Zix Corporation CEO discusses Q4 2012 Results - Earnings Call Transcript

| About: Zix Corporation (ZIXI)

Zix Corporation (NASDAQ:ZIXI)

Q4 2012 Earnings Call

February 19, 2013 05:00 PM ET


Geoff Bibby - VP of Corporate Marketing

Rick Spurr - President, CEO and COO

Mike English - CFO, VP and Treasurer


Mike Malouf - Craig-Hallum Capital

Noel Atkinson - LOM

Fred Ziegel - Topeka Capital Markets


Good day, ladies and gentlemen, and welcome to the Zix Corporation 2012 Q4 and Full Year Conference Call. My name is Kimberly and I will be your operator today (Operator Instructions)

I would now like to turn the conference over to, Mr. Geoff Bibby, Vice President of Corporate Marketing. Please proceed Sir.

Geoff Bibby

Thank you Kimberly and thank you for joining us today. 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 CFO, Mike English, will give you details of our financial results.

Later in the call we 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 forecast 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 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 Investor website, detailed explanations of our non-GAAP financial measures along with reconciliations of our adjusting items to the most directly comparable GAAP financial measures.

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

Rick Spurr

Thank you Geoff. Good afternoon, everyone, and thanks for joining us today. I am pleased to report solid financial results for the fourth quarter and the full year 2012 which include record full year results for new first year orders, backlog, revenue and adjusted earnings per share. Let me first discuss our results for the fourth quarter.

New first year orders were $2.2 million up 16% from $1.9 million in the fourth quarter of last year. This result has a finishing at $9 million in new first year orders for all of 2012, a 27% increase over 2011.

Revenue for the fourth quarter was $11.7 million, an 18% increase over the same quarter last year which represents our 16th consecutive quarterly record in revenue. We also achieve strong bottom-line results including non-GAAP adjusted net income in the fourth quarter of $3 million or $0.05 per diluted share, up 9.8% year-over-year.

During the fourth quarter, our business generated $400,000 in cash flow from operations. Cash generated from operations was down as expected due to expected yearend annual payments and the increased investment in marketing the new products one of which is the new Zix DLP which was announced last week.

Looking at the competitive landscape based on activity in the fourth quarter, we don’t have much to report. We’re seeing the same competitors with the same go-to-market strategies in pricing as we’ve seen before. Meaningful competitors continue to be Cisco Ironport, McAfee, Proofpoint, and in the S&B space Sophos.

Now let’s turn to full year results. As I mentioned earlier, new first year orders for all of 2012 were a record $9 million up 27% from 2011. This healthy growth reflects our view of the overall market for email encryption and suggests that demand for email encryption in the broader security landscape went to a new level in 2010 and continues to be strong. In that respect the demand slowdown in 2011 appears to have been only a temporary pullback.

For the full year we generated record revenue of $43.4 million, up 14% from $38.1 million in 2011 and slightly exceeding our guidance of $43 million. We also achieved record non-GAAP adjusted earnings per share in 2012. Full year adjusted net income was $12 million or $0.18 per diluted share. This $0.18 per diluted share exceeded our most recent guidance of $0.17. On a non-GAAP basis net income was $11.6 million or $0.18 per fully diluted share, an increase of nearly 14% over 2011. Our backlog at the end of the year was a record $57.7 million, up 7.5% year-over-year. We finished the year with a cash balance of $23 million, up $2.3 million from last year despite $9 million in share repurchases during 2012.

Let me provide some more detail on the composition of our new first year orders. From an industry vertical perspective, our new first year orders in Q4 broke down as follows. Healthcare was 41%; followed by finance at 31%; government at 6%; and other was 22%. As most of you know, other for us is a category that captures new first year orders from all non-healthcare, non-finance, and non-government accounts. So other continues to expand as a percentage of our total sales.

