue Growth, Expanding Adjusted EBITDA Margins, and 18% Organic Annual Recurring Revenue (ARR) Growth to $200.3 Million

DALLAS--(BUSINESS WIRE)--Oct. 31, 2019-- Zix Corporation (Zix) (NASDAQ: ZIXI), a leading provider of cloud email security solutions, today announced financial results for the third quarter ended September 30, 2019.

Third Quarter 2019 Financial Highlights (results compared to the same year-ago quarter)

  • Revenue increased 168% to $47.8 million. Total overall organic revenue growth across Zix and AppRiver was 15%.
  • Annual recurring revenue (ARR), representing aggregate contract value attributable to the 12 months ending September 30, 2019, increased 167% to $200.3 million. Total overall organic ARR growth across Zix and AppRiver was 18%.
  • GAAP net loss attributable to common stockholders totaled $3.7 million compared to net income of $2.5 million. The company’s net loss attributable to common shareholders includes the effect of a deemed dividend to preferred shareholders of $2.1 million and one-time acquisition-related expenses of $1.9 million.
  • GAAP fully diluted earnings (loss) per share attributable to common stockholders totaled ($0.07) compared to $0.05.
  • Non-GAAP adjusted net income before deemed dividends and excluding deferred tax (benefit) expense totaled $6.7 million compared to $4.7 million. The company’s Q3 2019 non-GAAP adjusted net income also excludes $1.9 million of one-time acquisition-related expenses.
  • Non-GAAP adjusted net income per share before deemed dividends and excluding deferred tax (benefit) expense and one-time acquisition-related expenses increased 43% to $013.
  • Adjusted EBITDA increased 116% to $11.5 million, representing an adjusted EBITDA margin of 24%.

Management Commentary

“In the third quarter, we continued to make considerable progress in a number of key areas as we integrate and accelerate our performance as a unified, larger company,” said David Wagner, Zix’s Chief Executive Officer. “With another quarter of 15% organic revenue growth and 24% adjusted EBITDA margins, we’re again knocking on the ‘Rule of 40’ door and doing so while driving increased cross-sell activity. Within the AppRiver channel, we doubled the number of ZixEncrypt and ZixArchive trials compared to last quarter. In the Zix channel, we had 27 Office 365 cross-sell wins in the quarter. Heading into the end of the year, we expect to extend our track record of profitable growth through enhanced cross-selling and increased attach rates, which will help Zix accelerate revenue and ARR improvements into 2020 and beyond.”

Zix’s Chief Financial Officer Dave Rockvam added: “As our results for the quarter clearly demonstrated, we are firing on all cylinders and continuing to recognize material financial benefits as well as operational and sales process efficiencies as a larger organization. We not only exceeded our revenue guidance for Q3 with a record $47.8 million, but we also generated sequentially improved non-GAAP adjusted earnings of $0.13. Put together, our continued outperformance on both the top and bottom line demonstrates our ability to leverage the benefits of scale within two highly complementary businesses. We also generated improving organic ARR growth of 18% year-over-year, which allowed us to cross the $200 million threshold and also provides improved incremental visibility into our long-term accelerated growth expectations. With our first two and a half quarters of solid execution, we are becoming more and more confident that we can maintain this level growth combined with an investment level that would put us right on the ‘rule of 40’ metric, which we believe will help us drive higher shareholder value as well as the achievement of our three- to five-year vision of profitably scaling the business.”

Recent Operational and Product Highlights

  • AppRiver direct customers and Managed Service Provider partners (MSPs) started over 300 trials of ZixEncrypt and ZixArchive in Q3 2019
  • Zix added 27 O365 customers representing nearly 4,000 mailboxes in Q3 2019, increasing ARR 64% over Q2 2019 with an average product attach of 3.1 services per mailbox
  • AppRiver reported findings from its Q3 Cyberthreat Index for Business Survey, revealing SMBs severely underestimate the damaging consequences of successful cyberattacks

Third Quarter 2019 Corporate Financial Summary and Other Operational Metrics (1)

       

$ in Millions, except per share data

Q3 2019

Q3 2018

Change (2)

Revenue

$47.8

$17.9

167.6%

GAAP Net Income (Loss) Attributable to Common Stockholders

($3.7)

$2.5

(250.2%)

GAAP Net Income (Loss) Per Share Attributable to Common Stockholders – Diluted

($0.07)

$0.05

(251.1%)

Non-GAAP Adjusted Net Income Attributable to Common Stockholders (4)

$4.6

$4.7

(2.5%)

Non-GAAP Adjusted Net Income Per Share Attributable to Common Stockholders – Diluted (4)

$0.09

$0.09

(1.9%)

Non-GAAP Adjusted Net Income Before Deemed Dividends(4)

