Zix CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Zix Corporation (ZIXI)

Zix Corporation (NASDAQ:ZIXI)

Q3 2011 Earnings Conference Call

October 25, 2011 5:00 PM ET

Executives

Charles Messman – IR, MKR Group

Rick Spurr – CEO, Chairman & COO

Mike English – CFO

Analysts

Mike Malouf – Craig-Hallum Capital Group

Jonathan Ruykhaver – Morgan Keegan

Jackson Spears – Gar Wood Securities

Ian Kell – Northland Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to third quarter 2011 Zix Corporation earning conference call. My name is Jeff and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator instructions) I would now like to turn the conference over to your host for today, Mr. Charles Messman with the MKR Group, and you have the floor sir.

Charles Messman

Thank you, Jeff, and good afternoon. My name is Charles Messman. I’m President of MKR Group, Zix Corp’s investor relations firm. I am introducing today’s call for Geoff Bibby, our vice president of Corporate Marketing, who is here today, but unfortunately lost his voice, which I am sure has nothing to do with the recent Texas Rangers win last night.

So thank you for joining us on our Q3 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. Then, our Chief Financial Officer, Mike English, will give you details on our financial results. Later in the call, they 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 forecasts of revenues, earnings, operating margins and cash flow, projections about contracts for 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 factors 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 adjusted items to the most directly comparable GAAP financial measures.

With that said, I would now like to turn the call over to Rick Spurr. Rick.

Rick Spurr

Thank you, Charlie. Good afternoon everyone and thank you for joining us today to discuss our 2011 third quarter financial results. I am pleased with our overall record results for the quarter, which included record non-GAAP net income, record cash flow generation, and bookings backlog at quarter end of $52.6 million, up 13% when compared to 3Q of 2010.

We generated record revenue of $9.6 million in the third quarter, up 12% year-over-year and in line with our guidance of $9.5 million to $9.7 million. We also witnessed continued strength in our customer renewals. Our continued revenue growth reflects the strong and predictable business that we have built based upon our successful subscription model and our leadership in email encryption.

New first year orders for the third quarter were $1.64 million. We don’t see any meaningful change in the marketplace that explains this sequential decline. The variance could be due to the fact that unlike most quarters we did not close a large-sale during the quarter. By large sales I’m referring to deals at or above $100,000 in annual recurring revenue. In a broad sense, potential customers may have been showing caution with regard to new purchases based on their concerns about the future, driven by negative reports on the macro economic climate.

Although new first-year orders were down from the second quarter, and not as strong as we would like, we continued on our path of solid top line growth, and remain optimistic due to the strongest enterprise sales pipeline that we have ever had. To remind everyone, our enterprise sales are those to customers who have 1500 employees or more. The pipeline represents active sales situations that have the potential to close over the next six months or so.

This pipeline seems to reinforce the Gartner and Ponemon Survey data that we will discuss later in the call. Now let me talk a little bit about the growing strength of the e-mail encryption market, and Zix Corp’s leadership position. We believe that we are likely to see an upsurge in the use of e-mail encryption, and Zix Corp is well positioned to benefit from our industry’s overall growth. Our positive outlook is supported by three key items in addition to the strong pipeline we just discussed.

First we commissioned during the quarter a study of “the state of the e-mail encryption,” which is available on our website. This independent study was conducted by the highly regarded Ponemon Institute. Ponemon surveyed IT, IT security, and compliance practitioners within several vertical markets and received 830 responses representing what we believe is the largest survey of its kind. The majority of the responses came from large corporations, which are significant because this market segment seems well positioned to show strong growth for us over the next 12 to 24 months.

Overall, the majority of respondents strongly agree that the use of e-mail by employees is one of the main sources of data leakage throughout their organization. Over 70% of respondents indicated a concern about the loss of information via e-mail on mobile devices, and over 71% viewed ease of use for recipients, as well as senders as very important to them.

