Zix's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.18.14 | About: Zix Corporation (ZIXI)

Zix Corporation (NASDAQ:ZIXI)

Q4 2013 Results Earnings Conference Call

February 18, 2014 05:00 PM ET


Geoff Bibby - Vice President, Corporate Marketing

Rick Spurr - Chairman and CEO

Mike English - Chief Financial Officer


Mike Malouf - Craig-Hallum

Fred Ziegel - Topeka Capital Markets

Michael Kim - Imperial Capital


Good day ladies and gentlemen. And welcome to the 2013 Fourth Quarter and Year-End Conference Call. My name is Briana and I will be your operator for today.

At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Geoff Bibby, please proceed.

Geoff Bibby

Thank you, Briana. Good afternoon, everyone. As Briana mentioned, my name is Geoff Bibby, I’m Vice President of Corporate Marketing for Zix Corporation. Thank you very much for joining our 2013 fourth quarter and year end 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 and for the full year; then, our CFO, Mike English, will give you details of all 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 through 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 about 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 Rick?

Rick Spurr

Thank you, Geoff. Good afternoon everyone and welcome. I am pleased to report solid financial results for the fourth quarter and the full year 2013 which include new records for backlog, revenue and adjusted earnings per share. Our solid financial performance this past year is even more impressive when you exclude the temporary disruption of new sales we’ve experienced with Google. If you look at our total new first year orders for 2013 compared to 2012 and exclude Google and again for an apples to apples comparison also exclude any contribution from our new products in 2013, you will see that our base business grew 21% year-over-year. This fact, 21% growth underscores the underlying health of our base email encryption business. Add to this the growth we anticipate from our new products ZixDLP and ZixOne and the expected return of a steady stream of sales through Google, and you can see why we are optimistic about our business in 2014 and beyond.

Let me now focus on our results for the fourth quarter. Revenue for the fourth quarter reached a record high $12.3 million at the top-end of our guidance range and a slight increase sequentially from record revenue in the preceding quarter and up 5% from the same quarter last year. New first year orders for the fourth quarter were $2.3 million, an increase of about 6% compared to the prior year quarter. Total orders during the fourth quarter were $14.1 million up 9% from $12.9 million in the same quarter last year. In this past quarter, we grew our backlog to a new record high of $65.7 million at year end, a 14% increase from backlog at the end of 2012.

On the bottom line, we achieved GAAP net income of $4.8 million or $.08 per share on a fully diluted basis, up nearly 20% from the same quarter last year. Non-GAAP adjusted net income in the fourth quarter was $3.8 million or $0.06 per share on a fully diluted basis, up nearly 25% from the same quarter last year. During the fourth quarter, our business generated $3.5 million in cash flow from operations.

Now let’s turn to full year results. For the full year, we achieved revenue of $48.1 million, a record high for the company and up 11% from 2012; and adjusted net income for the full year of $10.5 million or $0.17 per diluted share. Non-GAAP adjusted net income reached a record high $12.1 million or $0.19 per fully diluted share, in line with our guidance.

We closed the year with the cash balance of $27.5 million, up $4.5 million from last year, despite $8.8 million in share repurchases in 2013.

Now I’ll provide some more detail on the composition of our new first year orders. For the fourth quarter, our corporate sales team came in at $1.6 million, up 34% over the fourth quarter of last year. As you know, this team targets small and medium businesses and the government sector and drives our VAR and MSSP partnering channel. Our enterprise group achieved just under $600,000 of new first year orders in the fourth quarter, up 84% over the fourth quarter of last year.

We’re pleased with this growing contribution from large accounts and believe that with the investments we’re making we should see continued growth from this segment. Our OEM business represented 6% of our new first year orders this quarter. This is down compared to 2012 due to the significant drop in order flow we've seen from Google, as they continue to work toward completion of the sales enablement process for the new GME or Google Message Encryption version 2.0.

Once completed the Google sales force will be compensated and motivated to sell our email encryption offering. We've been told by Google that they’re in the final stages of this process and we believe the issue will be resolved in the near-term. Just yesterday, Google took the first step towards publically informing customers on their email encryption transition.

To be more specific, Google has used something called the Postini transition site, a website resource to keep their customers aware of the steps required to transition from Postini to the Google Apps infrastructure -- if you recall the original reason for this interruption and delay.

