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ANASTASIA SUTJAHJO JEEWHAN SHIN TING-YING (ERICA) WU

November 1, 2012. ANASTASIA SUTJAHJO JEEWHAN SHIN TING-YING (ERICA) WU. AGENDA. Introduction and Current Holding Macroeconomic Review Stock Market Overview Industry Review Company Assessment Financial Analysis Financial Projection Methodology and Application Recommendation.

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ANASTASIA SUTJAHJO JEEWHAN SHIN TING-YING (ERICA) WU

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  1. November 1, 2012 ANASTASIA SUTJAHJO JEEWHAN SHIN TING-YING (ERICA) WU

  2. AGENDA • Introduction and Current Holding • Macroeconomic Review • Stock Market Overview • Industry Review • Company Assessment • Financial Analysis • Financial Projection • Methodology and Application • Recommendation

  3. CURRENT HOLDING • April 17, 2012 • Acquired 2,000 shares @ $2.89/share • Cost basis = $5,780 • October 31, 2012 • Current holdings 2,000 shares @ 2.90/share • Market value = $5,800 • Annualized HPR = 0.642% • 1.67 % of total portfolio

  4. MACROECONOMIC REVIEW • Unemployment Rate • U.S. unemployment rate fell to 7.8 percent in September, which was the lowest since January 2009 • GDP Growth • Slow recovery from recession Source : http://finance.yahoo.com/news/us-jobless-rate-falls-7-123110416.html http://www.bea.gov/national/index.htm

  5. Stock Market Source : Capital IQ

  6. INDUSTRY OVERVIEW • The global application software market • Total industry revenue of $76 billion in 2010 • Representing a 4.7% growth from 2006 to 2010 • The performance of the market is forecasted to accelerate • Anticipated to grow 7.8% during 2010 to 2015 • The value of the market is expected to be $110.9 billion by the end of 2015 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)

  7. INDUSTRY OVERVIEW Global application software market value: $ billion, 2006–10 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)

  8. Global application software market value forecast: $ billion, 2010–15 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001)

  9. Forces driving competition in the global application software market, 2010 Source: Market Line – Global Application Software Industry Report (http://advantage.marketline.com/Product?pid=MLIP0318-0001) 9

  10. COMPANY HISTORY • 1988 Incorporated in Texas, named as Amtech Corporation • 1999 Changed name to ZixIt Corporation and entered encrypted • email market • 2002 Became Zix Corporation as current name • 2003 Entered the e-prescribing • 2009 December 8, announced plan to exit from e-prescribing market • 2011 Introduced ZixAccess, a new decryption service for inbound • email delivery Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012

  11. BUSINESS DISCONTINUED OPERATIONS • E-prescribing • Started in July, 2003 • e-Prescribing consists of a single product line named PocketScriptR, which is an electronic prescribing service that allows physicians to use a handheld device to prescribe drugs and transmit the prescription electronically to virtually any pharmacy • Business going downward • December 8, 2009: Worked with Strategic View (Allen & Company LLC) • Announced it would wind down the e-Prescribing business and exit the business by December 31, 2010 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

  12. BUSINESS CONTINUING OPERATIONS • Email encryption: Software-as-Service (“Saas”) • ZixDirectory: largest email encryption information utility with more than 33 million members per week • Transparent Email Encryption: easy to use and encrypted without any extra steps. Completely transparent to the sender and receiver, not utilizing decrypted password • Zix Mobility: penetration to mobile support email encryption as a respond of technology trend Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

  13. Zix’s Competitive Advantage • Competitors: • Product based approach’ which is depends on each company’s own system • Directory of each user identities is not shared • Less desirable since different companies encrypted email systems are not interoperable • ZIX Corp.: • Saas architecture enable transparent email delivery through ZixDirectory • Enable company to have secured communication with external network Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012

  14. BUSINESS MODEL • Go-to-market model: • Multiple-year subscription contracts with the fees paid annually at the inception of each year of service. • As a result, a high percentage of customers subscribe to the Email Encryption Service for a three-year term versus a one-year term Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

