Zix Corporation (ZIXI)

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Zix Corp. :ZIXI-US: Earnings Analysis: Q2, 2017 By the Numbers : September 21, 2017

[unable to retrieve full-text content]Categories: Yahoo FinanceGet free summary analysis Zix Corp. reports financial results for the quarter ended June 30, 2017. We analyze the earnings along side the following peers of Zix Corp. – VASCO Data Security International, Inc., Proofpoint, Inc., Citrix Systems, Inc. and VMware, Inc. Class A (VDSI-US, PFPT-US, CTXS-US and VMW-US) that have also reported for this ... Read more (Read more...)

Zix Acquires Entelligence Messaging Server Business to Strengthen Its Industry-Leading Email Encryption Solutions

Zix Acquires Entelligence Messaging Server Business to Strengthen Its Industry-Leading Email Encryption Solutions

DALLAS & MINNEAPOLIS--(BUSINESS WIRE)--

Zix Corporation (Zix), (ZIXI), a leader in email security, today announced that the company has acquired the Entelligence Messaging Server (EMS) technology, an email encryption solution, and the related business from Entrust Datacard, a leading provider of trusted identity and secure transaction technology solutions. The EMS acquisition strengthens Zix’s email encryption capabilities, demonstrating the company’s ongoing commitment to deliver the industry’s premier email encryption solutions." data-reactid="23">Zix Corporation (Zix), (ZIXI), a leader in email security, today announced that the company has acquired the Entelligence Messaging Server (EMS) technology, an email encryption solution, and the related business from Entrust Datacard, a leading provider of trusted identity and secure transaction technology solutions. The EMS acquisition strengthens Zix’s email encryption capabilities, demonstrating the company’s ongoing commitment to deliver the industry’s premier email encryption solutions.

http://www.businesswire.com/news/home/20170914005251/en/ " data-reactid="24">This Smart News Release features multimedia. View the full release here: http://www.businesswire.com/news/home/20170914005251/en/

Dave Wagner, chief executive officer of Zix. “We’re excited to unveil new capabilities for our customers, deliver outstanding service to EMS customers and introduce our more robust email encryption solutions.”" data-reactid="25">“Zix continues to evolve our solutions to better serve our customers and meet their needs. The acquisition of the Entelligence Messaging Server business builds on our strength as the leader in email encryption and allows us to accelerate our product roadmap,” said Dave Wagner, chief executive officer of Zix. “We’re excited to unveil new capabilities for our customers, deliver outstanding service to EMS customers and introduce our more robust email encryption solutions.”

ZixEncryptSM." data-reactid="26">EMS offers rich enterprise-centric capabilities and delivery methods, such as advanced message tracking, PDF statement delivery, high availability on-premises architecture and standards-based end-to-end encryption. Zix will continue to invest in and support EMS, as well as incorporate its features into its policy-based email encryption solution ZixEncryptSM.

To ensure a smooth transition and to best meet customer needs, Zix and Entrust Datacard have established an ongoing working relationship, and the companies have implemented a transition agreement to mitigate any post-close service disruption to customers. As part of the ongoing relationship between the companies, Entrust Datacard will become a Zix value added reseller, enabling Entrust Datacard to serve its customers’ email security needs with EMS and other Zix solutions.

“Choosing to migrate our Entelligence Messaging Server business to Zix will provide our customers with access to the latest innovations in the secure email market while continuing to benefit from Entrust Datacard’s core security technologies via our ongoing relationship,” said Todd Wilkinson, president and CEO for Entrust Datacard. “Zix is the right partner for this transaction as they are a leader in email encryption, and given their reputation for delivering exceptional customer support, I’m confident our customers will recognize the value and protection in working with Zix for their email security needs.”

Zix currently expects the transaction to have no material impact on revenue, new first year orders or EPS.

About Entrust Datacard

www.entrustdatacard.com." data-reactid="31">Consumers, citizens and employees increasingly expect anywhere-anytime experiences — whether they are making purchases, crossing borders, accessing e-gov services or logging onto corporate networks. Entrust Datacard offers the trusted identity and secure transaction technologies that make those experiences reliable and secure. Solutions range from the physical world of financial cards, passports and ID cards to the digital realm of authentication, certificates and secure communications. With more than 2,000 Entrust Datacard colleagues around the world, and a network of strong global partners, the company serves customers in 150 countries worldwide. For more information, visit www.entrustdatacard.com.

About Zix Corporation

zixcorp.com." data-reactid="33">Zix Corporation (Zix) is a leader in email security. Trusted by the nation’s most influential institutions in healthcare, finance and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention, advanced threat protection, archiving and bring your own device (BYOD) mobile security. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance needs. Zix is publicly traded on the Nasdaq Global Market under the symbol ZIXI. For more information, visit 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, potential benefits of strategic relationships, 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 Zix on the date this release was issued. Zix 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 Zix solutions and how privacy and data security laws may affect demand for Zix email data protection solutions. Zix may not succeed in addressing these and other risks. Further information regarding factors that could affect Zix financial and other results can be found in the risk factors section of Zix’s most recent filing on Form 10-K with the Securities and Exchange Commission.