$6.8

$3.7

82.9%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends - Diluted(4)

$0.13

$0.07

84.1%

Non-GAAP Adjusted Net Income Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense(4)

$6.7

$4.7

42.1%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense(4)

$0.13

$0.09

42.9%

EBITDA (3)(4)

$7.9

$4.4

81.9%

EBITDA Margin

16.6%

24.4%

(7.8 pts)

Adjusted EBITDA (4)

$11.5

$5.3

116.2%

Adjusted EBITDA Margin (4)

24.0%

29.8%

(5.8 pts)

Total Billings

$46.2

$21.3

117.1%

Fiscal Nine Months 2019 Corporate Financial Summary and Other Operational Metrics (1)

 

 

 

 

$ in Millions, except per share data

YTD 2019

YTD 2018

Change (2)

Revenue

$123.0

$52.0

136.5%

GAAP Net Income (Loss) Attributable to Common Stockholders

($19.5)

$6.2

(414.5%)

GAAP Net Income (Loss) Per Share Attributable to Common Stockholders – Diluted

($0.37)

$0.12

(417.0%)

Non-GAAP Adjusted Net Income Attributable to Common Stockholders (4)

$8.3

$12.9

(35.2%)

Non-GAAP Adjusted Net Income Per Share Attributable to Common Stockholders – Diluted (4)

$0.16

$0.24

(34.7%)

Non-GAAP Adjusted Net Income Before Deemed Dividends(4)

$18.4

$10.2

80.1%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends – Diluted (4)

$0.35

$0.19

81.5%

Non-GAAP Adjusted Net Income Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense(4)

$16.2

$12.9

26.2%

Non-GAAP Adjusted Net Income Per Share Before Deemed Dividends Excluding Deferred Tax (Benefit) Expense and Acquisition Expense - Diluted(4)

$0.31

$0.24

27.2%

EBITDA (3)(4)

$9.8

$11.3

(12.9%)

EBITDA Margin

8.0%

21.7%

(13.7 pts)

Adjusted EBITDA (4)

$28.0

$14.6

92.5%

Adjusted EBITDA Margin (4)

22.8%

28.0%

(5.2 pts)

Total Billings

$120.9

$53.1

104%

ARR (at September 30, 2019)

$200.3

$74.9

167.4%

(1)

 

Metrics include results from AppRiver, unless otherwise specified

(2)

 

Changes are based on actual numbers versus numbers shown in the columns, which may reflect rounding

(3)

 

Earnings before interest, taxes, depreciation and amortization

(4)

 

A reconciliation of GAAP to non-GAAP results is included in this press release and available on the Zix investor relations website at http://investor.zixcorp.com

Financial Outlook

For the fourth quarter of 2019, the company forecasts revenue to range between $49.0 million and $50.0 million. The company forecasts fully diluted GAAP earnings (loss) per share attributable to common stockholders to be in a range of ($0.03) and ($0.02) and fully diluted non-GAAP adjusted earnings per share to be $0.14 for the fourth quarter of 2019. The financial outlook includes a required GAAP adjustment on the deferred revenue acquired from AppRiver.

Zix is increasing the midpoint of its target ARR with an updated range of approximately $205 million to $209 million (previously $204 million to $209 million) at fiscal 2019 year end, representing a growth rate of approximately 14% to 16% (previously 13% to 16%) year-over-year.

For the full fiscal year of 2019, the company is increasing its previously disclosed revenue guidance to a range of between $172.0 million to $173.0 million (previously $170.0 million to $172.0 million), representing an increase of between 144% and 145% (previously 141% and 144%) compared to fiscal year 2018. The company also updates its fully diluted GAAP earnings (loss) per share (attributable to common stockholders) guidance to a range of between ($0.25) and ($0.23) [previously ($0.24) and ($0.21)] and its fully diluted non-GAAP adjusted earnings per share (attributable to common stockholders) guidance to be $0.44 to $0.45 (previously $0.44 to $0.46) for fiscal year 2019. The financial outlook includes approximately 10 months of AppRiver financial results consolidated into Zix and also includes a required GAAP adjustment on the deferred revenue acquired from AppRiver. Zix is forecasting Q4 and full year 2019 to result in a GAAP net loss and expects to be using an approximate basic share count of 53.3 million for Q4 and an average of 53.1 million for the full year.

Conference Call Information

Management will discuss these financial results and outlook on a conference call today (October 31, 2019) at 8:00 a.m. ET (5:00 a.m. PT).

A live webcast of the conference call will be available in the investor relations section of Zix’s website here. Alternatively, participants can access the conference call by dialing 1-855-853-6940 (U.S. toll-free) or 1-720-634-2906 (international) at least 15 minutes before the call and entering access code 5993097. If you have any difficulty connecting with the conference call, please contact Gateway Investor Relations at 1-949-574-3860.