Findings included a continuous fear of data loss from e-mail applications. Frustration from senders and receivers as a result of working with outdated technology solutions and the need to provide support for an increasingly mobile world that allows transparent sending and receiving of encrypted messages on mobile devices. Our industry leading solution addresses all of these concerns, supporting our continuous positive outlook for long-term growth.

Second, Gartner Group, a leading technology analyst firm noted in its recently published Magic Quadrant a market summary of the secure e-mail gateway segment that large enterprises will seek to add e-mail encryption as a business imperative. These organizations are seeking to improve their ability to discover leakage of sensitive information in e-mail and they realize that simply blocking that exchange of information is rarely a viable option. As a result Gartner believes that companies will need to add or update e-mail encryption as a strategic feature of their e-mail systems during the course of contract renewal in the next 24 months.

Third cyber security and privacy initiatives in Washington may drive companies to focus even more attention on their use of unencrypted e-mail. Following up on the White House cyber security legislative proposal in May, the House Republican Cyber security Task Force issued in October its recommendations on federal cyber security regulation, and in September, the Senate judiciary committee approved three bills, aimed at setting national privacy standards for data breaches involving personal information.

In addition, the SEC recently issued new guidance directing public companies to review on an ongoing basis the adequacy of their disclosure about cyber security risks. Of course, government processes can be drawn out, and difficult to predict, but we are optimistic that these legislative and regulatory initiatives could increase the attention paid by businesses to cyber security and data privacy, which could provide a positive impact on our market.

We are encouraged by these positive trends in the e-mail encryption market. Now let me provide an update on the growth of ZixDirectory, which has now up to 28 million members and has been growing at a pace of approximately 100,000 new users per week. When I think back it wasn’t too long ago that I was excited to report reaching the 7 million member mark for the directory. Needless to say this growth is very impressive.

The key technological advantage that we offer in this unique cloud based shared directory architecture, the only one of its kind is allowing unequalled ease of use, most notably through our transparent e-mail encryption capabilities, allowing users to send and receive encrypted mail without any additional steps, not even a passport is required.

Now some specifics on what we saw in the sales for it during the third quarter. As many of you know we have three core sources of new orders. The first is our direct enterprise group, selling direct to large commercial enterprises, which as I mentioned earlier in the call are companies with 1500 employees or more. The second is our corporate group based in Burlington, Massachusetts. This is primarily an inside sales team that sells into the small and medium business market and to the Federal government, often working closely with more than 160 value-added resellers and managed security service partners.

The third source is our large OEM partners, including Google, Symantec, Webroot, Dell, Marshal 86 and others. In terms of breakdown of the new orders in the third quarter, our direct enterprise group represented 27% of our new first-year orders. The corporate sales group represented 52% of our new first-year orders. And the large OEM partners represented 17% of new first-year orders during the quarter.

We did see a decline in new first-year orders from our large OEM partners, but expect that this will be stronger in the fourth quarter. Now let us look at some of the notable business wins we achieved during the third quarter. We renewed our contract with 7-Eleven, a multi-year service agreement that leverages secure e-mail to communicate agreements, invoices and updates to their partners, as well as protect e-mail containing sensitive employee information, intellectual property and executive e-mails. This is our third multi-year renewal with this worldwide retailer.

We also recently signed an agreement with American Home Mortgage Servicing Incorporated, often referred to as AHMSI, a large mortgage servicer. We won this business due to our ability to ensure the delivery of encrypted replies, which is a critical capability for AHMSI to ensure secure exchange with their customers. On the international sales front, our OEM partner Marshall 86 signed an agreement for a 2000 user department of a large, well-known European-based bank.

We’re proud of our position in this marketplace. We now have over 6000 customers throughout several vertical markets, along with robust and growing distribution capabilities through both our direct and indirect channels, all coupled with the industry’s leading e-mail encryption platform.

Let me turn now to a brief discussion of the competition. As we have noted in the past, the overall landscape has changed during 2011. Tumbleweed at one point our largest competitor continues to erode its installed base due to outdated technology getting us replacement opportunities. Symantec however has become somewhat more active, in the enterprise space, now that their sales teams have become more familiar with their PGP offering that was acquired in 2010.