For the full year 2012 healthcare was 42%, finance was 29%; other was the third largest contributor at 21% and government was 8%. If we look at new first year orders, by vertical in 2012, and compare it to 2011 we see that healthcare volume was $3.8 million versus $3.4 million, up 12%. Finance was $2.6 million versus $2.1 million up 24%. Other was $1.9 million versus $1.2 million, up 58%. In government it was 720,000 versus 355,000. So government volume doubled.

The government success in 2012 was due to wins at both the federal and state level. In the federal space we added the U.S. consumer financial protection bureau and we expanded our relationship with a key federal banking regulator. Our presence in state governments expanded significant with wins in New York, Ohio, Utah, and Colorado.

Let’s look at the sales by channel. We have built a blended direct and indirect model for sales. Our direct sales team working harmony with partners to maximize our volumes. Our strategy to invest in indirect channels that leverage our direct sales force is paying off.

The contribution from our channel partners continues to grow at a high rate. This is due to variety of factors. First of all, greater broad-based mainstream demand for email encryption makes this market fertile ground for our partners. As a result, we’ve been able to signup 174 active bars up from 30 at the end of 2010 and 100 active MSSPs up from 43 at the end of 2010.

Growth also comes overtime from greater knowledge, confidence, and productivity from partners in all categories OEMs, bars, and MSSPs. Specifically, OEM contribution in 2012 was up 37% and bar and MSSP contribution was up 68% as compared with 2011.

Combined at new first year orders contributed by indirect channels was $5.7 million, up $2 million when compared to 2011. This combined contribution is up 54%. Google continues to be the highest producing partner in the OEM category and across the board. As most of you know, Zix is the only email encryption solution that Google resells rebranded as Google Message Encryption or GME. In Q1 of this year, Zix and Google will introduce GME 2.O a new version developed by Zix at Google’s request. GME 2.O will feature tighter integration of Zix inside of Google Apps so that customers can administer their company’s usage directly using the Google app console.

We ramped up our market investments in late 2012, and are pleased with our progress. Sales productivity can be greatly improved if marketing is used to gain leverage. Our goal through marketing investments is to continually increase awareness, consideration, preference and leads for Zix products and services so that when sales and our channel partners engage, they engage efficiently and prospects are pre conditioned to hear the Zix story and buy Zix products.

In the second half of 2012, after an intensive search, we engaged an outside marketing firm Babcock and Jenkins to take our marketing to a new level. The first step they guided us through was message creation via interviews with customers, analysts and our team. The result is our new overarching theme, ‘the power of everyone’, which distinguishes Zix from our competition by telling our Zix directory story and the network effect using a new and compelling narrative. You will see this power of everyone theme now, on our website, in our literature in our trade show booths and in various Zix advertising campaigns.

In Q4, our first campaign went live. This initiative was a targeted advertising campaign aimed at 500 named large accounts. The program ran from November until the end of January and the initial results are encouraging. During the program, we displayed our ads on sites all over the web, targeted specifically to employees within the selected 500 accounts. We tracked several metrics but the two most important are ad interactions, meaning people who clicked our ads and web traffic, did we drive more people to our site. The result showed that in less than three months, we had over 79,000 interactions with Zix ads, and we drove a 90% increase in web traffic from these targeted accounts.

We believe web traffic is a leading indicator of interest so we find it’s very encouraging that these prospects are coming to Zix to learn more about us and the fact that we’re raising marketing awareness, consideration and preference for Zix’s products and services.

One of our most powerful and inexpensive forms of branding and visibility are the tens of millions of encrypted messages we send every year. Over the last couple of quarters, we have implemented tactics that allow us to have greater visibility through enhanced branding in the messages as well as techniques that allow us to have greater understanding of this traffic.

We now have 1800 ZixGateway in the marketplace and 725 or 40% of them have upgraded to ZixGateway release 4.4 or higher. When these new releases are installed, these ZixGateways add a blue bar branding message at the top of very message sent.