In the section on that website entitled “what do I receive in my transition”, there is statement under Google Message Encryption, it says “GME customers will be transitioned to a new version of GME that will work natively on the Google apps platform. GME is still a Zix solution.” This is the first public communication from Google regarding this new offering and we hope the first of many.

More broadly we believe our relationship with Google is as good as ever and we are pleased to announce that we signed yet another extension to our reseller contract with Google taking us into 2015. We are also happy to report that just recently in the current quarter; we received a large order from Google for a very large banking customer for their U.S. based employees.

Now I’ll report our new first year order results for the year. For all of 2013, new first year orders were $9 million essentially flat compared to 2012. But our corporate sales team came in at $5.4 million, up 17% over 2012. Our enterprise group achieved $2.4 million, up 39% over last year.

So again, it was the significant shortfall in the OEM business then held us back. Our OEM business made up mostly its sales through Symantec and Google represented 11% of our new first year orders in 2013, which is down 60% from last year, reflecting the substantially lower contribution from Google both from a normal new sales order flow and for Google overages.

In fact for the full year, total new first year orders from Google including overages were down over 70% from 2012. So as I said earlier, while new first year orders for the full year were flat compared to 2012, if you exclude the temporary impact from Google, as well as any impact from our new products, the first two orders for 2013 were actually up approximately 21% year-over-year.

We are pleased to see continued growing contribution and the increased activity from our OEM relationship with Symantec. New first year orders from Symantec for 2013 were up 40% over 2012 and we expect to see continued growth in 2014. This optimism is based on meaningful progress in our joint relationship both at a technical level, as well as the sales and marketing level and simply based on our knowledge of activity in the pipeline.

Another contributor to growth in our base email encryption business is competitive replacements. In 2013 our competitive replacements were up 81% as compared with 2012 and the new first year order contribution from these replacements was up 103%.

As we typically do, I will now comment on sales contribution from an industry perspective. Our new first year orders in the fourth quarter broke down as follows. Healthcare was 51% followed by finance at 28%, other was 17% and government was 4%. 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. For the full year, healthcare was 46%, finance was 28%, other was the third largest contributor at 18% and government was 8%.

In summary our base email encryption business is healthy and growing. Our corporate and enterprise sales groups are delivering growth and we're planning on continued growth in 2014.

We also see upside in 2014 with the continued growth in our Symantec OEM relationship, as well as the return of Google. And of course we expect a meaningful contributed to sales in 2014 from our new products ZixDLP and ZixOne. We believe all of these factors will accelerate our top-line growth in 2014 and beyond.

Now let me give you an update on our new products that we believe that lay us on top of our growing email encryption business will help drive revenue growth, culture to our goal of 25% year-over-year.

ZixDLP is our single application email data loss prevention solution designed to help both new and existing ZixCorp customers, address the one number data leakage problem in our organization. Email, industry surveys indicate that 70% of data leakage incorporations today is in email. ZixDLP can work in unison with our e-mail encryption product and is differentiated by the fact that it’s relatively low cost and simple to implement.

Since launching in March of last year, we had 37 customers at year-end and the number of license seats has grown to approximately 13,000 or additional 5,000 seats from the end of the third quarter. Of the 37 total ZixDLP customers at year-end, all that but one were bundled with new email encryption sales or renewals, underscoring the bundling opportunity that we have with the introduction of ZixDLP. We’re excited to note 56% of our new ZixDLP sales had been made with new customers, showing the power of a bundled sale as we approach new prospects.

We continue to be on track with development and introduction of enhanced versions of ZixDLP, but we last reported on this topic, we said we would have a new version in the first half of 2014, which would some of the features requested by new perspective customers. Now we've split this into two new releases and first of which is already available in the marketplace.

This new ZixDLP version 1.1 was introduced earlier this month and includes a forensics capability to allow customers to track content in emails that trigger certain customer policies, policies relating to both data loss prevention and encryption. This is a great first step to customers to better understand what's being released in their outbound email flow. This forensics capability is something that customers have been asking for, for many years in the context of our email encryption business.

We’re planning the introduction of yet another version ZixDLP version 1.2 within the first half of this year, which will include additional features, specifically tools that will allow the customer to delegate the decision regarding quarantined messages to the appropriate business unit. So instead of the IP or compliance department having responsibility for making decisions on the quarantine messages an automated process will distribute the messages to the appropriate business unit for disposition.