An audio replay of the conference will be available for seven days, by dialing 1-855-859-2056 (U.S. toll-free) or 1-404-537-3406 (international) and entering the access code 5993097. An archive of the webcast will also be available on the Zix investor relations website.

About Zix Corporation

Zix Corporation (Zix) is a leader in email security. Trusted by the nation’s most influential institutions in healthcare, finance and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention, advanced threat protection, unified information archiving and bring your own device (BYOD) mobile security. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance needs. Zix is publicly traded on the Nasdaq Global Market under the symbol ZIXI. For more information, visit www.zixcorp.com.

Statements in this release that are not purely historical facts or that necessarily depend upon future events, including statements about forecasts of sales, revenue, annual recurring revenue, EBITDA, EBITDA margin, earnings or earnings per share, potential benefits of acquisitions and strategic relationships, or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to Zix on the date this release was issued. Zix undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including but not limited to risks or uncertainties related to the completion and integration of acquisitions, the effects of our debt and equity financing transactions, year-end adjustments to previously reported preliminary unaudited financial information, market acceptance of both existing and new Zix solutions, changing market dynamics resulting from technological change, innovation and continuing customer migration to the cloud, changes in the competitive ecosystem, and how privacy and data security laws may affect demand for Zix data protection solutions. Zix may not succeed in addressing these and other risks. Further information regarding factors that could affect Zix’s business and its financial and other results can be found in the risk factors section of Zix’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, each as filed with the Securities and Exchange Commission, as those risk factors may be supplemented in subsequent filings.

 
ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
         
         
    September 30,    
   

2019

 

December 31,

   

(unaudited)

 

2018

ASSETS        
Current assets:        
Cash and cash equivalents  

$

10,066,000

 

$

27,109,000

Receivables, net  

 

10,106,000

 

 

3,188,000

Prepaid and other current assets  

 

4,705,000

 

 

3,176,000

Total current assets  

 

24,877,000

 

 

33,473,000

Property and equipment, net  

 

9,403,000

 

 

3,924,000

Operating lease assets  

 

10,055,000

 

 

-

Other assets and deferred costs  

 

11,619,000

 

 

9,424,000

Intangible Assets, Net  

 

149,280,000

 

 

15,251,000

Goodwill  

 

174,357,000

 

 

13,783,000

Deferred tax assets  

 

30,935,000

 

 

28,785,000

Total assets  

$

410,526,000

 

$

104,640,000

         
         
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued expenses  

$

23,763,000

 

$

10,516,000

Deferred revenue  

 

44,564,000

 

 

30,622,000

Other current liabilities  

 

5,732,000

 

 

-

Total current liabilities  

 

74,059,000

 

 

41,138,000

Long-term liabilities:        
Deferred revenue  

 

1,090,000

 

 

1,539,000

Deferred rent  

 

-

 

 

1,016,000

Operating lease liabilities  

 

9,904,000

 

 

-

Debt  

 

176,407,000

 

 

-

Total long-term liabilities  

 

187,401,000

 

 

2,555,000

Total liabilities  

 

261,460,000

 

 

43,693,000

Total preferred stock  

 

104,436,000

 

 

-

Total stockholders’ equity  

 

44,630,000

 

 

60,947,000

Total liabilities, preferred stock and stockholders’ equity  

$

410,526,000

 

$

104,640,000

 
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                 
                 
                 
    Three Months Ended September 30,   Nine Months Ended September 30,
   

2019

 

2018

 

2019

 

2018

Revenue  

$

47,833,000

 

 

$

17,876,000

 

 

$

123,049,000

 

 

$

52,029,000

 

                 
Cost of revenue  

 

21,422,000

 

 

 

3,870,000

 

 

 

52,865,000

 

 

 

11,189,000

 

Gross profit  

 

26,411,000

 

 

 

14,006,000

 

 

 

70,184,000

 

 

 

40,840,000

 

Operating expenses:                
Research and development  

 

5,590,000

 

 

 

2,764,000

 

 

 

15,048,000

 

 

 

8,720,000

 

Selling, general and administrative  

 

19,592,000

 

 

 

8,025,000

 

 

 

61,729,000

 

 

 

24,139,000

 

Total operating expenses  

 

25,182,000

 

 

 

10,789,000

 

 

 

76,777,000

 

 

 

32,859,000

 

                 
Operating income  

 

1,229,000

 

 

 

3,217,000

 

 

 

(6,593,000

)

 

 

7,981,000

 
Operating margin  

 

3

%

 

 

18

%

 

 

-5

%

 

 

15

%

                 
Other income (expense)                
Investment and other income  

 

