Zix's CEO Hosts 2014 Annual Meeting of Shareholders Conference (Transcript)

| About: Zix Corporation (ZIXI)
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Zix Corporation (NASDAQ:ZIXI) 2014 Annual Meeting of Shareholders Conference Call June 11, 2014 11:00 AM ET


Richard D. Spurr – Chief Executive Officer, Chairman and Chief Operating Officer

James F. Brashear – General Counsel

Richard D. Spurr

Good morning. Welcome to our 2014 Zix Corp Annual Shareholders Meeting. I think I’ve met everyone. My name is Rick Spurr and I’m Chairman of the Board and Chief Executive Officer. We’ll follow our agenda very closely and that agenda will be first of all, I’ll introduce my fellow directors who are here with us, some of our executives in the room and other officials. Then we will vote on the proposals that we’ve all seen. Then I’ll describe, give an overview, an update on the company. And then we will look at the votes, specifically on the proposals, and get preliminary results and then I’ll take your questions.

So with me here are, as I said, our directors, Mr. Mark Bonney in the front row, Michael Dailey, Taher Elgamal, Mr. Bob Hausmann and Maribess Miller. Thank you for being with us.

And the executives, not all of our executives are here, but those that are here I’d like to introduce. First of all, of course, Jim Brashear, our Vice President and General Counsel who will be helping with this meeting; also Mike English, our Chief Financial Officer; Russell Morgan, our Vice President of Client Services; Geoff Bibby, our Corporate Vice President of Marketing; and Jim Lesniak, our Vice President of Sales. We also have with us our Independent Auditors, Whitley Penn who are represented by Jeff Lawlis, good morning Jeff, and a representative from Broadridge Financial Solutions, Jim Gonn. This year serving as our Independent Inspector of Election.

Now, Mr. Brashear will present the Corporate Secretary’s report and explain our voting procedures.

James F. Brashear

Thank you, Mr. Spurr. I’m presenting for the record an affidavit certifying that an annual report and Form 10-K for 2013, and a proxy statement and proxy card for this meeting were mailed on or about April 30, 2014 to all shareholders of record as of April 15, 2014, which is the record date for this meeting. Accordingly this meeting has been duly called under the Laws of Texas, which is the state of incorporation of Zix Corporation and under the Corporation's by-laws.

As Mr. Spurr said, a representative of Broadridge Financial Solutions has been appointed by the Board of Directors as the Independent Inspector of Election for this meeting. And he has executed an appropriate oath of office. Mr. Gonn has presented for the record a certificate of quorum, indicating that there are representative at this meeting approximately 53,188,015 shares of the Company's Class A common stock. Each share of Class-A common stock is entitled to one vote at this meeting. So shares representing 89.76% of the voting power of the Company's outstanding shares are represented at this meeting in person or by proxy and a quorum is present.

This meeting has three proposals before it. Proposal 1 is the reelection of our six directors to the Company’s Board of Directors. Proposal 2 is the ratification of the selection of Whitley Penn LLP as the Company's independent auditors for 2014. And Proposal 3 is to approve an advisory vote on the Company’s executive compensation.

Each of these proposals is described in the proxy statement. The proposals will be presented in the order they appear in the proxy statement and each proposal will be presented separately by Mr. Spurr.

Voting on these proposals will be by written ballot. For those of you who have not voted already or wish to change your vote, after Mr. Spurr presents each proposal, you can mark your ballot on that proposal, and we will collect the ballots after all of the proposals have been presented and the votes have been called. After all the proposals have been presented and considered at this meeting and the ballots collected, the polls will close and no more ballots or proxies will be accepted. After Mr. Spurr’s company update, I will provide a preliminary report of voting results.

Ballots were given to all qualifying stockholders who requested that at the registration desk, stockholders who executed proxies or voted on line or by telephone do not need to vote again by ballot unless they wish to change their votes. And now with any qualified stockholder needs a ballot please raise your hand and we will provide one to you.

During this report or during the question-and-answer session, Mr. Spurr may discuss some non-GAAP financial measures in talking about the Company's performance and new product offerings, and some of his statements may constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations.

Those factors are described in the risk factor section of the Company's most recent 10-K filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliation of our special items and non-GAAP financial measures on our Web site at www.zixcorp.com/investors.