Competition from Cisco continues to be far less visible these days than in 2010. Overall we remain confident about our market leadership both now and in the future. Before I turn the call over to Mike, to discuss our financials in more detail, I would like to spend a little time on ZixMobility. On our last call we noted that we began rolling out ZixMobility to both new and existing customers. ZixMobility brings seamless e-mail encryption designed specifically for the users’ particular smart phone, tablet computer, or other mobile device, and its ease of use is unmatched in the industry.

We are adding this solution for our paying customers at no additional charge in order to continue to differentiate our solutions and to give us additional pricing power with future agreements and renewals. I am very pleased with the strong customer response we have received. We expect to have migrated all customers to the new ZixMobility by early 2012.

Now I would like to turn the call over to Mike to review our financials. Later in the call I will provide some more color on full year guidance, and then we will open up the call to take your questions.

Mike English

Thanks Rick and good afternoon everyone. We are pleased to report strong results for the third quarter in our key financial metrics, revenue, GAAP and adjusted net income and EBITDA. GAAP net income was $2.6 million for the quarter as compared to $1.8 million for the same period in 2010.

We achieved record revenues from continuing operations of $9.6 million for the third quarter, which compares to $8.5 million for the third quarter of 2010. This was within our previous guidance range of $9.5 million to $9.7 million.

Our OEM partners drove approximately $300,000 of the revenue increase, a 39% improvement from the third quarter a year ago. Our direct sales to enterprise and corporate customers, including through our resellers and managed security service providers drove the remaining growth.

We ended the third quarter with bookings backlog of $52.6 million, which is a 13% increase over the $46.6 million backlog at the end of third quarter of 2010. As a reminder to everyone, our backlog is comprised of contractual commitments that we expect to amortize into revenue in the future as the services are performed.

The timing of the revenue recognition from the backlog is affected by both the length of time required to deploy a service and the length of the service contract. We anticipate approximately 58% of the backlog being recognized into revenue within the next 12 months. As it happens from time to time, on a sequential basis the backlog at $52.6 million was flat reflecting the timing impact of renewal orders. In the second quarter, we renewed a larger base of contracts, which generated a large increase in the backlog, while in the third quarter the renewable base was smaller.

Let’s move on to look at our various margins as well as the details on our expenses. We achieved third quarter adjusted gross profit from continuing operations of $7.8 million, 82% of revenues. This compares to $6.9 million, 81% of revenues for the same quarter last year. On a sequential basis, it compares to $7.7 million or 82% of revenues for the second quarter of 2011.

With regard to adjusted operating expenses from continuing operations, adjusted R&D and SG&A expenses totaled $4.9 million in the third quarter of 2011 compared to $4.6 million for the same period last year.

Adjusted R&D expenses were $1.3 million in the third quarter of 2011 compared to $1.2 million in the third quarter of 2010. SG&A expenses for the third quarter were $3.6 million, an increase of $200,000 over the same period last year.

Adjusted operating margin for the third quarter was $2.9 million, 30% of revenues. This compares to a margin of $2.3 million or 27% of revenues for the same quarter last year. Adjusted operating margin year to date was $8.1 million, 29% of revenues, as compared to $5.1 million, 21% of revenue for the same period in 2010.

Our adjusted EBITDA for the third quarter was $3.2 million compared to $2.9 million in the third quarter of 2010. The adjusted EBITDA margin for the third quarter was 33.7% while brings the year to date margin to 33.4%.

Capital expenditures for the third quarter were $348,000 and depreciation expense for the quarter was also approximately $348,000. Depreciation is recorded in the various P&L line items, with approximately 72% recorded in cost of revenues.

Pending cash including commercial paper investments was $22.0 million, an increase of approximately $4.9 million from the Q2, 2011 ending cash balance. Contributing to this $4.9 million increase was $4.8 million from operating activities. Compared to this time last year, cash including commercial paper investments increased $2.5 million, despite using 15 million cash this year to repurchase our common stock.