  15. BUSINESSDISTRIBUTION CHANNEL Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012

  16. Customers • Five division of US Treasury, all FFIEC U.S Federal Banking Regulators, SEC and FINRA, 22 U.S State Banking Regulators • 1,800 Financial Institution, 20% all bank in U.S. • 1,500 U.S. Hospital, 20% U.S Hospital, 32 Blue Cross Blue Shield Organizations Source: ZIXI Company Website (http://www.zixcorp.com/resources/), accessed October 31, 2012

  17. BUSINESS RISKS • Decrease in demand • Unfavorable economic/political conditions • Rapid technology change • Lack of infrastructure • Significant investment with no guarantee of revenue • Fierce competition • Weak position in the supply chain • Market penetration failure • Low quality of services (reputation, potential legal liability) Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

  18. POTENTIAL CONTROLS • Lobbying Activities • $20,000 in 2005 by hiring Health Policy Group lobbying firm • High Operating Costs • SG&A (5yr avg.): 57.4% of total sales • R&D Expenses (5yr avg.): 15% of total sales • Significant Cash Holdings • Cash & ST Investment (5yr avg.): 86% of current assets •  Might mitigate some business risks Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

  19. How company generates money • Revenue Drivers • Email Encryption Contracts: • New First Year Order (“NFYO”): New Subscription • Multiyear contract which is irrevocable and nonrefundable • Price is manufactured to induce long term contract • Upfront payment and revenue will be recognized ratably throughout subscription year • Retention of subscription: Renewal Subscription • 90% retention rate • Account for 95% revenue • Regulatory Driver • Significant increase in demand in healthcare sector led by April 2005 HIPAA (Health Insurance Portability and Accountability Act) • HITECH ACT: Increase penalty while expanding the scope of HIPPA • Current trend: Law, and regulation across the country have enhanced security awareness. Governments have focused on encryption. • Licensing (potential) • Potential large number of future NYFO • Signed extended 3 year contract with Blue Cross Blue Shield, Pen Publishing Interactive, Austin Bank xDefenders, Berkshire Bank in 2011 Source : ZIXI 10-K FY2011 (http://www.sec.gov/Archives/edgar/data/855612/000119312512106508/d279168d10k.htm)

  20. How company generates money • Revenue Breakdown • Price * Quantity • Price: Constant, even allowance due to high competition • Matter of Quantity, Maximizing volume of contracts • Backlog: Contractually bound agreements expected to be recognized as services are performed (Deferred Revenue) • Approximately 60% to be recognized during the next 12 month • Order: New First Year Order (NFYO) and Renewals • As of June 2012: Backlog is $55.5M and Total Order is $22.6M Source: ZIXI 10-K and 10-Q FY2007 – 2012 (http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000855612&type=10&dateb=&owner=exclude&count=40)

  21. Financial Analysis • Quarterly Revenue Growth • Average Growth of 16.74% Source: ZIXI 10-Q FY2002 – 2012 (http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000855612&type=10-q&dateb=&owner=exclude&count=40)

  22. Financial Analysis • Key Observations • Great Gross Profit Margin: Approx. Above 80% • Stable Operating Expenses • Improving EBIT • Huge Tax Refund in 2010 and 2011 Source: Capital IQ (ZIXI Financial Statements from 2007 to 2011)

  23. Financial Analysis • Key Observations • Significant Cash Holdings and Deferred Tax Assets • PP&E and Depreciation • 99% Equity Financing: No public debt • Deferred Revenue is 88% of Current Liabilities and 87% of Total Liabilities • Negative Retained Earnings Source: Capital IQ (ZIXI Financial Statements from 2007 to 2011)

  24. FinaNCIAL PROJECTIONS • Sales are Increasing • Industry growth trend • Economy recovery • Increase of contracts sourced from the regulatory drivers and new product initiatives • Increasing backlog to be recognized • Cost of Goods Sold is Increasing with Revenue • SG&A is Decreasing • Declining percentage of the revenue comes from the direct sales distribution, which may lead the company to reduce marketing expense • Discontinuation at E-Prescription business • R&D is Increasing • Rapid technology change • Development of new products such as ZixMobility • Increase quality of products (reputation, potential legal liability)

  25. Discounted CasH FLOW

  26. Comparable Analysis

  27. Valuation SUMMary

  28. Recommendation • High growth potential • Competitive advantage through ZixDirectory • Growing stage • Negative retained earnings • Smaller size compared to diversified competitors HOLD

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