" data-reactid="35">

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Zix to Participate at the Dougherty & Company 2017 Institutional Investor Conference on September 19

DALLAS--(BUSINESS WIRE)--

Zix Corporation (Zix) (ZIXI), a leader in email security, has been invited to participate at the Dougherty & Company 2017 Institutional Investor Conference on Tuesday, September 19, 2017. The conference will be held at the Millennium Hotel in Minneapolis, Minnesota." data-reactid="12">Zix Corporation (Zix) (ZIXI), a leader in email security, has been invited to participate at the Dougherty & Company 2017 Institutional Investor Conference on Tuesday, September 19, 2017. The conference will be held at the Millennium Hotel in Minneapolis, Minnesota.

here for 90 days, as well as in the Investor Relations section of Zix’s website." data-reactid="13">Zix management is scheduled to present on Tuesday, September 19, at 1:30 p.m. CT, with one-on-one meetings held throughout the conference. The presentation will be webcast live and available for replay here for 90 days, as well as in the Investor Relations section of Zix’s website.

For additional information or to schedule a meeting, please contact your Dougherty & Company representative or Zix’s investor relations team at 949-574-3860.

About Zix Corporation

www.zixcorp.com." data-reactid="16">Zix Corporation (Zix) is a leader in email security. Trusted by the nation’s most influential institutions in healthcare, finance and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention, advanced threat protection, archiving and bring your own device (BYOD) mobile security. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance needs. Zix is publicly traded on the Nasdaq Global Market under the symbol ZIXI. For more information, visit www.zixcorp.com.

" data-reactid="17">

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Zix to Present at the 6th Annual Liolios Gateway Conference on September 6, 2017

DALLAS--(BUSINESS WIRE)--

Zix Corporation (Zix) (ZIXI), a leader in email security, has been invited to present at the 6th Annual Liolios Gateway Conference, which is being held on September 6-7, 2017, at the Four Seasons Hotel San Francisco." data-reactid="12">Zix Corporation (Zix) (ZIXI), a leader in email security, has been invited to present at the 6th Annual Liolios Gateway Conference, which is being held on September 6-7, 2017, at the Four Seasons Hotel San Francisco.

here for 90 days, as well as in the investor section of Zix’s website." data-reactid="13">Zix management is scheduled to present on Wednesday, September 6, at 10:30 a.m. PT, with one-on-one meetings held throughout the conference. The presentation will be webcast live and available for replay here for 90 days, as well as in the investor section of Zix’s website.

[email protected]." data-reactid="14">To receive additional information, request an invitation or to schedule a one-on-one meeting, please email [email protected].

About the Gateway Conference

www.gateway-conference.com or www.liolios.com." data-reactid="16">The 6th Annual Gateway Conference is an invite-only conference presented by Liolios, which brings together the most compelling companies with the nation’s top institutional investors and analysts. This year’s event features more than 100 companies from a number of growth industries, including technology, business and financial services, consumer, digital media, clean technology and life sciences. The format has been designed to give attendees direct access to senior management via company presentations, Q&A sessions and one-on-one meetings. For more information, visit www.gateway-conference.com or www.liolios.com.

About Zix Corporation

www.zixcorp.com." data-reactid="18">Zix Corporation (Zix) is a leader in email security. Trusted by the nation’s most influential institutions in healthcare, finance and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention, advanced threat protection, archiving and bring your own device (BYOD) mobile security. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance needs. Zix is publicly traded on the Nasdaq Global Market under the symbol ZIXI. For more information, visit www.zixcorp.com.

" data-reactid="19">

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Edited Transcript of ZIXI earnings conference call or presentation 1-Aug-17 9:00pm GMT

Q2 2017 Zix Corp Earnings Call

DALLAS Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Zix Corp earnings conference call or presentation Tuesday, August 1, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Rockvam

Zix Corporation - CFO and VP

* David J. Wagner

Zix Corporation - CEO, President and Director

* Geoffrey R. Bibby

Zix Corporation - VP of Marketing

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Conference Call Participants

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* Joseph Anderson Maxa

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity

* Michael Wonchoon Kim

Imperial Capital, LLC, Research Division - SVP

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Presentation

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Operator [1]

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Good afternoon, welcome to Zix' Second Quarter 2017 Earnings Conference Call. My name is Tikia, and I will be your operator this afternoon.

Joining us for today's presentation are the company's President and CEO, David Wagner; CFO, David Rockvam; and Vice President of Marketing, Geoff Bibby. Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website.

Now, I would like to turn the call over to Geoff Bibby. Sir, please proceed.