Adjusted net income from continuing operations for the third quarter was $2.8 million, which compares with $2.3 million for the same period in 2010. Our adjusted net income for fully diluted share of common stock from continuing operations for the quarter was $0.04 versus $0.03 for the same period last year.

Before I move on to guidance for 2011, I want to mention the status of our warrants. Subsequent to the end of the third quarter, but prior to the October 5 expiration date approximately 1.6 million warrants with an exercise price of $1.54 were exercised, increasing our fourth quarter cash by approximately $2.5 million. We have approximately 146,000 remaining warrants outstanding with an exercise price of $4.48. These warrants will expire in January 2012.

Turning now to guidance for the fourth quarter of 2011, we project our fully diluted adjusted earnings per share to be $0.04 per share on a projected revenue guidance ranging from $9.7 million to $9.9 million. Based on this fourth quarter guidance, our fully diluted adjusted earnings per share for the full year will be $0.16 and our revenue will be approximately $38 million. Adjusted EBITDA margin percent is expected to be in the low 30s and adjusted operating margin slightly less than 30%.

In closing, I would like to say again that we are pleased with the third quarter results against our key financial metrics, and look forward to continued growth as we close out 2011. With that I will turn it back to Rick.

Rick Spurr

Thank you, Mike. So we are pleased to be reporting records in many aspects of our business. In the one area that wasn’t a record new first-year orders, we are hopeful that future results will reflect our strong pipeline and the future of the market as predicted by third-party analysts. Later this week I will be presenting at the Houlihan Lokey Conference in New York City on October 27.

I hope to see some of you there, or in the near future. Thank you for your time and continued interest in Zix Corp, and with that we will turn it over to the operator to see if we might have questions.

Question-and-Answer Session

Operator

All right. Thank you. (Operator instructions) Our first question comes from the line of Mike Malouf with Craig-Hallum Capital Group. Please proceed.

Mike Malouf - Craig-Hallum Capital Group

Hi Rick and Mike.

Rick Spurr

Hi Mike.

Mike English

Hello Mike.

Mike Malouf - Craig-Hallum Capital Group

Rick, you just, you mentioned that you have a strong pipeline on your new first-year orders, I’m wondering if you could just give us a little bit of color on that. Is that more on that direct side, is that more on the corporate side, and maybe that is being driven by some Federal, government orders. I would love some color on that?

Rick Spurr

Yes, (inaudible). So where the pipeline is as I said in a record level is in our enterprise sales group. So again we have the OEM guys and we have the OEM source of orders, and we don’t have much visibility into their backlog or their pipelines. They send us a report every month, and it basically tells us what they sold in the prior month, and that is the only visibility we have.

Other than our interactions with them on an ongoing basis, but still we don’t have visibility to their pipeline. The corporate sales guys, they are doing well, are optimistic not doing as well as last year off by maybe 10%, 15%. And so the backlog I was referring to, or pipeline is referring to is with the enterprise team that calls on accounts of 1500 employees or greater, and does not include the Federal opportunities.

So this is just across the board health care, finance, non-core verticals, deals ranging from at a very low end 15 K at the very high-end $150,000, $200,000 deals. And that list of deals that are active is as I have said, larger than it has ever been. And there is a whole variety of factors. There is really not any one thing I can point to. It is compliance; it is the replacement of outdated solutions that is a big piece of it I think.

These large customers are typically the first to buy solutions to problems, and as such they were requiring email encryption solutions early in the decade, early in the year 2000 through 2004 let us say, and those systems are now old. They are 7 to 10 years old in many cases, and over time those things get outdated. The new generation technology shows advancement, and they turn over. And that is what we think we’re beginning to see.

Mike Malouf - Craig-Hallum Capital Group

And it sounds like you know given that that group tends to go after that large accounts, as you said over 100,000 for some of these, and you didn’t close any accounts over 100,000 in this quarter, was there any, some particular delays caused by some of the macroeconomic issues that you talked about, and can you actually point to three or four deals that just didn’t happen?

