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Zix Corporation Announces 2012 Fourth Quarter and Year-End Results

[February 19, 2013]

Zix Corporation Announces 2012 Fourth Quarter and Year-End Results

DALLAS --(Business Wire)--

Zix Corporation (NASDAQ: ZIXI), the leader in email encryption services, today announced financial results for the fourth quarter and full year ended Dec. 31, 2012.

Fourth Quarter 2012 Financial Highlights

Fourth quarter new first year orders of $2.2 million
Fourth quarter revenue of $11.7 million, an increase of 18.2% year-over-year, the Company's 16th consecutive quarterly record in revenue
Fourth quarter GAAP net income of $0.06 per share, a decrease of $0.16 year-over-year due to changes in deferred tax valuation allowances⁽¹⁾
Fourth quarter Non-GAAP net income of $0.05 per share, an increase of 9.8% year-over-year
The Company generated approximately $0.4 million in cash flow from operations, a decrease of $2.1 million year-over-year primarily due to increased R&D and sales and marketing expenditures
Cash and cash equivalents totaled $23.0 million, the same as the Sept. 30, 2012, ending cash balance

Full-Year 2012 Financial Highlights

Ending backlog of $57.7 million, an increase of 7.5% from the prior year
Full-Year new first year orders of $9.0 million, an increase of 27.0% from the prior year
Full-year revenue of $43.4 million, an increase of 13.7% year-over-year and a record high for the company
Full-year GAAP net income of $0.17 per share, down $0.16 year-over-year due to changes in deferred tax valuation allowances⁽¹⁾
Full-year Non-GAAP net income of $0.18 per share, an increase of 13.6% year-over-year and a record high for the company
The Company generated approximately $12.5 million in cash flow from operations for the full year ended Dec. 31, 2012, a decrease of $0.7 million year-over-year primarily due to increased R&D and sales and marketing expenditures
Cash and cash equivalents at year-end was $23.0 million, despite $9.0 million spent on share repurchases during 2012. This $23.0 million is an increase of $2.3 million compared to the ending cash balance for 2011

"We are very pleased to report record financial results for 2012 in new first year orders, backlog, revenue and adjusted earnings per share," said Rick Spurr, ZixCorp's Chairman and Chief Executive Officer. "During the year, we continued to enhance our email encryption solution, maintaining our industry-leading ease of use and our position as the market leader. We also began investments in two new data protection products and expanded our resources in sales and marketing to extend our reach. These investments, and the recent unveiling of the final omnibus HIPAA rule, position ZixCorp for revenue growth as we progress through 2013."

Fourth Quarter and Full-Year 2012 Corporate Financial Summary and Other Operational Metrics

% or $

$ in Millions, except per share data

2012

2011

Change ⁽²⁾

2012

2011

Change ⁽²⁾

Revenue ⁽³⁾

11.7

9.9

18.2

43.4

38.1

13.7

GAAP Gross Profit ⁽³⁾

9.6

8.0

19.9

35.7

30.9

15.6

GAAP Net Income ⁽¹⁾

4.0

15.0

(73.3

11.0

22.6

(51.2

GAAP Net Income Per Share - Diluted ⁽¹⁾

0.06

0.23

(71.5

0.17

0.34

(47.8

Non-GAAP Adjusted Gross Profit ^{(3) (4)}

9.7

8.1

20.0

35.9

31.0

15.7

Non-GAAP Adjusted Net Income ⁽⁴⁾

3.0

2.9

2.7

11.6

10.9

6.2

Non-GAAP Adjusted Net Income Per Share - Diluted ⁽⁴⁾

0.05

0.04

9.8

0.18

0.16

13.6

Adjusted EBITDA ^{(4) (5)}

3.4

3.5

(4.0

13.3

12.7

4.9

Adjusted EBITDA Margin ^{(4) (5)}

28.9

35.5

(6.7pts)

30.6

33.2

(2.6pts)

Email Encryption New First Year Orders

2.2

1.9

16.0

9.0

7.1

27.0

Email Encryption Total Orders

12.9

11.1

16.2

48.2

42.3

14.8

Email Encryption Bookings Backlog ⁽⁶⁾

57.7

53.7

7.5

⁽¹⁾ GAAP Net Income for the quarters and years ended Dec. 31, 2012, and Dec. 31, 2011, include tax benefits of $2.3 million and $11.8 million, respectively, resulting from reductions to the deferred tax valuation allowance

⁽²⁾ Changes reported are based on actual results, and numbers shown in the columns may reflect rounding

⁽³⁾ Amounts indicated are from continuing operations

⁽⁴⁾ A reconciliation of GAAP to Non-GAAP adjusted results is attached to this press release and is available on our investor relations Web page at http://investor.zixcorp.com

⁽⁵⁾ Adjusted earnings before interest, taxes, depreciation and amortization

⁽⁶⁾ Service contract commitments that represent future revenue to be recognized as the services are provided

Outlook

For the first quarter 2013, the Company forecasts revenue to be between $11.7 million and $11.9 million and fully diluted adjusted earnings per share to be $0.03. Full-year 2013 revenues are projected to be between $48 million and $50 million. Fully diluted Non-GAAP adjusted earnings per share, which are adjusted primarily for non-cash stock-based compensation and non-recurring expense items, are projected to be between $0.19 and $0.20.

