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Zix Corporation: World's Largest Email Encryption Services Provider

February 20, 2013 | About:
Headquartered in Dallas, Texas, and founded in 1998, Zix Corporation (ZIXI) offers industry-leading email encryption and a unique email data leak protection solution to meet companies' data protection and compliance needs. ZIXI is trusted by the nation's most influential institutions in healthcare, finance and government for easy to use secure email solutions.

Business Quality and Capital AllocationZIXI boosts of a recurring, predictable revenue model with high renewal rates. ZIXI's email encryption services are purchased by senders based on a subscription model, either through direct and value-added reseller channels or through OEM and managed security service providers. Seventy-five percent of new customer contracts acquired through direct and value-added reseller channels are three year contracts with an average of approximately two and half years; while most sales through OEM and managed security service partners are one-year contracts with 98% to 99% of all customers completing the full length of the contract. Strong customer renewal rates result in resulting in retention of about 95% of revenue from year to year. Subscription fees are recognized ratably as services are performed and ZIXI has a backlog of contractually committed orders not yet reflected in revenue of $57.7 million as at Dec. 31, 2012.

ZIXI's competitive advantage lies in its ease of use, a result of its three unique components: ZixDirectory, ZixMobility and Transparent Email Encryption. ZixDirectory is the world’s largest email encryption information utility with more than 33 million members and growing at approximately 100,000 members per week. Its market leadership with more than 1,500 hospitals and over 1,800 financial institutions (20% of all banks and hospitals in the U.S.) using ZIXI's email encryption service, becomes a critical factor in the buying decision for companies, particularly those in the healthcare and finance sectors. ZixMobility functions across all mobile platforms and was the first to allow users on any encryption email platform to seamlessly receive encrypted email on their mobile devices. ZIXI also offers the only fully transparent email encryption services - email is encrypted without any extra steps between ZixGateway customers without any extra steps or passwords.

Valuation and Financial AnalysisZIXI currently trades at a trailing 12 months P/E of 19 and a trailing 12 months EV/EBITDA of 18. ZIXI achieved a trailing 12 months ROE of 44% and a five-year average ROE of 82%.

ZIXI Historical Enterprise Value Multiples (1-Year)1361359522258.png

ZIXI Historical P/E Multiple (1-Year)1361359589673.png

For the past three fiscal years from 2010 to 2012, ZIXI has been profitable and free cash flow positive. Gross margin has also stayed consistently above 80% during this period, a huge improvement from margins of 55% and 65% in 2007 and 2008 respectively.

ZIXI Earnings-Cash Flow Comparison 1361359676330.png

Financial and Business Risks

Since 2006, ZIXI has been debt-free.

ZIXI Cash-Debt-Market Capitalization Comparison1361359736224.png

ZIXI competes with products and services offered by larger companies such as Axway, Cisco Systems Inc., Echoworx, McAfee Inc., Symantec, Proofpoint, Trend Micro and Voltage Security. Some of its competitors offer email encryption services together with other products and services through product bundling, rendering ZIXI's offering less compelling in comparison.

ZIXI collects, processes, stores and transmits large amounts of personally identifiable information about individuals, which are subject to client confidentiality agreements and other regulations. Any failure by ZIX to comply with data privacy requirements and prevent the unauthorized disclosure of confidential information could subject it to potential penalties and damages.

DisclosureThe author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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