Rick Spurr

Let me first make sure that there is clarity. They do close in some cases large deals over 100,000, and over the course of 2010, and in the second quarter of 2011, we averaged about one of those very large deals a quarter. They close a lot of the smaller than that between 15 to 40, to 50, to 60 in that range. So I don’t want to get everyone over rotating on $100,000 deals. There are more of those in our pipeline that we have ever had, but it is more broad-based. The overall demand and pipeline seems to me more broad-based.

More to your point Mike about any particular slippage, my view is that there were some medium-sized deals that got delayed. They are not gone, they are still active. We are still hopeful, but I think customers were just reticent to pull the trigger given some of the macroeconomic fear mongering that was going on. In terms of the very large deals, I would put them more in the category of evolving and developing as opposed to more keyed up and now slipped.

Mike Malouf - Craig-Hallum Capital Group

Okay, and then one of the things you mentioned also on your prepared remarks was that you thought the OEM channel, which was at 17% and declined versus prior periods would be higher certainly in the fourth quarter, and then of course you said that I don’t have any visibility into that OEM. So I’m a little surprised by that comment, maybe you could help me to square those two?

Rick Spurr

You mean the comment about visibility?

Mike Malouf - Craig-Hallum Capital Group

Yes.

Rick Spurr

Well, let us address the overall situation. The overall situation is that they were off 20%-ish, which is uncommon. I don’t have any specific reason that we can point to. Google seem to chug along, Symantec and Webroot were off, and I can only speculate that that is then dealing with the macroeconomic negativity that was present in the third quarter.

In terms of – we don’t have visibility to their specific pipelines, but the people that deal with them are able to work up forecasts for the current quarter. And so based upon those forecasts for the current quarter, we have reason to be optimistic that that falloff was one time.

Mike Malouf - Craig-Hallum Capital Group

Okay, and with the forecast going into the third quarter, surprisingly below where they had been?

Rick Spurr

Yes.

Mike Malouf - Craig-Hallum Capital Group

Okay. All right, thanks.

Rick Spurr

Like I said, off by 20%, 30%.

Mike Malouf - Craig-Hallum Capital Group

Sure. Got it. And then, with regards, my last question as regards to pricing are you seeing any change either positive or negative with regards to pricing with (inaudible) data renewals or with new clients?

Rick Spurr

You know, our strategy was to introduce fixed mobility, and we assumed that would give us greater pricing power. I think there is evidence of that in the renewals. I can’t say that I can point to specific evidence of that in the new business. So pricing still is strong, our ability to hold our pricing has continued as it has in the past with some slightly better pricing power that I think exists now in the renewal world.

Mike Malouf - Craig-Hallum Capital Group

Okay, great. Thanks a lot guys.

Rick Spurr

Thank you, Mike. Those were great questions.

Operator

Our next question comes from the line of Jonathan Ruykhaver with Morgan Keegan. Please proceed.

Jonathan Ruykhaver – Morgan Keegan

Hi Rick.

Rick Spurr

Hi Jonathan, how are you?

Jonathan Ruykhaver – Morgan Keegan

Good. How are you?

Rick Spurr

Great.

Jonathan Ruykhaver – Morgan Keegan

Okay, and Rick can you talk about your M86 and Dell, I think you added those two guys as partners via the Webroot agreement last quarter, any kind of contribution?

Rick Spurr

From the Webroot guys, who did you make reference to?

Jonathan Ruykhaver – Morgan Keegan

M86 and Dell, I think you mentioned with them M86 in Europe.

Rick Spurr

Yes. So M86 has been developing well I would say over the last nine months or so, and contributing more now than they have in the past. The Dell arrangement is not yet paying dividends, and we are working with them to improve on that. But the Dell/Webroot channel is slow right now.

Jonathan Ruykhaver – Morgan Keegan

Okay, and you did mention from a competitive standpoint Symantec being a bit more aggressive it sounds like with their own encryption products, do you see them using those encryption products on their new front here more than bringing you into opportunities?