Conference Call Information

The Company will discuss its financial results and outlook on a conference call on Tuesday, Feb. 19, 2013, at 5 p.m. ET. A live webcast of the conference call will be available on its investor relations Web site at http://investor.zixcorp.com. Alternatively, participants can access the conference call by dialing 1-800-561-2693 (U.S. toll-free) or 1-617-614-3523 (international) at least 15 minutes before the call and entering access code 78780561. An audio replay of the conference will be available until Feb. 26, 2013, by dialing 1-888-286-8010 (U.S. toll-free) or 1-617-801-6888 (international) and entering the access code 69992551. An archive of the webcast will also be available on the ZixCorp investor relations Web site.

About Zix Corporation

ZixCorp offers industry-leading email encryption and a unique email DLP solution to meet your company's data protection and compliance needs. ZixCorp is trusted by the nation's most influential institutions in healthcare, finance and government for easy to use secure email solutions. ZixCorp is publicly traded on the Nasdaq Global Market under the symbol ZIXI, and its headquarters are in Dallas, Texas. For more information, visit www.zixcorp.com.

Statements in this release that are not purely historical facts or that necessarily depend upon future events, including statements about forecasts of revenue or earnings, or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to ZixCorp on the date this release was issued. ZixCorp undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to how privacy and data security law mandates may affect demand for email encryption and ZixCorp's ability to obtain and retain customers and grow revenues. ZixCorp may not succeed in addressing these and other risks. Further information regarding factors that could affect ZixCorp financial and other results can be found in the risk factors section of ZixCorp's most recent filing on Form 10-K with the Securities and Exchange Commission.




ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31,
	2012		December 31,
	(unaudited)		2011
ASSETS
Current assets:
Cash and cash equivalents	$	22,988,000	$	20,680,000
Receivables, net		967,000		704,000
Prepaid and other current assets		1,697,000		1,422,000
Deferred tax assets		1,600,000		1,551,000
Total current assets		27,252,000		24,357,000
Property and equipment, net		2,384,000		2,228,000
Goodwill		2,161,000		2,161,000
Deferred tax assets		51,052,000		48,806,000
Other assets		-		-
Total assets	$	82,849,000	$	77,552,000


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	3,156,000	$	2,292,000
Deferred revenue		17,470,000		16,568,000
Total current liabilities		20,626,000		18,860,000
Long-term liabilities:		-		-
Deferred revenue		902,000		795,000
Deferred rent		76,000		140,000
Total long-term liabilities		978,000		935,000
Total liabilities		21,604,000		19,795,000
Total stockholders' equity		61,245,000		57,757,000
Total liabilities and stockholders' equity	$	82,849,000	$	77,552,000




ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)



	Three Months Ended December 31,						Twelve Months Ended December 31,
	2012			2011			2012			2011
Revenue	$	11,689,000		$	9,885,000		$	43,356,000		$	38,145,000

Cost of revenue		2,055,000			1,849,000			7,609,000			7,211,000
Gross profit		9,634,000			8,036,000			35,747,000			30,934,000
Operating expenses:
Research and development		2,431,000			1,281,000			7,419,000			5,229,000
Selling, general and administrative		5,665,000			3,818,000			19,385,000			15,128,000
Total operating expenses		8,096,000			5,099,000			26,804,000			20,357,000

Operating income		1,538,000			2,937,000			8,943,000			10,577,000
Operating margin		13	%		30	%		21	%		28	%

Other income, net		95,000			9,000			111,000			88,000

Income before income taxes		1,633,000			2,946,000			9,054,000			10,665,000
Income tax (expense) benefit		2,358,000			12,021,000			1,949,000			11,889,000
Net income	$	3,991,000		$	14,967,000		$	11,003,000		$	22,554,000

Basic income per common share:	$	0.07		$	0.23		$	0.18		$	0.34


Diluted income per common share:	$	0.06		$	0.23		$	0.17		$	0.34

Shares used in per share calculation - basic		60,913,533			65,259,001			62,211,228			65,439,078

Shares used in per share calculation - diluted		61,633,224			65,865,826			62,875,347			67,261,514
Note: EPS totals off due to rounding




ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Twelve Months Ended December 31,
	2012			2011
Operating activities:
Net income	$	11,003,000		$	22,554,000
Non-cash items in net income		224,000			(9,806,000	)
Changes in operating assets and liabilities		1,306,000			471,000
Net cash provided by operating activities		12,533,000			13,219,000

Investing activities:
Purchases of property and equipment		(1,533,000	)		(1,471,000	)
(Purchase) sale of commercial paper		-			-
Net cash used in investing activities		(1,533,000	)		(1,471,000	)

Financing activities:
Proceeds from exercise of stock options		308,000			1,791,000
Proceeds from exercise of warrants		-			3,707,000
Payment of license subscription note payable		-			(186,000	)
Purchase of Treasury Stock		(9,000,000	)		(20,999,000	)
Net cash used in financing activities		(8,692,000	)		(15,687,000	)

Decrease in cash and cash equivalents		2,308,000			(3,939,000	)
Cash and cash equivalents, beginning of period		20,680,000			24,619,000
Cash and cash equivalents, end of period	$	22,988,000		$	20,680,000




ZIX CORPORATION
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(Unaudited)

		Three Months Ended						Twelve Months Ended
		December 31,						December 31,
		2012			2011			2012			2011
Revenue:
GAAP revenue		$	11,689,000		$	9,885,000		$	43,356,000		$	38,145,000

Cost of revenue
GAAP cost of revenue		$	2,055,000		$	1,849,000		$	7,609,000		$	7,211,000
Stock-based compensation charges (1)	(A)		(41,000	)		(26,000	)		(135,000	)		(71,000	)
Non-GAAP adjusted cost of revenue		$	2,014,000		$	1,823,000		$	7,474,000		$	7,140,000

Gross profit:
GAAP gross profit		$	9,634,000		$	8,036,000		$	35,747,000		$	30,934,000
Stock-based compensation charges (1)	(A)		41,000			26,000			135,000			71,000
Non-GAAP adjusted gross profit		$	9,675,000		$	8,062,000		$	35,882,000		$	31,005,000

Research and development expense
GAAP research and development expense		$	2,431,000		$	1,281,000		$	7,419,000		$	5,229,000
Stock-based compensation charges (1)	(A)		(51,000	)		(21,000	)		(142,000	)		(68,000	)
Non-GAAP adjusted research and development expense		$	2,380,000		$	1,260,000		$	7,277,000		$	5,161,000

Selling and marketing expense
GAAP Selling and marketing expense		$	2,974,000		$	2,279,000		$	10,984,000		$	9,196,000
Stock-based compensation charges (1)	(A)		(114,000	)		(64,000	)		(360,000	)		(176,000	)
Non-GAAP adjusted selling and marketing expense		$	2,860,000		$	2,215,000		$	10,624,000		$	9,020,000

General and administrative expense
GAAP general and administrative expense		$	2,691,000		$	1,539,000		$	8,401,000		$	5,932,000
Stock-based compensation charges (1)	(A)		(165,000	)		(93,000	)		(539,000	)		(302,000	)
Non-recurring litigation costs (2)	(B)		(1,014,000	)		-			(1,712,000	)		-
Non-GAAP adjusted general and administrative expense		$	1,512,000		$	1,446,000		$	6,150,000		$	5,630,000

Operating income:
GAAP operating income		$	1,538,000		$	2,937,000		$	8,943,000		$	10,577,000
Stock-based compensation charges (1)	(A)		371,000			204,000			1,176,000			617,000
Non-recurring litigation costs (2)	(B)		1,014,000			-			1,712,000			-
Non-GAAP adjusted operating income		$	2,923,000		$	3,141,000		$	11,831,000		$	11,194,000
Adjusted Operating Margin			25.0	%		31.8	%		27.3	%		29.3	%

Net income:
GAAP net income		$	3,991,000		$	14,967,000		$	11,003,000		$	22,554,000
Stock-based compensation charges (1)	(A)		371,000			204,000			1,176,000			617,000
Non-recurring litigation costs (2)	(B)		1,014,000			-			1,712,000			-
Income tax impact	(C)		(2,377,000	)		(12,252,000	)		(2,295,000	)		(12,248,000	)
Non-GAAP adjusted net income		$	2,999,000		$	2,919,000		$	11,596,000		$	10,923,000

Diluted net income per common share:
GAAP net income		$	0.06		$	0.23		$	0.17		$	0.34
Adjustments per share	(A-C)	$	(0.01	)	$	(0.19	)	$	0.01		$	(0.18	)
Non-GAAP adjusted net income		$	0.05		$	0.04		$	0.18		$	0.16
Shares used to compute Non-GAAP adjusted net income per share - diluted			61,633,224			65,865,826			62,875,347			67,261,514

