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ZixCorp Announces 2014 First Quarter Results

[April 22, 2014]

ZixCorp Announces 2014 First Quarter Results

DALLAS --(Business Wire)--

Zix Corporation (NASDAQ: ZIXI), a leader in email data protection, today announced financial results for the first quarter ended March 31, 2014.

First Quarter 2014 Financial Highlights

Ending backlog of $65.9 million, an increase of 10.6% year-over-year and the Company's 8th consecutive quarterly record in backlog
First quarter new first year orders of $2.0 million, down 5.3% year-over-year
First quarter revenue of $12.2 million, an increase of 3.4% year-over-year
First quarter GAAP net income of $0.02 per share, an increase of 90.5% year-over-year ⁽¹⁾
First quarter Non-GAAP net income of $0.03 per share, an increase of 1.2% year-over-year ^{(1) (3)}
The Company generated approximately $1.7 million in cash flow from operations, an increase of $0.7 million year-over-year
Cash and cash equivalents totaled $22.5 million, a decrease of $1.7 million compared to the Mar. 31, 2013, ending cash balance, and included the purchase of $6.2 million of its shares of common stock, completing the approved share repurchase program announced in November 2013

"We remain confident in the continued solid growth of our email encryption business and continue to be excited about the prospects for accelerated growth due to our new products," said Rick Spurr, ZixCorp's Chairman and Chief Executive Officer. "With the positive traction we are seeing with our increasing marketing efforts, the volume of marketing leads for our new BYOD product is at the highest level we've ever seen. We expect improved sales productivity and results through the remainder of the year."

First Quarter 2014 Corporate Financial Summary and Other Operational Metrics

$ in Millions, except per share data	Q1 2014	Q1 2013	% or $ Change ⁽¹⁾
Revenue	$12.2	$11.8	3.4%
GAAP Gross Profit	$10.1	$9.8	3.1%
GAAP Net Income	$1.1	$0.6	86.9%
GAAP Net Income Per Share - Diluted	$0.02	$0.01	90.5%
Non-GAAP Adjusted Gross Profit ⁽²⁾	$10.2	$9.9	3.2%
Non-GAAP Adjusted Net Income ⁽²⁾	$2.1	$2.1	(0.7)%
Non-GAAP Adjusted Net Income Per Share - Diluted ⁽²⁾	$0.03	$0.03	1.2%
Adjusted EBITDA ^{(2) (3)}	$2.6	$2.5	3.1%
Adjusted EBITDA Margin ^{(2) (3)}	21.6%	21.6%	(0.1)pts
New First Year Orders	$2.0	$2.1	(5.3)%
Total Orders	$12.5	$13.9	(10.0)%
Backlog ⁽⁴⁾	$65.9	$59.6	10.6%

⁽¹⁾ Changes are based on actuals versus numbers shown in the columns, which may reflect rounding

⁽²⁾ A reconciliation of GAAP to Non-GAAP adjusted results is attached to this press release and available on our investor relations Web page at http://investor.zixcorp.com

⁽³⁾ Adjusted earnings before interest, taxes, depreciation and amortization

⁽⁴⁾ Service contract commitments that represent future revenue to be recognized as the services are provided

First Quarter Business Highlights

First United Security Bank (FUSB) selected ZixOne^TM to enable its employees to use personal mobile devices for work, also known as Bring-Your-Own-Device (BYOD). By providing access to corporate email through ZixOne and not allowing that corporate data to reside on the device, FUSB enhances employee productivity, reduces liability risks and protects corporate data without hindering employee convenience or privacy.

Outlook

For the second quarter 2014, the Company forecasts revenue to be between $12.3 million and $12.6 million and fully diluted adjusted earnings per share to be between $0.02 and $0.03. For the full year 2014, the company's previously issued revenue guidance of $53 million to $55 million and fully diluted Non-GAAP adjusted earnings per share of $0.15 to $0.17 remains unchanged.

As previously announced with full-year guidance, the Company increased its investment in sales and marketing beginning in the first quarter of 2014. These investments are aimed at increasing momentum of ZixOne in the BYOD market and to further expand adoption of our email encryption and data loss prevention (DLP) solutions. The new sales benefits from these investments, if successful, would begin in 2014 while much of the revenue benefits would be deferred until 2015 due to revenue recognition timing of the Company's subscription model.

Conference Call Information

The Company will discuss its financial results and outlook on a conference call on Tuesday, April 22, 2014, 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 1-866-510-0707 (U.S. toll-free) or 1-617-597-5376 (international) at least 15 minutes before the call and entering access code 80292270.

An audio replay of the conference will be available until April 29, 2014, by dialing 1-888-286-8010 (U.S. toll-free) or 1-617-801-6888 (international) and entering the access code 47085808. An archive of the webcast will also be available on the ZixCorp investor relations Web site.