The wording in the blue bar says “this message was sent securely by ZixCorp”. We are sending close to 800,000 of these blue bar message per week and the blue bar is active, meaning a recipient can click on the bar and be taken to our website.

Late in Q4, we added a new landing page so that we can educate recipients on the benefits of Zix, give them a chance to request more information and create new sales opportunities. We also added a new form that lets them fill in some personal information if they like to learn more.

In addition to the blue bar, we also send millions of message notifications every year. These notifications let people know they received a secure message but must go to a portal to retrieve the message securely. Once they click on this message, they are either brought to our Zix message center or to one of our customers branded portals.

At the bottom of these portals, we provide yet another opportunity for recipients to request to be contacted. We also added our new form to this process to allow traffic to this page to give us personal contact information so they can learn more.

I am pleased to report that recently we are recording steady traffic to these pages and people are filling in the forms at a rate of approximately 300 per week.

It’s too early to tell the percentage of these leads that will lead to sales but we are convinced that knowledge, awareness and receptivity to Zix is increasing due to these investments.

In our earnings call last July, we announced that we were increasing our R&D spending in the July through December period by $400,000 to accelerate a DLP or data loss prevention product and by $1.4 million to build a new product to take advantage of the bring your own device or BYOD phenomena in the marketplace.

I am pleased to report that these two development efforts are proceeding as planned. Last week we announced ZixDLP; our single application email DLP solution. This new solution will help both existing ZixCorp customers and new ZixCorp customers address the number one data leakage problem in their organization email.

Most DLP solutions in the market today require expensive, complex, long drawn out deployments. By focusing on Emails, something we obviously know very well, we can address this major problem area inexpensively and at a fraction of the time that it typically takes for solutions that try to solve all possible areas of data leakage.

We were able to leverage Zix's proven policy in content scanning capabilities which had been in use for ten years now with new quarantine functionality. The quarantine system and its intuitive interface allow administrators to easily define policies for quarantining email messages to prevent data leakage. To conveniently manage quarantine messages using flexible searching and filtering options and to review reports that monitor quarantine activities and trends.

ZixDLP will start to ship on March 29th; a little over a month from today. Our initial emphasis will be selling ZixDLP add-ons into our credit customer base. We will offer brand new email encryption customers the option to include ZixDLP or new DLP customers the option to include Zix email encryption, and in either case, deliver the combination in a tightly integrated packaged solution.

ZixDLP will also be available as a standalone solution that could easily integrate with most email systems and competitive email encryption solutions.

Pricing for ZixDLP will be on a subscription basis per seat license just like our email encryption service and will be priced at about one third of the cost of the typical email encryption seat license.

We estimate the current U.S. market for email-only DLP to be approximately $200 million. We are also on track with the development and commercial launch of our BYOD solution which we have codenamed Brooklyn. BYOD stands for Bring Your Own Device and is a problem ranked in the top three currently challenging CIOs in every company where mobility and email are in use.

The corporate world used to rely on BlackBerry to allow employees to access corporate email securely. Now, most employees have their own iPhone or other mobile devices powered by Google’s Android mobile operating systems. Neither Apple nor Google design their operating systems to provide adequate security for corporate email. This is the problem that we will solve with this new product and in a way that is very simple and elegant and allows an enterprise to strike a balance between employee owned device use and corporate risk mitigation.

We believe we solution will have greater end-user acceptance and stronger security than solutions in the market today. Our planned R&D for Brooklyn in 2013 is approximately $3 million and planned sales and marketing expense is approximately $1 million, the addressable market at Brooklyn targets is currently defined as several $100 million.

For the past couple of months early versions of this solution have been used by some of our own employees and we’re now in the process of planning a rollout to early stage beta customers. Our commercial marketing launch is on schedule for Q2 and general availability is scheduled in Q3.