Reconciliation of Net income to EBITDA and Adjusted EBITDA:	(D)
Net income		$	3,991,000		$	14,967,000		$	11,003,000		$	22,554,000
Income tax provision			(2,358,000	)		(12,021,000	)		(1,949,000	)		(11,889,000	)
Interest expense			-			10,000			1,000			7,000
Depreciation expense			355,000			353,000			1,343,000			1,373,000
EBITDA			1,988,000			3,309,000			10,398,000			12,045,000

Adjustments:
Share-based compensation expense	(A)		371,000			204,000			1,176,000			617,000
Non-recurring litigation costs	(B)		1,014,000			-			1,712,000			-
Adjusted EBITDA		$	3,373,000		$	3,513,000		$	13,286,000		$	12,662,000
Adjusted EBITDA margin			28.9	%		35.5	%		30.6	%		33.2	%

(1) Stock-based compensation charges are included as follows:
Cost of revenues		$	41,000		$	26,000		$	135,000		$	71,000
Research and development			51,000			21,000			142,000			68,000
Selling and marketing			114,000			64,000			360,000			176,000
General and administrative			165,000			93,000			539,000			302,000
		$	371,000		$	204,000		$	1,176,000		$	617,000
(2) Non-recurring litigation costs are included as follows:
General and administrative			1,014,000			-			1,712,000			-
		$	1,014,000		$	-		$	1,712,000		$	-

This presentation includes Non-GAAP measures. Our Non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see items (A) through (D) on the next page.

ZIX CORPORATION
NOTES TO RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

USE OF NON-GAAP FINANCIAL INFORMATION

The Company occasionally utilizes financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States ("GAAP") in order to provide investors with an alternative method for assessing our operating results in a manner that enables investors to more thoroughly evaluate our current performance as compared to past performance. We also believe these Non-GAAP measures provide investors with a more informed baseline for modeling the Company's future financial performance. Management uses these Non-GAAP financial measures to make operational and investment decisions, to evaluate the Company's performance, to forecast and to determine compensation. Further, management utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. We believe that our investors should have access to, and that we are obligated to provide, the same set of tools that we use in analyzing our results. These Non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We have provided definitions below for certain Non-GAAP financial measures, together with an explanation of why management uses these measures and why management believes that these Non-GAAP financial measures are useful to investors. In addition, in our earnings release we have provided tables to reconcile the Non-GAAP financial measures utilized to GAAP financial measures.

ADJUSTED NON-GAAP MEASURES

Our Non-GAAP measures adjust GAAP Cost of revenue, Gross profit, Research and development expense, Selling and marketing expense, General and administrative expense, Operating income, Net income, Net income per share - diluted, and EBITDA for non-cash stock-based compensation expense, and non-recurring litigation expense to derive Non-GAAP adjusted Cost of revenue, adjusted Gross profit, adjusted Research and development expense, adjusted Selling and marketing expense, adjusted general and administrative expense, adjusted Operating income, adjusted Net income, adjusted Net income per share - diluted and adjusted EBITDA. We provide a reconciliation of these adjusted Non-GAAP measures to GAAP Gross profit, Operating income, Net income, Net income per share - diluted and EBITDA.

We do not provide a reconciliation of forward-looking adjusted Non-GAAP earnings per share to GAAP earnings per share. Our forward-looking adjusted Non-GAAP earnings per share information consistently excludes non-cash stock-based compensation expense. Additionally, the adjusted Non-GAAP earnings per share will consistently exclude non-recurring items that impact our ongoing business. See items (A) through (C) below for further information on the current quarter's reconciling items.

Items (A) through (D) on the "Reconciliation of GAAP to Non-GAAP Financial Measures" table are listed to the right of certain categories under "Gross profit," "Operating income," "Net income," "Net income per share - diluted" and "EBITDA" and correspond to the categories explained in further detail below under (A) through (D).

(A) Non-cash stock-based compensation charges relating to stock option grants awarded to employees and third-party service providers and accounted for in accordance with Share-Based Payment accounting guidance. See (1) on previous page for breakdown of stock-based compensation. Because of varying valuation methodologies, subjective assumptions and varying award types, the Company believes that the exclusion of stock-based compensation charges provides for more accurate comparisons to our peer companies and for a more accurate comparison of our financial results to previous periods. Additionally, the Company believes it is useful to investors to understand the specific impact of non-cash stock-based compensation charges on our operating results.

(B) Non-recurring litigation costs. See item (2) on previous page for breakdown of non-recurring litigation costs. The Company's management excludes these costs when evaluating the ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.

(C) The Non-GAAP adjustment to the tax provision represents the non-cash tax expense included in the GAAP tax provision, including the current period utilization of deferred tax assets created in previous periods. The remaining provision for income taxes represents expected cash taxes to be paid.

(D) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based compensation and non-recurring litigation expenses.

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