An opportunity for questions will be provided at the end of the meeting, please hold your questions until that time. It is now 10:06 AM on June 11, 2014, and the polls are open. The polls will close immediately following the presentation of the final proposal and Mr. Spurr’s call for collection of the ballots. Rick?

Richard D. Spurr

Thank you, Jim. We will now consider the three proposals before us. The first proposal is the election of directors. The Company has nominated the following six individuals as directors: Mark J. Bonney, Michael E. Dailey, Taher A. Elgamal, Robert C. Hausmann, Maribess L. Miller, and myself, Richard D. Spurr.

Each individual has been nominated to serve as a director of Zix Corporation for a one-year term, ending at the annual shareholders’ meeting in 2015. This proposal is discussed on Page 5 of your proxy statement. For those of you who have not voted already or wish to change your vote on the election of directors, please mark your ballots at this time and we’ll proceed to the next proposal.

The second proposal is ratifying the selection of Whitley Penn LLP, as independent auditors for the Company for 2014. This proposal is discussed on Page 6 of your proxy statement. If you haven’t already voted or wish to change your vote on proposal two, please mark your ballots on this item.

The third proposal is an advisory vote on the Company’s executive compensation. This proposal is discussed on Page 7 of your proxy statement. If approved, the resolution contained in the proxy statement will be adopted. If you haven’t already voted or wish to change your vote on proposal three, please mark your ballots on this item.

Please make sure you’ve signed your ballot and indicated the number of shares you own, then hold up your completed ballot and one of the attendants will collect it.

That completes the voting on proposals before the shareholders. The polls are now closed.

Now, I’d like to provide you an update on our business. In 2013, to position the Company for accelerated growth, we expanded our portfolio of offerings by launching two new products: ZixDLP, data loss prevention and ZixOne, our Bring-Your-Own-Device solution, and we did this without losing focus on our core email encryption business, which enabled us to reach new records in revenue and backlog for the year as well as our fourth consecutive year of positive earnings.

We’re very excited about the new products, but before I turn attention to them, we’d provide an overview of 2013 and our first quarter 2014 results.

In 2013, our Software-as-a-Service subscription model drove 11% growth in revenue and a 14% increase in our subscription backlog and we generated $9 million in new first year orders. The solid financial performance was even more impressive when you exclude the temporary disruption of new sales that we experienced with Google.

If you look at our total new first year orders from enterprise and our corporate team for 2013 and you compare those to 2012, you’ll see that our base business came 23% year-over-year. This fact 23% growth underscores the underlying health of our base email encryption business.

Our revenue growth in largely fixed cost structure enabled Zix Corp to end 2013 with a cash balance of $27.5 million, even after returning $8.8 million to our shareholders through share repurchases.

Moving to the first quarter of 2014, revenue was $12.2 million, up from $11.8 million in the same quarter last year. New first year orders for the quarter were $2 million and total orders for the first quarter of 2014 was $12.5 million. Our backlog which reflects all contractually committed business and therefore eliminates the impact of order timing was $65.9 million at quarter end, up 11% over the same quarter last year.

In summary, we believe our base business is very healthy and our increases in revenue and backlog reflect our stable business model. Now, let me give you an update on new products, starting with ZixDLP, our email data loss prevention solution, which was released at the end of Q1 of last year. As of the end of March 2014, we had 45 DLP customers and we believe new features recently unveiled with versions 1.1 and 1.2 will accelerate sales for the remainder of 2014.

ZixOne, our Bring-Your-Own-Device or BYOD solution that we launched last September is unique in the industry. BYOD or the use of personal mobile devices for work has challenged IT to find a solution that enables work productivity without compromising either corporate data protection or employee demands for control and privacy.

Before ZixOne came to market, companies were forced to choose between the two. Productivity enhancement with employee control or security and many ultimately found the available solutions compromise both, impinging on employee control and privacy and providing inadequate data security.

With the ZixOne, companies no longer have to choose between these competing needs. ZixOne provides the BYOD solution that is engineered for security and designed for users. ZixOne allows employee secured access to corporate email without ever allowing the data to reside on the device. It’s a simple BYOD approach, it solves the corporate data security problem without jeopardizing employee control or privacy.