14,000

 

 

 

183,000

 

 

 

115,000

 

 

 

662,000

 

Interest expense and other expense  

 

(2,973,000

)

 

 

-

 

 

 

(7,398,000

)

 

 

-

 

Total other income (expense)  

 

(2,959,000

)

 

 

183,000

 

 

 

(7,283,000

)

 

 

662,000

 

                 
Income before income taxes  

 

(1,730,000

)

 

 

3,400,000

 

 

 

(13,876,000

)

 

 

8,643,000

 

Income tax benefit (expense)  

 

133,000

 

 

 

(945,000

)

 

 

2,308,000

 

 

 

(2,455,000

)

                 
Net (loss) income  

$

(1,597,000

)

 

$

2,455,000

 

 

$

(11,568,000

)

 

$

6,188,000

 

                 
Deemed and accrued dividends on preferred stock  

 

(2,090,000

)

 

 

-

 

 

 

(7,894,000

)

 

 

-

 

                 
Net (loss) income attributable to common shareholders  

$

(3,687,000

)

 

$

2,455,000

 

 

$

(19,462,000

)

 

$

6,188,000

 

                 
Basic (loss) income per share attributable to common shareholders:  

$

(0.07

)

 

$

0.05

 

 

$

(0.37

)

 

$

0.12

 

                 
Diluted (loss) income per share attributable to common shareholders:  

$

(0.07

)

 

$

0.05

 

 

$

(0.37

)

 

$

0.12

 

                 
Shares used in per share calculation - basic  

 

53,148,078

 

 

 

52,494,340

 

 

 

52,965,163

 

 

 

52,611,161

 

                 
Shares used in per share calculation - diluted  

 

53,148,078

 

 

 

53,474,849

 

 

 

52,965,163

 

 

 

53,389,622

 

                 
Other Comprehensive income, net of tax:                
Foreign currency translation adjustments  

 

35,000

 

 

 

-

 

 

 

(52,000

)

 

 

-

 

Comprehensive (loss) income  

$

(1,562,000

)

 

$

2,455,000

 

 

$

(11,620,000

)

 

$

6,188,000

 

 

 

 
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         
         
   

Nine Months Ended September 30,

   

2019

 

2018

Operating activities:        
Net (loss) income  

$

(11,568,000)

 

$

6,188,000

Non-cash items in net income  

 

19,638,000

 

 

7,668,000

Prepaid and other current assets  

 

(119,000)

 

 

(2,094,000)

Net cash provided by operating activities  

 

7,951,000

 

 

11,762,000

         
Investing activities:        
Purchases of property and equipment and capitalized software  

 

(7,860,000)

 

 

(2,340,000)

Acquisition of business, net of cash acquired  

 

(284,590,000)

 

 

(11,773,000)

Net cash used in investing activities  

 

(292,450,000)

 

 

(14,113,000)

         
Financing activities:        
Proceeds from issuance of series A preferred stock, net of offering costs  

 

96,588,000

 

 

-

Proceeds from exercise of stock options  

 

251,000

 

 

161,000

Proceeds from long term debt  

 

185,000,000

 

 

-

Debt issuance costs  

 

(6,443,000)

 

 

-

Repayment of long term debt  

 

(900,000)

 

 

-

Repayment of finance lease obligations  

 

(1,277,000)

 

 

-

Payment of acquisition-related contingent consideration  

 

(3,843,000)

 

 

(605,000)

Purchase of treasury stock  

 

(1,881,000)

 

 

(6,042,000)

Net cash provided used in financing activities  

 

267,495,000

 

 

(6,681,000)

         
Effect of exchange rate changes on cash  

 

(39,000)

 

 

-

         
(Decrease) Increase in cash and cash equivalents  

 

(17,043,000)

 

 

(9,032,000)

Cash and cash equivalents, beginning of period  

 

27,109,000

 

 

33,009,000

Cash and cash equivalents, end of period  

$

10,066,000

 

$

23,977,000

 

 

 
ZIX CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Unaudited)
                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
   

2019

 

2018

 

2019

 

2018

Revenue:                
GAAP revenue  

$

47,833,000

 

 

$

17,876,000

 

 

$

123,049,000

 

 

$

52,029,000

 

                 
Cost of revenue                
GAAP cost of revenue  

$

21,422,000

 

 

$

3,870,000

 

 

$

52,865,000

 

 

$

11,189,000

 

Stock-based compensation charges (1) (A)

 

(154,000

)

 

 

(91,000

)

 

 

(422,000

)

 

 

(239,000

)

Strategic consulting and litigation costs (2) (B)

 

(21,000

)

 

 

-

 

 

 

(293,000

)

 

 

(1,000

)

