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Analysts: Su Chen Jionghan Dai Liang Nan Presented: March 29, 2012

Analysts: Su Chen Jionghan Dai Liang Nan Presented: March 29, 2012. Introduction. Zix Corp. Zix Corporation provides email encryption solutions in software as a service model in the United States. Market Cap 185 million PEG ratio 0.83 Adjusted P/E 18

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Analysts: Su Chen Jionghan Dai Liang Nan Presented: March 29, 2012

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  1. Analysts: Su Chen Jionghan Dai Liang Nan Presented: March 29, 2012

  2. Introduction • Zix Corp. • Zix Corporation provides email encryption solutions in software as a service model in the United States. • Market Cap 185 million • PEG ratio 0.83 • Adjusted P/E 18 • 1-year implied growth in earning 30% • 7-10 years implied growth 5%

  3. Stock Review • Stock price closed at $ 2.93 on Mar. 28, 2012 • Underperformed compared to SP Small Cap 600 Index in the past 5 months Source: Yahoo Finance

  4. Overview of Zix’s Business

  5. Macro Economics Review • The initial unemployment claim lowered to 348,000 on March 22, 2012 • Policy markers forecasts federal fund rate to keep near zero at least through late 2014 • The U.S. economy is recovering slowly from the 2008 recession

  6. The industry Sector: Technology GICS MAP: Application Software # 45103010

  7. External Driver & Risk factor • External Driver • Regulation Demand • Corporation Demand • Risk Factor • New technology and product • High R&D investment • Relationship with third party distributors • Strong competition

  8. Review Relevant Products

  9. Overview of Zix’s Business

  10. What is the company doing • Protect confidential data from been seized by unauthorized parties while transporting via email • Required by some data privacy laws, such as Health Information Portability Accountability Act (“HIPAA”), Gramm-Leach-Bliley Act (“GLBA”) • Companies with business secrets want to protect the property

  11. Who does the company serve • Healthcare, financial services, insurance and government sectors • More than 1,200 hospitals and over 1,600 financial institutions, including SEC Source: Zix Corp investor presentation http://investor.zixcorp.com/phoenix.zhtml?c=108645&p=irol-IRHome

  12. How Encryption Decryption

  13. How

  14. External Drivers • Stricter regulations • increased penalties for violations, e.g. HIPAA • stricter and more onerous breach notification requirements • The first state law requiring encryption of emails containing sensitive information was passed by Nevada on Oct 1st, 2008 • Mar 1st, 2010 in Massachusetts, they reach far beyond the state borders

  15. External Drivers • Trusted by most influential institutions • 5 Divisions of the U.S. Treasury • SEC • All of the FFIEC U.S. federal banking regulators • 17% US banks • Nearly 1 in 5 US hospitals

  16. Internal Drivers • No significant customers • Not any customer accounts for more than 10% sales • Low incremental costs to add new users • Large up-front investment to establish the service • Strong renewal rate • Result in retention of 95% of revenue from year to year

  17. Recent News • On Dec 31, 2010, Zix Corp completed the wind down of its e-prescribing business • Had previously been reported as a segment • No longer fit the company’s strategy • Assets were compatible with the remaining business and were therefore absorbed

  18. Recent News • In 2011, the company included a tax benefit of 11.8 million, comparing to 35.3 million in 2010 • Largely attribute to the reduction of valuation allowance because the company is optimistic about their future operation • Still have 57.4 million valuation allowance left • Involve subjective judgment of future taxable income from mangers, and thus we don’t want to include into our analysis

  19. Recent News • In 2011, the company had a lower new first year order of 7.1 million compared to 8.7 million in 2010 • Partly explain its underperformance recently • Reorganization of sales force • Uncertainty in economy • Not because of pricing or competition • They actually have fewer competitors

  20. Comparable

  21. Comparable

  22. Financial Analysis • Improving operating results • Revenue grows without increasing SG&A

  23. Financial Analysis • A big amount of cash • Start repurchasing stock in 2011

  24. Recommendation

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