One last point before I turn the call over to Mike for more a detailed financial review. Out business in healthcare is likely to get a boost due to a recent announcement. On January 25th, HHS, the U.S. Department of Health and Human Services, published the final language referred to as the final rule for the HIPPA legislation. Going back to 2009, our government initiated an overall of HIPPA, and increased the seriousness with which the industry approached security and protecting people’s personal information.

New legislation was part of the stimulus bill and specifically the hi-tech act. But up until now everyone was using an interim rule to guide their behavior. Now with the publishing of the final rule, HHS has established a drop dead compliance date of September 23rd 2013. HHS also decided to extend full applicability of the rule to business associates or partners of healthcare organizations and their subcontractors which means many-many more organizations need to be compliant.

Encryption has always been part of the interim rule, so not surprisingly it remained intact in the final version. And companies are told in the final rule, that if they use encryption, it will provide a safe harbor. Even in the event of a breach or loss of emails containing PHI or personal health information.

Also the final rule eliminates an earlier clause that allowed the companies to decide if there could be harm from a breach or loss before reporting. Now, that’s no longer the case. A breach or loss must be reported. We are excited about the favorable implications the new final rule can have on our business going forward.

Now I will turn the call over to Mike English, our CFO, to discuss our fourth quarter and full year financial results in more detail and then we will be happy to take your questions. Mike?

Mike English

Thanks Rick and good afternoon, everyone. We achieved excellent results for the fourth quarter 2012 and the full year in our key financial metrics, including revenue, backlog and non-GAAP adjusted net income

GAAP net income was $4 million for the fourth quarter and $11 million for the year; both of which include an approximate $2.3 million tax benefit due to a reduction in our deferred tax asset evaluation allowance. This compares to GAAP net income of $15 million for the fourth quarter of 2011 and $22.6 million for the year which similarly included approximately $12 million of tax benefit.

We achieved record revenues of $11.7 million for the fourth quarter, which compares to $9.9 million for the fourth quarter of 2011. This exceeded the top end of our guidance range of $11.2 million to $11.5 million.

For the full year 2012, revenue was $43.4 million which compares to $38.1 million for 2011 and a slightly above the top end of our previous guidance of $43 million. Fourth quarter revenue grew $1.8 million and 18% increase over the comparable 2011 figure and full year grew $5.2 million a 14% increase over 2011.

Our OEM partners drove approximately $800,000 of the revenue increase for the quarter a 68% improvement from the fourth quarter a year ago. They drove approximately $1.9 million of the revenue increase for the year 2012 a 45% improvement over 2011.

The fourth quarter ending backlog was $57.7 million, which is the 7.5% increase compared to the $53.7 million backlog at the end of the fourth quarter 2011. We anticipate approximately 57% of the backlog will be recognized into revenue in the next 12 months.

We achieved fourth quarter adjusted gross profit of $9.7 million, 83% of revenues. This compares to 8.1 million 82% of revenues for the same quarter in 2011. On a sequential basis, it compares to $9.2 million or 83% of revenues for the third quarter 2012.

With regard to operating expenses, adjusted R&D and SG&A expenses totaled $6.8 million for the fourth quarter of 2012 compared to $4.9 million for the fourth quarter 2011.

Adjusted R&D expenses were $2.4 million in the fourth quarter of 2012 up $1.1 million from the fourth quarter of 2011 reflecting the previously announced investment in new product development.

Adjusted sales and marketing expenses for the fourth quarter were $2.9 million compared to $2.2 million for the fourth quarter of 2011.

Adjusted G&A expenses for the fourth quarter were $1.5 million, compared to $1.4 million for the fourth quarter of 2011. The increase in sales and marketing expenses was driven primarily by additional investment in sales headcount, sales tools and advertising.

For the full year 2012, adjusted operating expense was $24 million as compared to $19.8 million for 2011. Adjusted R&D expenses were $7.3 million for the year, an increase of $2.1 million over 2011, again driven primarily by the additional investments and new product development.