About Zix Corporation

ZixCorp is a leader in email data protection. ZixCorp offers industry-leading email encryption, a unique email DLP solution and an innovative email BYOD 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 sales, 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 market acceptance of new ZixCorp solutions and how privacy and data security laws may affect demand for ZixCorp email data protection solutions. 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

	March 31,
	2014		December 31,
	(unaudited)		2013
ASSETS
Current assets:
Cash and cash equivalents	$	22,498,000	$	27,518,000
Receivables, net		2,402,000		2,324,000
Prepaid and other current assets		1,650,000		2,038,000
Deferred tax assets		1,395,000		1,814,000
Total current assets		27,945,000		33,694,000
Property and equipment, net		2,561,000		2,608,000
Goodwill		2,161,000		2,161,000
Deferred tax assets		52,122,000		52,239,000
Total assets	$	84,789,000	$	90,702,000


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,793,000	$	2,487,000
Deferred revenue		17,880,000		19,080,000
Total current liabilities		20,673,000		21,567,000
Long-term liabilities:
Deferred revenue		1,102,000		1,278,000
Deferred rent		1,602,000		1,623,000
Total long-term liabilities		2,704,000		2,901,000
Total liabilities		23,377,000		24,468,000
Total stockholders' equity		61,412,000		66,234,000
Total liabilities and stockholders' equity	$	84,789,000	$	90,702,000


ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended March 31,
	2014			2013
Revenue	$	12,162,000		$	11,764,000

Cost of revenue		2,025,000			1,936,000
Gross profit		10,137,000			9,828,000
Operating expenses:
Research and development		2,201,000			2,611,000
Selling, general and administrative		6,289,000			6,616,000
Total operating expenses		8,490,000			9,227,000

Operating income		1,647,000			601,000
Operating margin		14	%		5	%

Other income, net		62,000			60,000

Income before income taxes		1,709,000			661,000
Income tax benefit (expense)		(650,000	)		(94,000	)
Net income	$	1,059,000		$	567,000

Basic income per common share:	$	0.02		$	0.01


Diluted income per common share:	$	0.02		$	0.01

Shares used in per share calculation - basic		59,375,283			60,977,582

Shares used in per share calculation - diluted		60,891,563			62,032,258


ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended March 31,
	2014			2013
Operating activities:
Net income	$	1,059,000		$	567,000
Non-cash items in net income		1,417,000			786,000
Changes in operating assets and liabilities		(743,000	)		(275,000	)
Net cash provided by operating activities		1,733,000			1,078,000

Investing activities:
Purchases of property and equipment		(391,000	)		(250,000	)
Net cash used in investing activities		(391,000	)		(250,000	)

Financing activities:
Proceeds from exercise of stock options		41,000			392,000
Purchase of Treasury Stock		(6,403,000	)		-
Net cash used in financing activities		(6,362,000	)		392,000

Increase (Decrease) in cash and cash equivalents		(5,020,000	)		1,220,000
Cash and cash equivalents, beginning of period		27,518,000			22,988,000
Cash and cash equivalents, end of period	$	22,498,000		$	24,208,000


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

	Three Months Ended
	March 31,
	2014			2013
Revenue:
GAAP revenue	$	12,162,000		$	11,764,000

Cost of revenue
GAAP cost of revenue	$	2,025,000		$	1,936,000
Stock-based compensation charges (1)		(51,000	)		(42,000	)
Non-GAAP adjusted cost of revenue	$	1,974,000		$	1,894,000

Gross profit:
GAAP gross profit	$	10,137,000		$	9,828,000
Stock-based compensation charges (1)		51,000			42,000
Non-GAAP adjusted gross profit	$	10,188,000		$	9,870,000

Research and development expense
GAAP research and development expense	$	2,201,000		$	2,611,000
Stock-based compensation charges (1)		(60,000	)		(51,000	)
Non-GAAP adjusted research and development expense	$	2,141,000		$	2,560,000

Selling and marketing expense
GAAP selling and marketing expense	$	4,217,000		$	3,610,000
Stock-based compensation charges (1)		(144,000	)		(121,000	)
Non-GAAP adjusted selling and marketing expense	$	4,073,000		$	3,489,000

General and administrative expense
GAAP general and administrative expense	$	2,072,000		$	3,006,000
Stock-based compensation charges (1)		(225,000	)		(188,000	)
Non-recurring litigation costs (2)		(33,000	)		(1,126,000	)
Non-GAAP adjusted general and administrative expense	$	1,814,000		$	1,692,000

Operating income:
GAAP operating income	$	1,647,000		$	601,000
Stock-based compensation charges (1)		480,000			402,000
Non-recurring litigation costs (2)		33,000			1,126,000
Non-GAAP adjusted operating income	$	2,160,000		$	2,129,000

Adjusted Operating Margin		17.8	%		18.1	%

Net income:
GAAP net income	$	1,059,000		$	567,000
Stock-based compensation charges (1)		480,000			402,000
Non-recurring litigation costs (2)		33,000			1,126,000
Income tax impact		536,000			29,000
Non-GAAP adjusted net income	$	2,108,000		$	2,124,000

Diluted net income per common share:
GAAP net income	$	0.02		$	0.01
Adjustments per share	$	0.01		$	0.02
Non-GAAP adjusted net income	$	0.03		$	0.03

Shares used to compute Non-GAAP adjusted net income per share - diluted		60,891,563			62,032,258

Reconciliation of Net income to EBITDA and Adjusted EBITDA:
Net income	$	1,059,000		$	567,000
Income tax provision		650,000			94,000
Interest expense		-			-
Depreciation expense		399,000			355,000
EBITDA		2,108,000			1,016,000

Adjustments:
Share-based compensation expense		480,000			402,000
Non-recurring litigation costs		33,000			1,126,000
Adjusted EBITDA	$	2,621,000		$	2,544,000

Adjusted EBITDA margin		21.6	%		21.6	%

(1) Stock-based compensation charges are included as follows:
Cost of revenues	$	51,000		$	42,000
Research and development		60,000			51,000
Selling and marketing		144,000			121,000
General and administrative		225,000			188,000
	$	480,000		$	402,000
(2) Non-recurring litigation costs are included as follows:
General and administrative		33,000			1,126,000
	$	33,000		$	1,126,000

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, restricted stock, and restricted stock units awarded to 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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