analysts: su chen jionghan dai liang nan presented: march 29, 2012

Analysts: Su Chen

Jionghan DaiLiang Nan

Presented: March 29, 2012

Zix Corp.◦ Zix Corporation provides email encryption

solutions in software as a service model in the United States.

◦ Market Cap 185 million◦ PEG ratio 0.83◦ Adjusted P/E 18 ◦ 1-year implied growth in earning 30%◦ 7-10 years implied growth 5%

Stock price closed at $ 2.93 on Mar. 28, 2012◦ Underperformed compared to SP Small Cap 600

Index in the past 5 months

Source: Yahoo Finance

The initial unemployment claim lowered to 348,000 on March 22, 2012

Policy markers forecasts federal fund rate to keep near zero at least through late 2014

The U.S. economy is recovering slowly from the 2008 recession

Sector: Technology

GICS MAP: Application Software

# 45103010

External Driver◦ Regulation Demand◦ Corporation Demand

Risk Factor ◦ New technology and product◦ High R&D investment◦ Relationship with third party distributors ◦ Strong competition

Protect confidential data from been seized by unauthorized parties while transporting via email◦ Required by some data privacy laws, such as

Health Information Portability Accountability Act (“HIPAA”), Gramm-Leach-Bliley Act (“GLBA”)

◦ Companies with business secrets want to protect the property

Healthcare, financial services, insurance and government sectors

More than 1,200 hospitals and over 1,600 financial institutions, including SEC

Source: Zix Corp investor presentation http://investor.zixcorp.com/phoenix.zhtml?c=108645&p=irol-IRHome

Encryption Decryption

Stricter regulations◦ increased penalties for violations, e.g. HIPAA◦ stricter and more onerous breach notification

requirements◦ The first state law requiring encryption of emails

containing sensitive information was passed by Nevada on Oct 1st, 2008

◦ Mar 1st, 2010 in Massachusetts, they reach far beyond the state borders

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

No significant customers◦ Not any customer accounts for more than 10%

sales

Low incremental costs to add new users◦ Large up-front investment to establish the service

Strong renewal rate◦ Result in retention of 95% of revenue from year to

year

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

business and were therefore absorbed

In 2011, the company included a tax benefit of 11.8 million, comparing to 35.3 million in 2010◦ Largely attribute to the reduction of valuation

allowance because the company is optimistic about their future operation

◦ Still have 57.4 million valuation allowance left◦ Involve subjective judgment of future taxable

income from mangers, and thus we don’t want to include into our analysis

In 2011, the company had a lower new first year order of 7.1 million compared to 8.7 million in 2010◦ Partly explain its underperformance recently◦ Reorganization of sales force◦ Uncertainty in economy◦ Not because of pricing or competition

They actually have fewer competitors

Financial DataFinancial Data

Comparables Price Shares Market Cap Net Debt EV Revenue EBITDA EBIT

eGain Communications Corp. (NasdaqCM:EGAN)

5.49 24.36 133.75 -2.1 131.67 42.7 4.3 3.6

SciQuest, Inc. (NasdaqGS:SQI)

15.2 22.07 335.46 -59.6 275.81 53.4 7.2 5.5

VASCO Data Security International Inc.

(NasdaqCM:VDSI)9.75 37.69 367.46 -84.5 282.96 168.1 28.6 24.8

Technical Communications(NasdaqCM:TCCO)

11.59 1.83 21.17 -11.5 9.69 13.8 4.4 4.2

Zix Corporation (NasdaqGM:ZIXI)

2.93 62.88 184.24 -20.7 163.56 38.1 12 10.6

Trading Data

Comparables TEV/Rev TEV/EBITDA TEV/EBIT

eGain Communications Corp. (NasdaqCM:EGAN)

3.08 30.74 36.4

SciQuest, Inc. (NasdaqGS:SQI) 5.16 38.3 50.61

VASCO Data Security International Inc. (NasdaqCM:VDSI)

1.68 9.9 11.43

Technical Communications Corp. (NasdaqCM:TCCO)

0.7 2.18 2.29

Zix Corporation (NasdaqGM:ZIXI) 4.29 13.69 15.46

Average 2.655 20.28 25.1825

Implied Valuation 1.94 4.20 4.57

Comprable Price 3.57

Improving operating results

◦ Revenue grows without increasing SG&A

2011 2010 2009

Gross Margin 81.10% 80.44% 82.67%

Operating Margin

27.73% 15.56% 8.65%

A big amount of cash

◦ Start repurchasing stock in 2011

2011 2010 2009

Cash From Operating(in million)

13.22 7.19 0.60

Cash ( in million) 20.68 24.62 13.29

Cash / CA 84.90% 87.51% 87.33%

Cash / TA 26.67% 36.83% 67.28%