Adjusted sales and marketing expenses for the year were $10.6 million, compared to $9 million for 2011 and adjusted G&A expenses for the year were $6.1 million compared to $5.6 million for 2011. The increase in sales and marketing expenses resulted primarily from additional investments in sales headcount and sales tools, higher sales commission resulting from higher sales and increased advertising.

Adjusted operating margin for the fourth quarter was $2.9 million, 25% of revenues compared to $3.1 million or 32 % of revenues for the fourth quarter of 2011.

Adjusted operating margin for the year was $11.8 million, 27% of revenue as compared to $11.2 million, 29% of revenues for the full year 2011. Our adjusted EBITDA for the fourth quarter was $3.4 million, compared to $3.5 million in the fourth quarter of 2011.

For the full year 2012, adjusted EBITDA was $13.3 million as compared to $12.7 million for 2011. The adjusted EBITDA margin percent for the fourth quarter was 28.9% which brings the full margin to 30.6% compared to 33.2% for the full year 2011.

Capital expenditures for the fourth quarter were $484,000 and the full year $1.5 million. Appreciation expense for the quarter was approximately $350,000 and for the year $1.3 million, approximately 70% of the depreciation expense was recorded in cost of revenues.

We continue to maintain a strong balance sheet with no debt. We ended the fourth quarter with $23 million in cash, essentially flat with the third quarter and up $2.3 million compared to yearend 2011. Our cash flow from operations averaged $3 million per quarter. This year we used cash to fund additional investments in R&D and sales and marketing. We also spent $9 million of cash as part of an overall $15 million share repurchase announced at the end of 2011.

Adjusted net income for the fourth quarter was $3 million which compares to $2.9 million for the same period in 2011. For the full year 2012, adjusted net income was $11.6 million as compared to $10.9 million for 2011.

Our adjusted net income for fully diluted share of common stock for the quarter was $0.05 versus $0.04 from the same period in 2011. For the full year 2012, adjusted net income for fully diluted share of common stock was $0.18 compared to $0.16 for 2011.

Now, let’s move to guidance for 2013. For the first quarter of 2013, we project our fully diluted non-GAAP adjusted earnings per share to be $0.03 on projected revenue guidance ranging from $11.7 million to $11.9 million. For full year guidance we project 2013 revenues to be between $48 million and $50 million. I want to remind everyone that our new products will contribute very little revenue in 2013 due primarily to our subscription revenue model which spreads revenue ratably over the subscription period and the fact that our new Brooklyn product won't begin shipping until the third quarter of this year.

We expect meaningful revenue impact from the two new products, ZixDLP and Brooklyn will begin in 2014.

Getting back to full year guidance, fully diluted non-GAAP adjusted earnings per shares projected to be between $0.19 and $0.20. This guidance will yield over an adjusted EBITDA margin and margin percent in the high 20s and adjusted operating margin in the mid-20% range.

Additionally, as previously discussed, in each of the last three years we reduced a differed tax evaluation allowance generating a tax benefit on the income line of our income statement. This adjustment was required by generally accepted accounting principles and was the result of the company growing profitability.

In 2013, we expect that based on our earnings guidance which reflects improved earnings; we will again reduce the tax valuation allowance and like the previous three years, generate an income tax benefit on the P&L.

In closing, we are pleased with the 2012 results against our key financial metrics. Our recurring revenue model continues to support revenue and profit growth while growing cash and maintaining a no debt position and allowing us to invest in key new product developments. We look forward to continued strong performance in 2013.

With that I'll turn it back to Rick.

Rick Spurr

Thank you Mike, before we go to Q&A, I have one final thing that I would like to mention. Our outside Director James Marston has elected to retire from the Zix Corporation Board of Directors at the end of February. We extend our sincere thanks to Jim, for his over 21 years of dedication and service to the shareholders, employees and management of the Zix Corporation. We have appreciated his commitment, guidance and many contributions over the years. Jim and I both feel that Zix is in a great place and the timing of his departure feels appropriate. From all of us at Zix wish him well in his retirement.