Rick Spurr

So, Symantec is very large and so they deal with all the various segments of the market. Where they have enterprise opportunities they do today and always have, well I shouldn’t say that, they lead with PGP today. No question about it. Now the truth is that in those enterprise markets in the past our Cloud-based solution was the best foot forward in many of those cases. So where they have been reselling our product and continue to resell our product is in Symantec hosted services.

So we still have channel there, we still get volume there, but I have to keep an eye on their sales force’s new-found sort of familiarity and knowledge about their PGP offering. And as these new enterprise deals come to the forefront, I think we are going to see more PGP and a lot less Cisco than we had in the past.

Jonathan Ruykhaver – Morgan Keegan

Do you think that looking at Symantec and Webroot that there is something problematic from an execution standpoint, or do you think it is the market in terms of you have a lackluster OEM contribution?

Rick Spurr

I think that we have some fundamental issues to deal with in the Webroot circumstance. I don’t feel that way as it relates to Symantec. We still have a good relationship, and not a lot of new news there, other than the fact that as I said their sales force seems to embrace the PGP thing better than they did in the past, particularly for enterprise on premise opportunities.

Jonathan Ruykhaver – Morgan Keegan

Okay. Given the strength you cited within your enterprise sales pipeline, is it your expectation that new first year orders come back into the $2 million range in the December quarter, is 1.5, 1.6 kind of a number we should think of going forward?

Rick Spurr

Well, I hope 1.5, 1.6 is not the number you should think about going forward. But we don’t as you know give guidance or try to predict sales because it is unpredictable, but the signs are there and the opportunities are there, and I did use the term in the script six months intentionally to not get you to get hands on fire for the fourth quarter, but you never know. There is a lot of activity, and we certainly have incentives out to maximize how many of them we can get close, but we will see.

Jonathan Ruykhaver – Morgan Keegan

Okay, and then you did mention strong renewal rates, can you quantify where those renewal rates are?

Rick Spurr

No, just because we made a commitment we weren’t going to do that. I guide everybody to 90% for those renewals that come up for renewal, and we always said we see about that always. We more recently said that we see about half of our business come up for renewal in any given year. So if you want to look at erosion that occurs, we are losing about 5% of annual revenue, due to downsizing or cancellations. And then of course more than offset that with all our new sales.

Jonathan Ruykhaver – Morgan Keegan

Okay. And I guess…

Rick Spurr

And also as it bubbles north of 90 and had at one or two instances what was actually lower than 90, I won’t be quoting those numbers because you don’t know the denominator, you don’t know much tougher we are renewing. It is better to just tell you in your mouse to use 90, and I will promise to keep you informed if on an annualized basis, you see some significant deviation from that.

Jonathan Ruykhaver – Morgan Keegan

Right.

Rick Spurr

It is certainly on the downward. We may provide an upside surprise here and there, but that is all good.

Jonathan Ruykhaver – Morgan Keegan

And the last question I have relates to some feedback that we are hearing related to RFP activity for these broader-based messaging solutions that will include a component around hosted e-mail security, in addition to our kind of discovery tools. So it is a broad platform type of approach, I am wondering if encryption is increasingly a future in those broader messaging type RFPs around security and compliance, and (inaudible) any discovery, do you lose out, did you not see those opportunities because it is really up to the partner to pull you in, if the partner isn’t pulling you in that you are just not getting into those deals?

Rick Spurr

So, first of all the survey data in our own experience would seem to substantiate the survey data, suggest that about a third of the large enterprise opportunities at least start out looking for a bundled solution. Further questioning in the survey material would suggest that of those third, some percentage of that let us say as much as half would consider best of breed if that seemed to be the ultimate outcome.

So if you buy that math you would see that maybe 15% to 20% we wouldn’t even see absent our inclusion in a Google bundle or a Symantec bundle. So our only access to that 15% to 20% would be again through one of our partners as they bundle our product with theirs. But that still leaves us a huge part of the market that we think we can address and are addressing.

Jonathan Ruykhaver – Morgan Keegan

Okay, good enough. All right I think that is all I have Rick. Thanks a lot.