Intangible Amortization (3) (C)

 

(1,943,000

)

 

 

(139,000

)

 

 

(4,472,000

)

 

 

(280,000

)

Corporate separation payment (4) (D)

 

-

 

 

 

-

 

 

 

(52,000

)

 

 

(28,000

)

Non-GAAP adjusted cost of revenue  

$

19,304,000

 

 

$

3,640,000

 

 

$

47,626,000

 

 

$

10,641,000

 

                 
Gross profit:                
GAAP gross profit  

$

26,411,000

 

 

$

14,006,000

 

 

$

70,184,000

 

 

$

40,840,000

 

Stock-based compensation charges (1) (A)

 

154,000

 

 

 

91,000

 

 

 

422,000

 

 

 

239,000

 

Strategic consulting and litigation costs (2) (B)

 

21,000

 

 

 

-

 

 

 

293,000

 

 

 

1,000

 

Intangible Amortization (3) (C)

 

1,943,000

 

 

 

139,000

 

 

 

4,472,000

 

 

 

280,000

 

Corporate separation payment (4) (D)

 

-

 

 

 

-

 

 

 

52,000

 

 

 

28,000

 

Non-GAAP adjusted gross profit  

$

28,529,000

 

 

$

14,236,000

 

 

$

75,423,000

 

 

$

41,388,000

 

                 
Research and development expense                
GAAP research and development expense  

$

5,590,000

 

 

$

2,764,000

 

 

$

15,048,000

 

 

$

8,720,000

 

Stock-based compensation charges (1) (A)

 

(295,000

)

 

 

(130,000

)

 

 

(765,000

)

 

 

(333,000

)

Strategic consulting and litigation costs (2) (B)

 

(459,000

)

 

 

-

 

 

 

(795,000

)

 

 

(58,000

)

Intangible Amortization (3) (C)

 

(76,000

)

 

 

-

 

 

 

(227,000

)

 

 

(76,000

)

Non-GAAP adjusted research and development expense  

$

4,760,000

 

 

$

2,634,000

 

 

$

13,025,000

 

 

$

8,253,000

 

                 
Selling and marketing expense                
GAAP selling and marketing expense  

$

13,312,000

 

 

$

5,223,000

 

 

$

37,323,000

 

 

$

15,054,000

 

Stock-based compensation charges (1) (A)

 

(473,000

)

 

 

(239,000

)

 

 

(1,590,000

)

 

 

(652,000

)

Strategic consulting and litigation costs (2) (B)

 

(511,000

)

 

 

-

 

 

 

(1,253,000

)

 

 

(7,000

)

Intangible Amortization (3) (C)

 

(2,794,000

)

 

 

(157,000

)

 

 

(7,045,000

)

 

 

(380,000

)

Non-GAAP adjusted selling and marketing expense  

$

9,534,000

 

 

$

4,827,000

 

 

$

26,796,000

 

 

$

14,015,000

 

                 
General and administrative expense                
GAAP general and administrative expense  

$

6,280,000

 

 

$

2,802,000

 

 

$

24,406,000

 

 

$

9,085,000

 

Stock-based compensation charges (1) (A)

 

(711,000

)

 

 

(441,000

)

 

 

(2,049,000

)

 

 

(1,150,000

)

Strategic consulting and litigation costs (2) (B)

 

(958,000

)

 

 

(64,000

)

 

 

(9,427,000

)

 

 

(857,000

)

Corporate separation payment (4) (D)

 

-

 

 

 

-

 

 

 

(689,000

)

 

 

40,000

 

Non-GAAP adjusted general and administrative expense  

$

4,611,000

 

 

$

2,297,000

 

 

$

12,241,000

 

 

$

7,118,000

 

                 
Operating income:                
GAAP operating income  

$

1,229,000

 

 

$

3,217,000

 

 

$

(6,593,000

)

 

$

7,981,000

 

Stock-based compensation charges (1) (A)

 

1,633,000

 

 

 

901,000

 

 

 

4,826,000

 

 

 

2,374,000

 

Strategic consulting and litigation costs (2) (B)

 

1,949,000

 

 

 

64,000

 

 

 

11,768,000

 

 

 

923,000

 

Intangible Amortization (3) (C)

 

4,813,000

 

 

 

296,000

 

 

 

11,744,000

 

 

 

736,000

 

Corporate separation payment (4) (D)

 

-

 

 

 

-

 

 

 

1,616,000

 

 

 

(12,000

)

Non-GAAP adjusted operating income  

$

9,624,000

 

 

$

4,478,000

 

 

$

23,361,000

 

 

$

12,002,000

 

                 
Adjusted Operating Margin  

 

20.1

%

 

 

25.1

%

 

 

19.0

%

 

 