So it’s a much more usable practical implementation because of the ability to engage this appropriate business unit in the decision process and (inaudible) creating bottleneck in the compliance for security group.

Now let’s provide an update on ZixOne. Our new Bring-Your-Own-Device, or BYOD solution that we launched last September. We continue to be extremely excited about the potential for ZixOne and the market acceptance that we’re seeing. As of the end of 2013 after just four months in the market, we had 45 new customers up from 11 at the end of the third quarter of last year. This is one new sale every other business day, the average number of Zix is now 43 in these earlier presentations.

And the average per user price is $62 per year. Overtime to [tailor] large enterprise account adoption as well as expansion within accounts, we expect many more deployed users on average and accordingly lower per user pricing. To give some additional color on these early customers, they typically fall into two categories.

The first category, our companies who value the straight forward and effective approach of ZixOne and don’t feel the need to evaluate competitive alternatives. They recognized ZixOne as a simple elegant solution to their biggest BYOD problem corporate data exposure and loss. And they buy ZixOne for their employees that when access to corporate email using the personal devices. The second category of customers are companies that want to evaluate ZixOne with a small number of users, 25 to 50 before making a larger commitment.

Obviously since we just released ZixOne in September and are only reporting sales through December, these two types of sales cycle are relatively short. Large enterprise sales capturing a large volume of seats is as you would expect a longer sales cycle with many decision makers and influencers involved and with multiple vendors in the mix.

Our pipeline of qualified leads for enterprise customers is growing nicely and we look forward to reporting our continued progress. As many of you know ZixOne is a BYOD mobile, email application to solve the diverging needs of protecting corporate data and email while at the same time allowing employees to access corporate email and yet maintain privacy and control of their personal devices.

ZixOne solves the BYOD problem of potential corporate data exposure and loss by never allowing data to be stored on the device. Instead we stream the information to the device through ZixOne servers that access the information directly from customers’ Microsoft exchange servers. To achieve high performance we’ve got patent pending highly efficient protocols and use proprietary prefetching and cacheing techniques. Using this approach customers never lose control of their corporate data, email and detachments. And users maintain full control over their personal devices.

It takes only about 30 minutes to set up a company of any size by connecting ZixOne servers with the customers’ e-mail exchange servers and then less than a minute for employees to download the app and become productive. There is no learning curve or training process because e-mail is already the largest and most well known application in the world. The unique architecture of ZixOne represents a significant shift by never allowing the corporate data to reside on the phone in the first place, providing a much higher level of security and greater ease of we use, which translates into greater employee acceptance.

A few words on the competitive landscape for ZixOne. The first generation solutions from companies like AirWatch, Good technology and MobileIron used MDM or continuation approaches, which loading the more software on to the device.

As we've done it before, a survey we commissioned last July with the Ponemon Institute found that when companies have tried these competitive BYOD offerings, 62% of them don't like the cumbersome nature of the products and the cost to implement and maintain them.

When we describe ZixOne to the survey respondents, and asked if they’d be interested in a solution of this type, and e-mail calendar and contacts solution with no storage on the device, 57% said they would be interested. It is on top of people’s list today because it affects productivity in a major way as well as in employee morale.

We believe this market is wide open and we have a attractive and highly differentiated offering with ZixOne. ZixOne’s unique architecture also enables us to add enhancements and features very rapidly. Because both our email encryption product and DLP have an own premise component, any enhancement to the product requires a customer upgrade, which by its very nature, adds complexity and time to the roll-out.

By contrast, ZixOne has no on-premise component and therefore the frequency of releases are not inhibited by any customer upgrade requirement. We are now already on our seventh release of ZixOne. We’re actively selling ZixOne using our direct sales force for both the small and medium business segment and enterprise accounts and have now fully trained all of our VARs on the new products.

On this coming of third party distribution this past year, we added 72 new VARs, a 28% increase, and now have 216 active value-added resellers. Of the 45 ZixOne customers, we had as of year-end, 22 of them were added through our channel partners. And although the VARs are all trained, there is naturally a learning curve before we’ll see the full impact of their potential contribution.

As we’ve noted before, ZixOne is a natural extension to our data protection products and a data protection brand. And we are finding with both existing and new customers are often ready to buy a combination of products. Of our 45 ZixOne customers at year end, all the two represented bundled sales with one or more of our other solutions.

Let’s move from our new product discussion to discussion of our new investments in sales and marketing. Our strategic marketing emphasis is on aggressively building on the positive outlook and momentum for both our existing email encryption business and our new products.

