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Zix CORPORATION October 15, 2013

Zix Corporation is a leading provider of email encryption designed for regulatory compliance and protecting sensitive communication. They have a strong market presence in the banking and healthcare industries. This report provides an overview of the company, industry analysis, financial analysis, valuation, and a recommendation for potential investors.

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Zix CORPORATION October 15, 2013

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  1. Zix CORPORATIONOctober 15, 2013 Dan Ballantine, Alexander Johansson & Ye Liang

  2. Agenda • Introduction • Holding Information • Macroeconomic Outlook • Industry Overview • Company Overview • Financial Analysis • Valuation • Recommendation

  3. Zix Corporation • Leading Provider of Email Encryption • Designed for Regulatory Compliance and Protecting Sensitive Communication • 1 in Every 5 U.S. Bank and Hospital • Products & Services: • ZixGateway / ZixMail – Sender Service • ZixAccess – Receiver Service • ZixDirectory • World’s Largest Shared Email Encryption Community • Zix Research Center Source: MarketLine, Zix 2012 10-K

  4. Current Holding • April 17, 2012 • Acquired 2,000 shares @ $2.89/share • Cost basis = $5,780 • October 15, 2013 • Current holdings 2,000 shares @ $4.85/share • Market value = $9,700 • Annualized HPR = 41.22% Source: Yahoo Finance

  5. Macroeconomic Overview • Unemployment Rate • BYOD Catalyst • 4 Out of 5 Employees Use Their Own Devices At Work • Sensitive Information Concerns Source: Bureau of Labor Statistics, Ribbit

  6. Macroeconomic Overview • HIPAA Compliance • Health Insurance Portability and Accountability Act • Covered entities: health plan, health providers, health care clearinghouses • Also applies to business associates of covered entities • Requirements: privacy, security, and transaction standards regarding health care patient information • Deadline for compliance was September 23, 2013 • Continued need for protection as more patient data is stored and transmitted electronically Source: Lorman, American Physical Therapy Association, US HHS

  7. Stock Market Source: Google Finance

  8. Industry Overview • What is Software Industry? • Components • System Software • Operating Systems • Network and database management • Other • Application Software • General business productivity and home use application • Cross-industry and vertical market applications • Other Source: MarketLine Industry Profile

  9. Industry Overview Source: MarketLine

  10. Industry Growth Source: MarketLine

  11. Industry Life Cycle Steady growth in sales as product acceptance widens Source: UIUC BADM 449

  12. Industry Forces Analysis Source: MarketLine

  13. Industry Forces Analysis • Buyer Power: MEDIUM • High switching cost, open source substitutes available, large population of customers • Supplier Power: MEDIUM • Highly differentiated inputs, low threat of forward integration • Rivalry Among Existing Competitors: MEDIUM • Differentiated products, fast industry growth, many competitors Source: MarketLine

  14. Industry Forces Analysis • Threat of New Entrants: MEDIUM • Low capital intensive, high labor intensive, trusts in certain sub-markets • Threat of Substitutes: MEDIUM • Cheap or free open source alternatives that update more frequently and quickly, capability issue with the alternatives Conclusion: Moderately attractive industry Source: MarketLine

  15. Company Overview • Products and Services: • New to the Family in 2013 • ZixONE; byod Source: Zix Corporation Website

  16. Company Overview • Strategy: Differentiation • Highly specialized in data protection • Software-as-a-Service (SaaS) • Revenue method: Annual service subscription fee • Pricing is fixed per sender each year • 75% of deals are 3-yr contracts with an average of 2.5 years • Cash generally collected annually upfront • Retention of 90%+ of revenue Source: ZixCorp Investor Relations

  17. Company Overview Source: Zix Corporation Investor Relations

  18. Product Life Cycle Steady growth in sales as product acceptance widens: • Demand increases as business related online communication expanding • Products reach out to wider range of audience Source: UIUC BADM 449

  19. Business Risk Analysis • Changing regulations on internet privacy • Main customers subject to political factors • Rapidly growing technologies bring uncertainty • Dependent on strong human capital • Existing and potential big players • End user preference • Hacker population brings challenges

  20. SWOT Analysis

  21. Management Outlook • Optimistic about subscription business model coupled with over $60 million backlog • Enthusiastic about September release of ZixOne to address the BYOD segment • Concerns over increased SG&A expenses in 2013 due to increased sales force • Recognized increased competition from companies such as McAfee and Cisco Systems Source: Zix Corporation Q2 Earnings Call

  22. Recent Financial Information Source: Zix 2012 10-K, Zix 2010 10-K

  23. Recent Financial Information Source: Zix 2012 10-K, Zix 2010 10-K

  24. Current Stock Information Source: Capital IQ, Yahoo Finance

  25. Financial Analysis

  26. Financial Analysis

  27. Comparable Companies Source: Capital IQ

  28. Stock Performance Source: Yahoo Finance

  29. Comparable Company Analysis Source: Capital IQ

  30. Comparable Company Analysis Source: Capital IQ

  31. Discount Rate Source: Yahoo Finance

  32. Discount Rate

  33. DCF Analysis

  34. Decision Drivers • Strengths • Strong cash position and improving balance sheet • Well positioned in health care segment • Additional BYOD segment growth opportunities • Concerns • Strong recent stock performance • Internet and data privacy threats • Operating losses in the past

  35. Recommendation • Valuation Summary • Current Stock Price: $4.85/share • Comparable Companies Valuation: $4.66/share • DCF Valuation: $3.51/share • Recommendation: HOLD

  36. Questions?

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