23.1

%

                 
                 
Net income:                
GAAP net (loss) income  

$

(1,597,000

)

 

$

2,455,000

 

 

$

(11,568,000

)

 

$

6,188,000

 

Stock-based compensation charges (1) (A)

 

1,633,000

 

 

 

901,000

 

 

 

4,826,000

 

 

 

2,374,000

 

Strategic consulting and litigation costs (2) (B)

 

1,949,000

 

 

 

64,000

 

 

 

11,768,000

 

 

 

923,000

 

Intangible Amortization (3) (C)

 

4,813,000

 

 

 

296,000

 

 

 

11,744,000

 

 

 

736,000

 

Corporate separation payment (4) (D)

 

-

 

 

 

-

 

 

 

1,616,000

 

 

 

(12,000

)

Non-GAAP adjusted net income  

$

6,798,000

 

 

$

3,716,000

 

 

$

18,386,000

 

 

$

10,209,000

 

                 
                 
Deferred tax (benefit) expense  

 

(142,000

)

 

 

969,000

 

 

 

(2,151,000

)

 

 

2,660,000

 

Non-GAAP adjusted net income excluding deferred tax (benefit) expense  

$

6,656,000

 

 

$

4,685,000

 

 

$

16,235,000

 

 

$

12,869,000

 

                 
                 
Deemed and accrued dividends on preferred stock  

 

(2,090,000

)

 

 

-

 

 

 

(7,894,000

)

 

 

-

 

Adjusted Net income attributable to common stockholders  

$

4,566,000

 

 

$

4,685,000

 

 

$

8,341,000

 

 

$

12,869,000

 

                 
                 
Diluted net income per common share:                
GAAP net income per share before deemed dividends  

$

(0.03

)

 

$

0.05

 

 

$

(0.22

)

 

$

0.12

 

Adjustments per share (A-D)

$

0.16

 

 

$

0.02

 

 

$

0.57

 

 

$

0.08

 

Non-GAAP adjusted net income per share before deemed dividends  

$

0.13

 

 

$

0.07

 

 

$

0.35

 

 

$

0.19

 

                 
                 
Deferred tax (benefit) expense impact to Non-GAAP adjusted net income before deemed dividends per share (E)

$

(0.00

)

 

$

0.02

 

 

$

(0.04

)

 

$

0.05

 

Non-GAAP adjusted net income before deemed dividends per share excluding deferred tax (benefit) expense  

$

0.13

 

 

$

0.09

 

 

$

0.31

 

 

$

0.24

 

                 
                 
Deemed dividends per share impact to Non-GAAP adjusted net income  

$

(0.04

)

 

$

-

 

 

$

(0.15

)

 

$

-

 

Adjusted Net income per share attributable to common stockholders  

$

0.09

 

 

$

0.09

 

 

$

0.16

 

 

$

0.24

 

                 
                 
Shares used to compute Non-GAAP adjusted net income per share - diluted  

 

53,148,078

 

 

 

53,474,849

 

 

 

52,965,163

 

 

 

53,389,622

 

                 
Reconciliation of Net income to EBITDA and Adjusted EBITDA: (F)              
Net income  

$

(1,597,000

)

 

$

2,455,000

 

 

$

(11,568,000

)

 

$

6,188,000

 

Income tax provision  

 

(133,000

)

 

 

945,000

 

 

 

(2,308,000

)

 

 

2,455,000

 

Interest expense  

 

2,973,000

 

 

 

-

 

 

 

7,398,000

 

 

 

-

 

Depreciation  

 

1,402,000

 

 

 

581,000

 

 

 

3,637,000

 

 

 

1,757,000

 

Amortization  

 

5,274,000

 

 

 

373,000

 

 

 

12,665,000

 

 

 

877,000

 

EBITDA  

 

7,919,000

 

 

 

4,354,000

 

 

 

9,824,000

 

 

 

11,277,000

 

                 
Adjustments:                
Stock-based compensation charges (1) (A)

 

1,633,000

 

 

 

901,000

 

 

 

4,826,000

 

 

 

2,374,000

 

Strategic consulting and litigation costs (2) (B)

 

1,949,000

 

 

 

64,000

 

 

 

11,768,000

 

 

 

923,000

 

Corporate separation payment (4) (D)

 

-

 

 

 

-

 

 

 

1,616,000

 

 

 

(12,000

)

Adjusted EBITDA  

$

11,501,000

 

 

$

5,319,000

 

 

$

28,034,000

 

 

$

14,562,000

 

                 
Adjusted EBITDA margin  

 

24.0

%

 

 

29.8

%

 

 

22.8

%

 

 

28.0

%

                 
(1) Stock-based compensation charges are included as follows:                
Cost of revenues  

$

154,000

 