At the end of the first quarter in 2014 after a little over six months in the market, we had 68 end customers and in addition had 19 evaluations underway. And already we are seeing customers buy additional seats, these positive indications along with our latest sales forecast for Q2 give us confidence that we have a highly competitive attractive BYOD offering through ZixOne.

We are very excited about the growth potential in ZixOne and ZixDLP, especially paired with the stability of our email encryption business. As most of you know, we recently reported positive email encryption news regarding Google. All remaining Google issues were resolved and our combined solution now called GAME, Google Apps Message Encryption is commercially available. As the new name reflects Zix has now become part of core Google Apps offering, unlike the past where we were more of an add-on.

As we’ve described previously, Zix Corp is the only email encryption provider for Google and the only third-party content offered within Google Apps. With this product transition finally behind us we look forward to return to increased sales through Google, which we’ll start to report in meaningful way in our Q3 results. All these positive results for both email encryption and our new solutions give us confidence as we move into the second half of 2014.

Thank you for that brief update, and as I said earlier, after we hear about the voting results on our proposals, I’ll entertain questions from the audience. Mr. Brashear?

James F. Brashear

Thank you, Mr. Spurr. I have been advised by our Independent Inspector of Election that the preliminary results of the voting are as follows. On Proposal 1, the election of directors, each director has received the plurality of four votes cast that were required for reelection. On Proposal 2, the shareholders have, by a majority of the votes cast, ratified the selection of Whitley Penn LLP as the independent auditors for the Company for 2014.

On Proposal 3, the shareholders have, by a majority of the votes cast, approved the advisory resolution on the Company’s executive compensation. These are preliminary results and they will be verified by our Independent Inspector of Election.

Now before Mr. Spurr opens the floor for questions, I want to quickly remind you of our procedures for the question-and-answer session. Please be aware that this meeting is being webcast. If you wish to address the meeting, please raise your hand when Mr. Spurr ask for questions and wait for a microphone attendant. Upon being recognized by the Chairman, stand up, state your name and indicate whether you are a shareholder or a proxy holder. If you are a proxy holder, please also say the name of the shareholder you are representing.

Persons addressing the meeting will be allowed three minutes per questions or statements when they are recognized by Mr. Spurr. Please address questions directly to Mr. Spurr and confine your questions or statements to one subject at a time. Mr. Spurr will stop discussions that are unrelated to matters properly before the meeting, are not in good taste, or unduly prolonged or are repetitious. And if your views differ from another speaker’s, please permit the speaker to conclude his or her remarks without interruption. Mr. Spurr?

Question-and-Answer Session

Richard D. Spurr

Do we have any questions?

James F. Brashear

Yes, sir. Bob?

Unidentified Analyst

(indiscernible) I think five or six Vice Presidents in this company that have to do with marketing and sales and we only have $50 million in revenue. And I was just wondering what it’s going to take to up kick the sales leverage to get the growth of the revenues more than what they’re at a faster rate than what they are now?

Richard D. Spurr

Sure. So the question is what can we do to accelerate growth, and that is top of mind for us and has been for some time and that is what underpins our decision to increase our sales investment this year. Overall, our sales investment increased in 2014 is up 30% to 40%, also increased our marketing investment to get broader awareness and generate more visibility and leads and that actually increased year-on-year for non-headcount related marketing spend, is actually up over 200%.

In addition, of course the introduction of the new products, which we – made that investment in late 2012 and delivered on time and according to our plan, those new products as I articulated a second ago in 2013. And so, we believe a combination of those actions will allow us to accelerate sales.

Our longer term, I think longer term, it is debatable obviously, it’s a qualitative point, is to get our revenue, our top line, north of 20%. Now, in order to do that we’ve got to accelerate sales north of 30% and so we’ve taken those actions to achieve those goals that we set for ourselves.

Of course we have internal goal, internal sales objectives reflecting in our budget and our investments and that’s reviewed by the Board and all the executives all the time and those are in place to achieve those goals. Thank you, Bob for your question. Any other questions?

Okay, with that we will conclude our meeting. The business of meeting is concluded and now the meeting is officially adjourned. Thank you very much all of you for your participation and continued investment in Zix.

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