As such our guidance for 2014 reflects a very aggressive spend on sales and marketing. Last year, we significantly increased our R&D spend on innovative new product development. Now we are making new investment to increase sales and marketing, in large part related to ZixOne to accelerate sales and penetration.

As part of this investment, we are increasing the sales capacity in our corporate team by 33% and increasing the enterprise group sales team by 50%. In marketing, we are increasing our advertising and marketing investment by 213%.Our positive outlook is supported by our healthy and growing backlog and the positive results we have seen from our increased marketing activities to-date, which are resulted in the nearly 60% increase in inbound inquiries increase in 2013 from the prior year. We expect this trend to continue as many of our new marketing campaigns and initiatives begin to produce results over the coming weeks, months and quarters.

To give just one example the market response we are seeing, we had more than 500 people register for a webinar we conducted a couple of weeks ago on corporate liability as it relates to BYOD phenomenon. By the time of our closing remarks and demonstration, we still had more than 150 attendees on the call after one hour and thirty minutes that’s almost unheard of. This underscores the fact that corporations are very concerned about the liability that comes with being able to access somebody’s phone and especially with the ability of a company to wipe the employee’s personal device. These capabilities are key to our competitors’ approach to BYOD. ZixOne opens the rise to a whole new way to address this issue without invading employee privacy.

In conclusion, we are very excited about the growth we are seeing in our existing email encryption business and the growth opportunities and outlook for both our base business and our new products. The underlying health of our business is strong. As noted earlier if you look at our total new first year orders in 2013 excluding any positive impact from our new products and any negative impact from Google and compare that to our base business as looked in 2012, you will see that our base business grew 21% year-over-year. As we stated before, one of our primary goals is to accelerate growth in our top-line in excess of 20%.

We expect our base email encryption business to remain healthy and continue to grow and with the added introduction of our two new products along with an expected turnaround in Google, we certainly believe that goal is achievable.

Now, let me turn the call over to Mike, our CFO to discuss first quarter financial results and full year results in more detail. Michael?

Mike English

Thanks Rick and good afternoon, everyone. As Rick touched on, 2013 saw improvements in both revenue and adjusted net income, despite the challenges with Google. We were able to improve slightly on new first year orders by offsetting the Google softness, growth in our other sales channels and we achieved excellent growth in our backlog.

Additionally, we successfully leveraged our data center capacity and reduced data center operating cost to achieve significant gross margin improvement. We also invested in new product development and introduced two new products during the year. Both ZixDLP and ZixOne were delivered on time and on budget. In addition to these new product development investments, we increased investments in sales and marketing.

As I typically do, I will begin by covering our GAAP revenue and earnings performance and then move on to our non-GAAP metrics.

We achieved record revenue of $12.3 million in the fourth quarter that is a 5% year-over-year increase and was at the top end of our guidance. For the full year, revenue was $48.1 million, which is an 11% increase over 2012 and in line with our guidance. That year-over-year growth was slowed by lower Google orders.

Our GAAP net income for Q4 was $4.8 million, up 21% and for the full year was $10.5 million, down 5%. Both of these figures include a tax benefit recorded in Q4, resulting from a reduction in our deferred tax valuation allowance. This benefit adjustment was approximately $1.4 million in 2013 and $2.3 million in 2012. Net of these tax benefits 2013 earnings were $9.1 million compared to $8.7 million for 2012.

A quick comment on our tax asset valuation allowance, generally accepted accounting principles required as earnings improve and therefore our ability to utilize historical net operating losses improves, we must reduce our deferred tax asset valuation allowance. So consistent with the prior three years, we again reduced the valuation allowance in 2013.

Our fourth quarter ending backlog was record $65.7 million, which is 14% increase year-over-year. We anticipate approximately 54% of the backlog will be recognized interim revenue in the next 12 months, consistent with our [SAP] subscription model.

Moving on to our non-GAAP metrics, we achieved fourth quarter adjusted gross profit of $10.5 million, 85% of revenue, up 8% year-over-year and essentially flat sequentially. With regard to operating expenses adjusted R&D and SG&A expenses totaled $6.5 million in the fourth quarter, down from $6.8 million in Q4 2012.

Adjusted R&D expenses were $2.1 million in Q4, which is down $300,000 year-over-year. Adjusted sales and marketing expenses for the fourth quarter were $3 million compared to $2.9 million, up only slightly from Q4 2012 due to the front-end loading of marketing expense in 2013.

