Zix Corporation (ZIXI)

Q2 2010 Earnings Call

July 27, 2010 5:00 pm ET

Executives

Geoff Bibby - VP of Corporate Marketing

Rick Spurr - Chairman, CEO, and COO

Susan Conner - CFO

Analysts

Mike Malouf - Craig-Hallum Capital

Operator

Welcome to Q2 2010 Zix Corporation Earnings Call. My name is Jonathan, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Geoff Bibby, Vice President of Corporate Marketing. Please proceed sir.

Geoff Bibby

Thank you, Jonathan and thank you for joining our 2010 Q2 conference call. You can find our earnings press release on our investor website at investor.zixcorp.com. The earnings release contains instructions for accessing a recording of this call.

Our Chairman and Chief Executive Officer, Rick Spurr will provide an overview of the company's performance in the quarter and then our Chief Financial Officer, Susan Conner will give you details of our financial results. Later in the call Rick and Susan will answer questions from analyst and institutional investors. Listeners can also submit questions during the call to our investor relation's mail box at invest@zixcorp.com.

Rick and Susan will provide forward-looking statement on matters such as forecast of revenues, earnings, operating margins, and cash flow, projections of our 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 factor section of the company's most recent Form 10-K filing with the SEC gives examples of those risks.

Rick and Susan will refer to various non-GAAP financial measures such as adjusted gross profit, adjusted operating expenses, adjusted earnings, adjusted net income, adjusted operating margin and adjusted EBITDA. You can find in our earnings press release and on our investor website detailed explanations of our non-GAAP financial measures along with reconciliations of our adjusting items to the most directly comparable GAAP financial measures.

Now, I'm pleased to the call over to Rick.

Rick Spurr

Thank you, Jeff. Good afternoon everyone and thanks for joining Zix Corporation's earnings call. In the second quarter of 2010, ZixCorp continued to build on its strong start to the year with yet another solid quarter in its Email Encryption business, which obviously led to a strong performance for the company overall.]

In Q2, we set records in total revenue, adjusted EBITDA, adjusted earnings per share and bookings backlog. We had continued success in our Email Encryption orders topping the $2 million mark in new first year orders for the third consecutive quarter, culminating in the best nine months of email orders in the company's history.

That sales performance combined with our sustained, high customer retention also generated a record backlog for the company. We are excited about the impressive top-line growth through the first half of this year with revenues running 24% ahead of the first half of 2009.

Concern among potential customers about privacy law compliance remains a strong driver for demand. HIPAA compliance is an important factor within healthcare. Banks and credit unions continue to get pressure from their regulators to protect electronic transmissions that contain sensitive information.

State laws such as those in Massachusetts, Nevada and most recently Washington State, continue to set new data protection standards and call for action from a variety of sectors, but Email Encryption isn’t just being driven by privacy and law compliance, businesses are concerned about protecting their reputations and their sensitive data. Publicity about data security breaches has certainly put protecting sensitive information on the front door for many companies.

These data breaches including some involving unsecured email have highlighted the vulnerability of sensitive information, including when it's in transit. In general, the heightened awareness of these threats and fear of unwanted publicity are causing companies to take proactive steps to secure this information.

Healthcare was the largest contributor to our new sales in the second quarter, with 55% of the $2.1 million in new first year orders coming from this sector. Many business associates of health care providers are just beginning to realize that HIPAA data's privacy and security privacy rules apply directly to them. Businesses such as third party administrators, medical transcription and billing companies, lawyers and accountants with access to patient information are being required to demonstrate compliance with HIPAA

We saw significant surge in demand from this group in the second quarter the bar keeps getting set higher to protect privacy in healthcare. Earlier this month, the United States Department of Health and Human Services, proposed yet new HIPAA data security and privacy rules that would among other things further expand HIPAA by broadening the definition of a business associate and requiring all business associates to impose new contractual conditions on their subcontractors.

These developments continue to drive a need for many more companies involved in healthcare to adopt appropriate data safeguards, such as email encryption. Our strong footprint in healthcare combined with ease of use of our transparent Email Encryption solution when communicating between entities behind our gateways makes ZixCorp a particularly attractive solution for these business associates.

So healthcare is our leading industry sector, but our solutions continue to be a demand in several industries. We've build the brand known for reliability, scalability, ease of use and customer service. Companies wants an easy to use email encryption solution that helps to mitigate their data security and privacy risks without adding significant burden for their users.

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