Zix Corporation (ZIXI)

Q4 2010 Earnings Call

February 22, 2011 5:00 pm ET

Executives

Geoff Bibby – VP, Corporate Marketing

Rick Spurr – Chairman, CEO and COO

Mike English – Chief Accounting Officer and Controller

Analysts

Mike Malouf - Craig-Hallum Capital

Fred Ziegel - Blue Water Capital Markets

Jackson Spears – Gar Wood Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and year end 2010 Zix Corporation Earnings Conference Call. My name is Crystal, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to host for today, Mr. Geoff Bibby. Please proceed.

Geoff Bibby

Thank you, Crystal. As Crystal just mentioned, my name is Geoff Bibby, I am Vice President of Corporate Marketing for Zix Corporation. Thank you for joining our fourth quarter and full-year 2010 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 Controller, Mike English, will give you our 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' mail box at invest@zixcorp.com.

Rick and Mike will provide forward-looking statements on matters such as forecasts 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 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 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'm very pleased to turn the call over to Rick.

Rick Spurr

Good afternoon everybody, and thank you for joining Zix Corporation's fourth quarter and 2010 full-year conference call. I am very pleased to announce another quarter end here of consistent and strong growth from the company on virtually every level. As we have stated over the past few quarters, we continue to build a solid and predictable business based on our successful subscription business model.

Additionally, our results clearly indicate we are transitioning to mainstream demand for email encryption. As data security and integrity issues continue to make headline news, we're also benefiting from recognition of a powerful cloud-based offering along with the growing need for regulatory compliance.

As we stated in our earnings press release issued earlier today, we successfully wound down the E-Prescribing business on December 31 2010 as planned. And as such, our financials for the fourth quarter and the year have been restated to reflect our continuing email encryption operations while treating E-Prescribing as discontinued operations.

The $33.1 million of email encryption revenue we reported for 2010 represents a 25% increase year over year. Included in that number was $8.8 million in encryption email revenue for Q4, which represents a 25% increase over the year-ago quarter and the strongest email encryption quarter in the company's history.

New first year orders for email encryption during the fourth quarter were $2.1 million, giving us a total of $8.7 million in new first-year orders for the year, which represents a 34% increase over 2009. So, we experienced very solid sales performance for email encryption in 2010. We also were able to continue to build our email encryption bookings backlog to the highest levels in the company's history, now at $50 million, a 16% increase over Q4 of 2009.

As you all know, we have reported a GAAP profit in each of the preceding three quarters of this year, and we are pleased to report another GAAP profit for the fourth quarter and, for the first time in company history, a GAAP profit for the year as a whole.

Our non-GAAP net income for the quarter, which excludes the deferred tax asset valuation discussed in the press release, was $2.5 million, or $0.04 a share, and increase of $0.02 per share year over year. We finished the year with non-GAAP net income of $8.4 million, or $0.13 per share, an increase of $0.12 year over year. We generated $7.2 million in cash flow during the year, an increase of $6.6 million over last year, and giving us a cash balance of $25 million at the end of the year.

Another significant accomplishment is that our shared cloud-based Zix directory has now eclipsed 25 million members, including some of the most respected institutions in the country. Our success was driven by strong performances across our three core verticals:healthcare, finance, and government, and, for the first time every, outside of these core verticals in a category we call other.

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