Adjusted G&A expenses for the fourth quarter were $1.5 million, flat with the prior year. For the full year 2013 adjusted operating expense was $28.2 million, up $4.2 million. This year-over-year increase was about evenly split between R&D and sales and marketing.

The full year $9.4 million in adjusted R&D expense was up $2.1 million over 2012 with the increase driven primarily by investments and new product development that began in July of 2012 and continued through 2013 as we’ve described to you before. Adjusted sales and marketing expense for the year was $12.9 million compared to $10.6 million for 2012.

The increased in sales and marketing expense resulted primarily from increased sales headcount and additional investments in advertising to drive revenue growth. Our adjusted G&A expenses for the year were $6.1 million, down slightly from the prior year reflecting our continued discipline in this area.

Adjusted operating margin for the fourth quarter was $3.9 million, 32% of revenue compared to $2.9 million or 25% of revenue for the fourth quarter of 2012. Adjusted operating margin for the year was $12.4 million, 26% of revenue as compared with $11.8 million, 27% of revenue for the full year 2012.

Our adjusted EBITDA for the fourth quarter was $4.3 million, up 28% year-over-year. For the full year adjusted EBITDA was $13.9 million, up 5%. The adjusted EBITDA margin percentage was 35% for the fourth quarter and 29% for the full year. Fourth quarter 2013 capital expenditures totaled $331,000 and for the full year $1.6 million compared to $1.5 million for 2012.

Depreciation expense for the quarter was approximately $390,000 and for the year $1.5 million, approximately 70% of the depreciation expense was recorded in cost of revenues. Our cash flow from operations again exceeded our operating requirements including new investments in product development and advertising, we therefore continue to have no borrowing needs and consistent with the past several years we continue to have no debt on our balance sheet.

In November of 2013 we announced a $15 million share repurchase program. Under that program in 2013 we used $8.8 million to repurchase approximately 2 million shares of our stock.

Year-end cash was $27.5 million, down $5.4 million from the third quarter of 2013 and up $4.5 million compared to the year-end 2012. Our cash flow from operations averaged $3.3 million per quarter totaling $13.3 million for 2013.

Adjusted net income for the fourth quarter was $3.8 million, up 27% from Q4 2012. For the full year 2013 adjusted net income was $12.1 million, up 4% from 2012. Our adjusted net income per fully diluted share of common stock for the quarter was $0.06, up $0.01 and at the high-end of our guidance. For the full year 2013, adjusted net income per fully diluted share of common stock was $0.19 also up $0.01 from the prior year and in line with our guidance.

I'd like to set the stage before moving on to forecast our revenue and adjusted earnings per share for 2014. As Rick mentioned earlier, we are planning new investments in sales and marketing in 2014. These are intended to accelerate growth across our legacy email encryption base, as well as our new products ZixDLP and ZixOne.

Recall that our revenue model is a multi-year subscription model, recognizes revenue from new orders relatively over the term of the subscription, with revenue recognition starting only after we implement the service. Remember too that our new first year orders metric reflects only the first 12 months of revenue from new multi-year subscriptions.

Because of the delayed revenue recognition for new orders approximately 90% of our revenue typically comes from backlog in the renewal base. That means new orders in any given year contribute only about 10% of revenue. Depending on the timing of new orders, only 40% to 50% of the current year new first year orders actually contribute to this 10% in any given year.

Before we expect that our investments in sales and marketing will accelerate our sales growth. But most of the P&L benefits of increased sales to be deferred due to our revenue recognition model. As a result, we expect to see higher expense in 2014 with an increase of new first year orders and total orders that will grow our backlog, but with much of the revenue benefit from those new orders deferred until 2015 and beyond, when we deliver services on those new subscriptions.

Taking this into the consideration, we project first quarter fully diluted non-GAAP adjusted earnings per share to be $0.02 to $0.03 of projected revenue ranging from $12.2 million to $12.5 million. For full year 2014, we project revenue to be between $53 million and $55 million and fully diluted non-GAAP adjusted earnings per share to be between, $0.15 and $0.17.

That guidance (inaudible) adjusted EBITDA margin percent in low 20s and adjusted operating margin percent in the high-teens. One more thing to keep in mind for 2014. As I mentioned earlier, we reduced the deferred tax asset valuation allowance in each of the last four years, generating a tax benefit on the income tax line of our operating statement.