Operator let's move to Q&A now, please.

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Mike Malouf from Craig Hallum, please go ahead Mike your line is open.

Mike Malouf - Craig-Hallum Capital

Couple of questions for you. The new HIPPA rules, the final rule as you say; what do you think that does to your healthcare percentage, as we look into 2013? And I am just wondering where does most of the healthcare business originate from? What channel is that really driven by?

Rick Spurr

So, I don't have any idea what’s going to happen to the percentage. I don't expect, we've got success across all vectors, so all verticals, so I can't really say that that boost is going to cause healthcare to run ahead of where it is today. We just don't know, but it clearly is good wind in our sales. In terms of channels, so the way we think about healthcare is that it's health insurance companies which are large accounts, most of whom have done something already so they won't be the big add this year other than competitive index in that space if we’re fortunate in our efforts there.

Hospitals, our data says only 60% of the hospitals in the United States have done anything to comply with the law. There are 6,000 hospitals and so 40% or 2,400 hospitals should be compelled to step up and buy something. We currently have 33% at the existing hospital market. So, we hope to get at least our fair share if not a greater share given our dominance in healthcare.

The third category of the business associates which will be most significantly affected by the final rule because for the first time they’re all being compelled to comply. These are all the companies that hospitals and insurance companies use as subcontractors or partners to do a whole litany and variety of functions and to the extent that they have any access to patient data in that process they now are compelled to comply.

As you know our S&P channel is a blend of our inside sales group working in conjunction with our now 174 bars and so they’re the ones that are likely to see the biggest boost and it will be through both that corporate sales channel and the related bars in that space.

Mike Malouf - Craig-Hallum Capital

And then if I could just expand on that, 2400 hospitals with end of September deadline, I imagine that they’re probably going to be scrambling to try to find a solution. What’s the impact for these hospitals if they do not implement an encryption solution?

Rick Spurr

Well, they would have to convince a regulator that they weren’t putting any sensitive information in email which would be, I would think, very, very difficult to do. I would say difficult to impossible to enforce training across all your employees so that they never put anything in email. And they can be subject to audits and obviously large fines and I would say post September, those auditors aren't going to be very forgiving and so not only is it defines but it’s also the reputation risk because these breaches and fines will be reported.

Mike Malouf - Craig-Hallum Capital

Right, and then could you give us an update on the litigation, specifically around the expense, it looks like the expense was a little bit higher this quarter?

Mike English

The litigation expense for the quarter, you are right. We did report that it was right about $1 million. They tend to go in peaks and valleys and Q4 was time where we were doing quite a bit of activity. I can't comment going forward how that’s going to be. But we do know that these things are choppy depending on the amount of work that’s being done. So we do know that this is out there, but there is not much we can tell you about at this point regarding 2013.

Rick Spurr

With regard to the one large effort we've been engaged in the (inaudible) suite, there was a development actually just this afternoon. There is a thing called the Markman hearing, and the Markman hearing took place last week. And the Markman hearing is where the judge listens to both sides' lawyers and decides how certain terms are going to be defined and it can have a very significant impact on the case. And the court in the (inaudible) case issued, just this afternoon, a provisional opinion and an order that interpret certain words in to relevant pattern and it directs the parties to mediate within 30 days. The court’s order is publicly available. There is a federal court’s pacer system that lets people go in and actually read this provisional opinion and order, and we haven’t really had time to even analyze the detailed opinion in the court, but it’s moved ahead.

Mike Malouf - Craig-Hallum Capital

So there is a chance that we could get some finality here in a short term basis, is that sort of, how we should…

Rick Spurr

Nobody knows, but if the parties are forced to mediate, there is a possible settlement.


Just to remind you. (Operator Instructions). The next question comes from the line of Mr. Noel Atkinson from LOM, please go ahead. Noel, your line is open.