 

$

91,000

 

 

$

422,000

 

 

$

239,000

 

Research and development  

 

295,000

 

 

 

130,000

 

 

 

765,000

 

 

 

333,000

 

Selling and marketing  

 

473,000

 

 

 

239,000

 

 

 

1,590,000

 

 

 

652,000

 

General and administrative  

 

711,000

 

 

 

441,000

 

 

 

2,049,000

 

 

 

1,150,000

 

   

$

1,633,000

 

 

$

901,000

 

 

$

4,826,000

 

 

$

2,374,000

 

(2) Strategic consulting, acquisition, integration and litigation costs are included as follows:                
Cost of revenues  

 

21,000

 

 

 

-

 

 

 

293,000

 

 

 

1,000

 

Research and development  

 

459,000

 

 

 

-

 

 

 

795,000

 

 

 

58,000

 

Selling and marketing  

 

511,000

 

 

 

-

 

 

 

1,253,000

 

 

 

7,000

 

General and administrative  

 

958,000

 

 

 

64,000

 

 

 

9,427,000

 

 

 

857,000

 

   

$

1,949,000

 

 

$

64,000

 

 

$

11,768,000

 

 

$

923,000

 

(3) Intangible Amortization is included as follows:                
Cost of revenues  

 

1,943,000

 

 

 

139,000

 

 

 

4,472,000

 

 

 

280,000

 

Research and development  

 

76,000

 

 

 

-

 

 

 

227,000

 

 

 

76,000

 

Selling and marketing  

 

2,794,000

 

 

 

157,000

 

 

 

7,045,000

 

 

 

380,000

 

   

$

4,813,000

 

 

$

296,000

 

 

$

11,744,000

 

 

$

736,000

 

(4) Corporate separation payment is included as follows:                
Cost of revenues  

 

-

 

 

 

-

 

 

 

52,000

 

 

 

28,000

 

Research and development  

 

-

 

 

 

-

 

 

 

236,000

 

 

 

-

 

Selling and marketing  

 

-

 

 

 

-

 

 

 

639,000

 

 

 

-

 

General and administrative  

 

-

 

 

 

-

 

 

 

689,000

 

 

 

(40,000

)

   

$

-

 

 

$

-

 

 

$

1,616,000

 

 

$

(12,000

)

                 
(5) Net Income tax components:                
Current tax (benefit)/expense  

 

9,000

 

 

 

(24,000

)

 

 

(157,000

)

 

 

(205,000

)

Deferred tax (benefit)/expense  

 

(142,000

)

 

 

969,000

 

 

 

(2,151,000

)

 

 

2,660,000

 

   

$

(133,000

)

 

$

945,000

 

 

$

(2,308,000

)

 

$

2,455,000

 

                 

This presentation includes Non-GAAP measures. Our Non-GAAP measures, including "Non-GAAP adjusted net income and net income per share excluding deferred tax expense" are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see Notes to Reconciliation of GAAP to Non-GAAP Financial Measures on the next page.

ZIX CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES OUTLOOK
                   
                   
    LOW   HIGH   LOW   HIGH  
    Three Months Ended   Three Months Ended   Twelve Months Ended   Twelve Months Ended  
    September 30,   September 30,   December 31,   December 31,  
   

2019

 

2019

 

2019

 

2018

 
Revenue:                  
GAAP revenue  

$

49,000,000

 

 

$

50,000,000

 

 

$

172,000,000

 

 

$

173,000,000

 

 
                   
                   
                   
Diluted net income per common share:                  
GAAP net income  

$

(0.02

)

 

$

(0.03

)

 

$

(0.25

)

 

$

(0.23

)

 
Stock-based compensation charges  

$

0.04

 

 

$

0.04

 

 

$

0.14

 

 

$

0.13

 

 
Strategic consulting, acquisition and litigation costs  

$

0.02

 

 

$

0.03

 

 

$

0.25

 

 

$

0.24

 

 
Intangible Amortization  

$

0.10

 

 

$

0.10

 

 

$

0.32

 

 

$

0.32

 

 
Corporate separation payment  

$

0.01

 

 

$

0.00

 

 

$

0.02

 

 

$

0.02

 

 
Non-GAAP adjusted net income per share  

$

0.14

 

 

$

0.15

 

 

$

0.49

 

 

$

0.49

 

 
                   
                   
Deferred tax (benefit) expense  

$

(0.00

)

 

$

(0.01

)

 

$

(0.05

)

 

$

(0.05

)

 
Non-GAAP adjusted net income per share excluding deferred tax (benefit) expense  

$

0.14

 

 

$

0.14

 

 

$

0.44

 

 

$

0.45

 

 
                   