Rick Spurr

Those were good questions. Thank you.

Operator

(Operator instructions) Up next we have Jackson Spears with Gar Wood Securities. Please proceed.

Jackson Spears – Gar Wood Securities

Rick, how are you? Congratulations on your numbers. Could you give some color on the tax rate in the fourth quarter, and what kind of tax rate you think you might have next year. I realize you have a huge tax loss because our world is changing for you?

Rick Spurr

That is a Mike English question. Here he is.

Mike English

We do expect in the fourth quarter that we would be, as we did at the end of last year adjusting our deferred tax asset valuation allowance, which then would provide a credit or benefit to our tax provision. So you can expect to see that again. We have not worked through the detail of that the exact amount. We do expect that it will be lower than last year, but we are expecting a credit again.

With regard to 2012, I can’t give you any guidance on that yet, whether or not we will be adjusting it again. There will be some deferred tax asset remaining, although I don’t know to what extent we will be adjusting, so I probably can’t help you at this point with 2012.

Jackson Spears – Gar Wood Securities

In this part of this call that you talk about the (inaudible) SG&A and for your R&D?

Mike English

We did. We covered those in the script.

Jackson Spears – Gar Wood Securities

Well, I will look in the script and get it. It is fine. Thank you.

Rick Spurr

You are welcome.

Mike English

Thanks Jack.

Operator

And our next question comes from the line of Ian Kell with Northland Capital Markets. Please proceed.

Ian Kell - Northland Capital Markets

Hi Rick and Mike.

Rick Spurr

Hi, Ian.

Ian Kell - Northland Capital Markets

Just Rick, obviously in the last call you talked about new first-year orders here in the second half should grow versus the first half, I mean how confident are we in that still?

Rick Spurr

I wish I could say absolutely I am sure, but because sales are so unpredictable I would not have bet the 1.6 number in the third quarter, but as we said I think the negativity because of the macroeconomic news tamped that down. it feels like that is improving, and you know if you do the simple math, I think we got to get to 1.85 to make that a true statement. I sure as heck think I can and believe I can, but I can’t predict that. We could have a nice surprise on the upside too and go by it. That is all about we can say right now.

Ian Kell - Northland Capital Markets

I mean, is there anything concrete you can talk about that needs to kind of get done to get back to the $2 million level, or are we just assuming at this point the economic hangs in there that we can get back to growth again?

Rick Spurr

No, like I said, given this pipeline we just got to land deals, close deals, there is – we can easily get back to that number if we can win deals and close deals and stuff materializes meaning we can go by that number, and our optimism about next year based on all that. But I just can’t start predicting it.

Ian Kell - Northland Capital Markets

Okay.

Rick Spurr

The sales guys I think they can.

Ian Kell - Northland Capital Markets

Yes. I am sure they do. On the ZixAccess, you didn’t talk about that at all, any update there in terms of penetration or just results so far?

Rick Spurr

We are not going to report results, but I will tell you that we were about to launch a new element of that strategy where we now have a virtualized software which runs under VMware and therefore doesn’t require a new appliance. And in those instances if the customers are capable of using VMware, we’re going to actually start offering that product for free, again because it was the receiving strategy and the way to get Zix out there. We hope also through our customers encouraging their recipients to acquire and sell ZixAccess, which again in this setting would be free of charge.

So that is the tweak on the strategy to get even greater footprint and ultimately the lead from ZixAccess.

Ian Kell - Northland Capital Markets

Great. That is all I have. Thanks for the time.

Rick Spurr

Thank you, Ian.

Operator

All right. Ladies and gentlemen, that will conclude the question and answer portion of our call. I would now like to turn the presentation back over to Mr. Rick Spurr for closing remarks.

Rick Spurr

I am simply going to say thank you again. Those were great questions. Thanks for everyone attending, and if you are going to be New York this week, stop by and see me, or give me a call, and I will come see you and thanks again.

Operator

Ladies and gentlemen, that concludes our conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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