Zix Corporation ( ZIXI)

Q2 2011 Earnings Call

July 26, 2011 5:00 PM ET

Executives

Geoff Bibby – VP, Corporate Marketing

Rick Spurr – Chairman, President, CEO and COO

Mike English – Controller

Analysts

Mike Malouf – Craig-Hallum Capital

Jonathan Ruykhaver – Morgan Keegan

Alex Kuen [ph] – Morgan Keegan

Ian Kim [ph] – Lothan [ph] Capital Markets

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to second quarter 2011 Zix Corp earning conference call. My name is Carmen and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions). I would now like to turn the call over to your host for today, Mr. Geoff Bibby. Please proceed.

Geoff Bibby

Thank you Carmen. Good afternoon. My name is Geoff Bibby. I’m Vice President of Corporate Marketing for Zix Corporation. Thank you for joining our 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. Then, our Controller, Mike English, will give you 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 mailbox 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 about contracts for 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 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 adjusted items to the most directly comparable GAAP financial measure.

Now, I am pleased to turn the call over to Rick Spurr. Rick.

Rick Spurr

Thank you Jeff. Good afternoon everyone and thank you for joining us today to discuss our 2011 second quarter financial results. I am very pleased to report another strong quarter for the company.

We generated revenue of $9.4 million in the second quarter, up 15% year over year and above our guidance of $9 million to $9.2 million. The revenue growth that we delivered reflects the solid and predictable business that we have built based on our successful subscription model and our leadership in email encryption.

As we anticipated, new first year orders rebounded from a soft first quarter and reached $2 million in Q2, a 37% improvement sequentially and down only 3% from $2.1 million in the second quarter of 2010. As we stated on the last call, we believe the shortfall we experienced in new first year orders during the first quarter was related to several one-time occurrences, which excluding the impact of the tragedy in Japan, are now behind us. In fact, we are very confident that new first year orders in the back half of 2011 will be stronger than first half.

Total bookings in the second quarter were $12.5 million compared to $9 million in Q1. Our bookings backlog at the end of June was a company record $52.6 million, up 15% over Q2 2010.

We continued to deliver strong bottom line results, achieving our sixth consecutive quarter of GAAP profitability. GAAP net income for the second quarter was $2.6 million, which is a 74% increase over the $1.5 million we reported in the second quarter of last year.

Non-GAAP net income for the second quarter increased 25% year over year to a record $2.7 million, or $0.04 per share. On a cash basis, during the quarter, we generated approximately $2.5 million in cash flow from operations, an increase of $1.5 million year over year.

We ended the quarter with a commercial paper and cash balance of $17.1 million, a decrease of $400,000 compared to the ending cash balance last year at this time. This is very healthy, in that during the second quarter, we completed our repurchase program with the purchase of $10 million worth of our stock. Mike English will provide more details on the buy back in his prepared remarks.

Let’s turn now to some comments about the market and our leadership position. We are seeing continued growth in the Zix directory, which now has over 27 million members that include some of the most respected institutions in the country. This cloud based, shared directory architecture, the only one of its kind, allows for unequaled ease of use, most notably through our transparent email encryption capability, and it continues to grow by approximately 100,000 new users per week.

Two independent industry analysts validated our position as the number one provider of email encryption in the marketplace. These analysts’ reports affirmed our number one ranking atop the email encryption vendor landscape.

One report from Infinity Research detailed the global email encryption market, and named Zix Corp as the number one provider ahead of Cisco, Semantic and MacAfee, to name a few.

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