In 2014, we expect to book federal income tax, but unlike prior years further adjustments to the deferred tax valuation allowance if any are not expected to fully offset the tax provision. In the event we do not further reduce the valuation allowance, we anticipate recording an income tax provision on a quarterly basis for approximately 34% of pre-tax book earnings, significantly higher than in the past. We will however continue to have favorable cash tax treatment due to the tax benefits of the deferred tax asset.

In closing we’re pleased that we achieved record revenue and continue to grow to backlog to record levels in 2013. We also achieved record adjusted earnings, while at the same time making significant investments in new products, sales and marketing.

Although these investments will have an impact on our earnings in 2014, we are excited about the potential benefits from our continued investments ended their expanding sales and accelerating revenue growth. We look forward to delivering another year of strong financial results in 2014.

With that I’ll turn it back to Rick.

Rick Spurr

And with that we will open it up to questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Mike Malouf with Craig-Hallum.

Mike Malouf - Craig-Hallum

Hey, guys. Thanks for taking my question.

Rick Spurr

Hello, Mike. (Inaudible).

Mike Malouf - Craig-Hallum

Okay. Just want to talk a little bit about the guidance. It looks like you got $53 million to $55 million on the top line. Can you give us a sense of what that guidance includes with regards to both the new business as well as Google?

Rick Spurr

We don’t intend Mike to start breaking it down in that granular fashion. You’ve got a number of models that vary the different components and numbers that we believe are achievable and realistic.

The other point that I think is important to note as Mike said in his script only 10% of our revenue will be driven by our new sales. So that’s just an another point that we can flex our sales up dramatically even beyond maybe our current estimates for all new products and it still wouldn’t have any meaningful impact on 2014 revenue.

Mike Malouf - Craig-Hallum

Right, okay. And then with regards to ZixOne when you take a look at the pipeline and potential deals out there, are you finding that ZixOne is going towards more of a smaller customer versus some other competitors out there or are you engaged with some sort of multi thousand employee opportunities or I am just trying to get a sense of where you think the product is best within the (inaudible)?

Rick Spurr

Sure. We are engaged with some multi thousand user opportunities, but because of the time we’ve been in the market it is true that the majority of our current sales have been with smaller customers just because those sales cycles are short. The bigger customers of course have a lot more people in the mix in terms of decision makers. And some 60% of them have at least a toe in the water with some of our competitors. And that’s good news and if they know about the competitive weaknesses but it just makes their process of evaluating and making yet another decision a little more complex. But yes we don’t think at least right now I would say we don’t have an opinion to suggest that we are going to be majoring in one segment or another, we are going across the board from the very largest customers to actually quite small.

Mike Malouf - Craig-Hallum

And one of the VARs tell you with regards to feedback on the product are they, are any of them selling competing products and are using you as a secondary product or are the I guess 200 or so VARs that have signed up now are they exclusively selling ZixOne?

Rick Spurr

There is a mix Mike, that’s a good question there is a mix. They are very enthusiastic about our offering and I mentioned that half of our sales now although against the small base have been made by the VARs. So one of the beautiful things about ZixOne is it is so (inaudible) and simple to present and so easy to articulate the advantages. And so it lot of VARs to come up speed pretty quickly and makes the money. Those are the solutions take a long time to get started and even when they do, because of their cumbersome nature, we have seen a large roll out. So, we think we're going to win the hearts and minds. But and so far so good, we'll see how it evolves.

Mike Malouf - Craig-Hallum

Okay, great. Thanks a lot for the color.

Rick Spurr

Thanks so much Mike.


(Operator Instructions). And your next question comes from the line of Fred Ziegel with Topeka Capital Markets

Fred Ziegel - Topeka Capital Markets

Hi guys.

Rick Spurr

Hey Fred.

Fred Ziegel - Topeka Capital Markets

So, in terms of the spending and headcount additions that go along with that or driven by that, how do you think about that you just mentioned half of the ZixOne business so far has come through the channel. How are you thinking about managing potential channel conflicts? Are you bifurcating me the sales force and the channels by some mechanism?

Rick Spurr

That also a good question Fred. We've been dealing with processes and mechanisms to create harmony across various channels for ever. So, we know what we're doing. And before I speak, the punch line is our sales people, our direct sales people, they get paid for channel mix of placement within their geography.