                   
Deemed dividends per share impact to Non-GAAP adjusted net income  

$

(0.04

)

 

$

(0.04

)

 

$

(0.19

)

 

$

(0.19

)

 
Adjusted Net loss per share attributable to common stockholders  

$

0.10

 

 

$

0.10

 

 

$

0.25

 

 

$

0.26

 

 
Shares used to compute Non-GAAP adjusted net income per share - diluted  

 

53,279,000

 

 

 

53,279,000

 

 

 

53,100,000

 

 

 

53,100,000

 

 
                                   

This presentation includes Non-GAAP measures. Our Non-GAAP measures, including "Non-GAAP adjusted net income per share excluding deferred tax expense" are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see Notes to Reconciliation of GAAP to Non-GAAP Financial Measures on the next page.

ZIX CORPORATION
NOTES TO RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

USE OF NON-GAAP FINANCIAL INFORMATION

The Company occasionally utilizes financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) in order to provide investors with an alternative method for assessing our operating results in a manner that enables investors to more thoroughly evaluate our current performance as compared to past performance. We also believe these Non-GAAP measures provide investors with a more informed baseline for modeling the Company’s future financial performance. Management uses these Non-GAAP financial measures to make operational and investment decisions, to evaluate the Company's performance, to forecast and to determine compensation. Further, management utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. We believe that our investors should have access to, and that we are obligated to provide, the same set of tools that we use in analyzing our results. These Non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We have provided definitions below for certain Non-GAAP financial measures, together with an explanation of why management uses these measures and why management believes that these Non-GAAP financial measures are useful to investors. In addition, in our earnings release we have provided tables to reconcile the Non-GAAP financial measures utilized to GAAP financial measures.

ADJUSTED NON-GAAP MEASURES

Our Non-GAAP measures adjust GAAP Cost of revenue, Gross profit, Research and development expense, Selling and marketing expense, General and administrative expense, Operating income, Net income, Net Income excluding deferred tax (benefit) expense, Net income per share - diluted, Net income per share - diluted excluding deferred tax (benefit) expense, and EBITDA for non-cash stock-based compensation expense, and strategic consulting and litigation costs to derive Non-GAAP adjusted Cost of revenue, adjusted Gross profit, adjusted Research and development expense, adjusted Selling and marketing expense, adjusted General and administrative expense, adjusted Operating income, adjusted Net income, adjusted Net income per share - diluted and adjusted EBITDA. We provide a reconciliation of these adjusted Non-GAAP measures to GAAP Gross profit, Operating income, Net income, Net income per share - diluted and EBITDA.

Our forward-looking adjusted Non-GAAP earnings per share information consistently excludes non-cash stock-based compensation expense. Additionally, the adjusted Non-GAAP earnings per share will consistently exclude litigation expenses and non-recurring items that impact our ongoing business. See items (A) through (E) below for further information on the current quarter's reconciling items.

Items (A) through (F) on the "Reconciliation of GAAP to Non-GAAP Financial Measures" table are listed to the right of certain categories under "Gross profit," "Operating income," "Net income," "Net income excluding deferred tax (benefit) expense," "Net income per share - diluted," "Net income per share excluding deferred tax (benefit) expense- diluted," and "EBITDA" and correspond to the categories explained in further detail below under (A) through (F).

(A) Non-cash stock-based compensation charges relating to stock option grants, restricted stock, and restricted stock units awarded to and accounted for in accordance with Share-Based Payment accounting guidance. See (1) on previous page for breakdown of stock-based compensation. Because of varying valuation methodologies, subjective assumptions and varying award types, the Company believes that the exclusion of stock-based compensation charges provides for more accurate comparisons to our peer companies and for a more accurate comparison of our financial results to previous periods. Additionally, the Company believes it is useful to investors to understand the specific impact of non-cash stock-based compensation charges on our operating results.

(B) Strategic consulting, acquisition integration and litigation costs. See item (2) on previous page. The Company’s management excludes certain board-directed consulting costs and litigation expenses when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(C) Intangible amortization costs. See item (3) on previous page. The Company’s management excludes amortization expenses associated with the acquisition of intangible assets when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(D) Corporate separation payment relating to employment termination benefits agreement. See item (4) on previous page. The Company’s management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(E) Deferred tax expense represents the non-cash tax expense included in the GAAP tax provision, including the current period utilization of deferred tax assets created in previous periods. The remaining provision for income taxes represents expected cash taxes to be paid.

(F) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based compensation charges and litigation expenses.

Source: Zix Corporation

Zix Company Contact
Geoff Bibby
1-214-370-2241
gbibby@zixcorp.com

Zix Investor Contact
Matt Glover and Tom Colton
Gateway Investor Relations
1-949- 574-3860
ZIXI@gatewayir.com