Noel Atkinson - LOM

I was wondering, I might have missed this, could you talk a little bit about your pipeline activity within your internal direct sales force?

Rick Spurr

We don’t ever comment on the pipeline, no, so you didn’t miss it. Demand is quite strong. We talked about lead flow and inbound increase and all the marketing we’re doing, I can say this. Zix has never been busier in any department of the company certainly sales and marketing and development, so 2013 feels very good to us but that’s all I’ll say about sales guidance.

Noel Atkinson - LOM

Okay. And then in terms of your R&D activity, so you’re talking about a pretty strong investment in R&D for your MDM device product going forward this year, are you reallocating resources that have been working on the DLP product?

Rick Spurr

There might be a little bit of that but generally no, you can’t build the product either DLP or BYOD in this case to Brooklyn product and then stop, you’re constantly at least in the early phases evolution of the product making enhancements and preparing for subsequent releases. So there maybe a little of shifting around, but generally no.

The R&D expense for Brooklyn I outlined is planned $3 million this year and which is a run rate spend based on what we already told everybody about last year and our overall R&D spend is planned to be around 20% of revenues this year.

Noel Atkinson - LOM

And then in the fourth quarter based on the success of your initial sales and marketing efforts through the web to 500 named accounts, were you looking at your main verticals the ones that have been you targeted so your healthcare, your finance, are you’re also going into that the non-mandated companies as well that were potentially named accounts?

Rick Spurr

Its primary healthcare and finance so our largest financial institution ranks about 24 in the list of U.S. banks and so one through 23 are setting there as targets for us and then you’ve got some very large health insurance companies, but we didn’t stop only there. So that was and all the Cisco replaced stuff, so the IEA high-end encryption product that Cisco's now pulled the plug on, is a target for us and those are in multiple verticals.


The next question comes from the line of Fred Ziegel from Topeka Capital Markets, please go ahead Fred, your line is open.

Fred Ziegel - Topeka Capital Markets

Sort of a corollary to the high tech discussion you just had. You mentioned the state government business and specifically you mentioned Colorado, I read an article that basically talked about, I think this goes back in a deployment in the fall of last year where the state of Colorado, to be compliant with the FBI database essentially put in your gear alongside Google Apps for government. Is that something we should think about as something unique to Colorado? I haven't read anything that's a state mandate so how should we think about that opportunity?

Rick Spurr

I don't think it's unique to Colorado, you're referring to a requirement there that was a new one for us and it had to do with the criminal justice system mandates that certain criminal justice system relevant information must be encrypted, not only in transit in an email but it has to be encrypted in a static state when it's sitting in a file. And we were asked if we could do that and the facts are that we do encrypt data in the static state in the Zix message center in all of our portals. And so with very minimal R&D, it was pretty for us as we had all the functionality to accommodate that specialized requirement so that the transactions that the state of Colorado processes that had to do with the criminal justice systems, in those cases that data is stored and encrypted by us in the portal to meet the regulatory requirements. And there are other email dataflow outside of criminal justice transactions, takes place as our normal customers would process, scanning and encrypting and sending encrypted mail. So, it is applicable to other states where criminal justice transactions are being conducted.

Fred Ziegel - Topeka Capital Markets

You mentioned New York and Ohio and Utah, are those similar to Colorado?

Rick Spurr

I don't believe the criminal justice transactions were subject in those particular state, Vince. It could become but I don’t think they, it’s only been implemented so far in Colorado.

Fred Ziegel - Topeka Capital Markets

Is this mandated essentially by the FBI?

Rick Spurr

I believe so.


Thank you for your questions today. I'd now like to turn the call over to Mr. Spurr for closing remarks.

Rick Spurr

Our closing remarks are thank you again for your time and attention and your continued interests. We are as excited as ever and so told you we were as busy as ever and have a lot on the goal, we are excited about it. Thanks and stay tuned.


Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Thank you for calling. Have a lovely day.

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