And so they are encouraged to for any channels, hybrid channels and encourage the channels to go get business. So it’s all-in team work approach that creates the harmony that (inaudible)

Fred Ziegel - Topeka Capital Markets

It’s in either of the new products, in the DLP I know Semantic has a product, but if I think about your big OEMs, do they represent any potential channel for ZixOne product?

Rick Spurr

They represent sequential, we are not now selling to them, but they and other strategic distributors are obviously part of our plan, not necessarily them, but I mean to go to the various parties. The next uptick in broad-based distribution which don’t expect this early because they expect to have us to have a meaningful basic clients before they start selling that part of our strategy will certainly create new full uptick assuming we’re able to execute our.

Fred Ziegel - Topeka Capital Markets

And the broader question, where is Zix today in terms of thinking about international?

Rick Spurr

Yes, it’s a good question. So our products are enabled for international sales, we support 12 languages. We do create, we do have a support organization place for international sales, sales have been made today are naturally through, Semantic primarily, although Google is the needle to sell worldwide as well. We have not chosen yet to invest in feed on the street, in remote international markets. Those investments take a long time for payback. And we feel like we've got more than ample opportunity for organic investments and ZixOne and [BLP] investments here in the states.

Fred Ziegel - Topeka Capital Markets

Okay, so no time soon we’ll talk presumably?

Rick Spurr

Again even include feed on the street in Japan or UK or Western Europe was ramp up safe with this two couple three years to getting meaningful volume, and it’s not that we shouldn’t do it, it’s just to say that we got a some priorities.

Fred Ziegel - Topeka Capital Markets

Okay. All right, thanks.

Rick Spurr



Your next question comes from the line of Michael Kim with Imperial Capital.

Michael Kim - Imperial Capital

Hi, good afternoon guys. Just turning back to the base email encryption business, where are you seeing the strongest growth drivers in terms of verticals that non-regulated industries or still pretty much across the board? And in terms of the customer mix are you seeing maybe an extension deployment of the larger enterprise customers?

Rick Spurr

It was a very time, Michael, we’ve seen especially what?

Michael Kim - Imperial Capital

Expansions in the customer mix with the larger enterprise customers?

Rick Spurr

Yes. Well, I mentioned that the fourth quarter sales from the UK deal were up 84% and the full year was up 37%. And so we are seeing growth in the enterprise segment for sure. And that reflects to certain degree of consolidation in the marketplace most notably Cisco has now declared end of life to their high-end product. So we have been investing heavily and we are starting to see those returns come in. What was the first part of your question?

Michael Kim - Imperial Capital

If you are seeing growth from non-regulated verticals or is it across the broad?

Rick Spurr

Yes, we are not -- over the years our fastest growing on a percentage basis sector or segment is the other category which are non-regulated segment for the business but it still only represents 18% of our sales, 18% up in the (inaudible) but we’re still seeing close to 80% from healthcare and finance.

Michael Kim - Imperial Capital

Great. And then just on competitive displacement is it primarily just Ironport or are you actually seeing opportunities with other competitors?

Rick Spurr

That’s a good question again Michael. The 2013 we took business away from a much larger number of competitors. And specifically our greatest success was vis-à-vis Cisco and also meaningful uptick and win backs from Barracuda who came out with kind of a low end product and a lot of early placements, but it’s really not a very, well we don’t think a very full featured product. So it’s there relatively easy for us to take out some of those. While we’ve got one of everyone, as you name a vendor and we have won business from.

Michael Kim - Imperial Capital

Great. And then just on the OEM side with the ramp in the Symantec relationships. Is it your expectation that Symantec will be roughly comparable this year or with reengagement by Google sales force that they will again be kind of the larger OEM partner this year?

Rick Spurr

They will so much larger than Symantec. When we get them back online which certainly is our expectation we communicated that very clearly, we didn’t say when, but we certainly say we will. We may conduct online. Symantec could catch up, but I'm certainly not ready to clean that just yet.

Michael Kim - Imperial Capital

Great. Thank you very much.

Rick Spurr

Thanks Michael.


Ladies and gentlemen, this will conclude today’s question-and-answer session. I will now turn the call over to Mr. Rick Spurr for closing remarks.

Rick Spurr

And my closing remarks are simple as always. Thank you very much for your continued interest and look forward to meeting many of you in person over the coming days and months and, call us if we can help. Thanks again.

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