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Geoffrey R. Bibby, Zix Corporation - VP of Marketing [2]

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Thank you, Tikia. Good afternoon, everyone, and thank you for joining our second quarter 2017 earnings conference call. With me today is our CEO, Dave Wagner; and our CFO, Dave Rockvam. After the market close, we issued a press release announcing our results for the second quarter ended June 30, 2017, a copy of which is available in the Investor Relations section of our website at www.zixcorp.com. Please note that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the company undertakes no obligation to update such statements.

We caution you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and in this conference call. The Risk Factors section of our most recent Form 10-K filing with the SEC provides examples of those risks.

During the call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing the company's performance. A reconciliation of certain GAAP to non-GAAP measures is included in today's press release, which can be found in the Investor Relations section of our website.

Now with that, I would like to turn the call over to Dave Wagner for his opening remarks. Dave?

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David J. Wagner, Zix Corporation - CEO, President and Director [3]

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Thanks, Geoff. Good afternoon, and thank you, everyone, for joining us today. Q2 represented the beginning of a new chapter for Zix. Before our acquisition of Greenview Data in March, our business focused primarily on providing the absolute best in e-mail encryption for our customers. E-mail encryption remains a core part of what we do, but our capabilities in addressable markets have expanded considerably since then making this quarter one of the true inflection points in our corporate history. In a moment, I'll talk about what Q2 meant to us at a strategic level. But before I do, I'd like to share just some of our results for the quarter, which Dave will review in more detail shortly.

Our record revenue of $16.4 million represents a 10% increase over the same quarter last year, and was our 13th consecutive growth quarter. Our GAAP net income more than doubled to $1.1 million and our non-GAAP adjusted net income increased 7% to $3.5 million. We also achieved our guidance for revenue, GAAP EPS and non-GAAP EPS. Supplementing the strong financial performance with the early traction gained in our recently launched ZixProtect and ZixArchive.

During the quarter, our sales team closed 44 ZixProtect and ZixArchive transactions with every one of our corporate and SMB sales reps generating at least one transaction for these offerings. What's more is that nearly a 1/3 of these transactions were with new customers, demonstrating the early success we are experiencing selling bundles to new accounts.

Greenview Data achieved all of our integration milestones for the quarter, including development milestones, service integration milestones and sales milestones. But what was most impressive, was how quickly they dug in with the Zix sales team to enable the Zix team to sell our expanded suite of e-mail protection products. Overall, Q2 was another solid quarter punctuated by record revenue, healthy new first year orders, significant positive progress on our integration with Greenview Data and strong customer adoption of ZixProtect and ZixArchive. Although, it's been less than 5 months since we made the acquisition, we've experienced tremendous progress so far and we've established a solid footing from which to further expand.

I'd now like to turn the call over to Dave Rockvam to provide more details on the financials for the quarter, then I'll return to provide an update on our progress on the 7 pillars as well as some more detail on Greenview Data and ZixProtect.

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David E. Rockvam, Zix Corporation - CFO and VP [4]

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Thank you, Dave, and good afternoon, everyone. As you just heard, in the second quarter, we were very focused on the integration of Greenview Data, our new product launches ZixProtect and ZixArchive and related pricing moves, all of which had a positive impact on our customer momentum and quarterly results.

Turning to our financial numbers in more detail. As Dave mentioned, revenue for the second quarter increased 10% to $16.4 million from $14.9 million in the same quarter last year. Q2 revenue came in at the high-end of our revenue guidance range and represented for the 13th quarter in a row, the highest level of quarterly revenue recorded in the company's history. New first year orders for the quarter were down 13% to $2.6 million from $3 million in Q2 of last year. The main cause of the decrease was due to a significant partner deal we won in Q2 of last year. This large multiyear partner deal distorts a meaningful year-over-year comparison for both new first year orders and total orders. If we exclude this large deal, our new first year orders would have actually been up 11% year-over-year. We're encouraged by the healthy level of new first year orders during the quarter, which included particularly strong contributions from our corporate enterprise teams, driven by new and existing customers moving to our cloud encryption and ZixProtect and ZixArchive solutions.

We are also encouraged by our Q2 traction with one of our OEM partner Cisco, which Dave will talk more about. Our adjusted gross profit for the quarter was $13.3 million or 81% of total revenue. This was an improvement from $12.4 million in the second quarter of 2016. Our gross margins at 81% was down from a year ago's 82.7%, mainly due to the 100% inclusion of Greenview Data's costs, while we are not yet capturing 100% of their revenue due to the nature of purchasing a subscription-based revenue company. We anticipate gross margins to remain within the range of 80% to 81% throughout the remainder of the year because of the costs associated with Greenview Data. We do expect gross margins to move back towards 81% to 82% in 2018.

Our adjusted R&D expenses for the second quarter of 2017 were $2.6 million or 15.9% of total revenue compared to $2.2 million or 15% of total revenue in the second quarter of last year. The year-over-year increase in adjusted R&D expenses was due to the inclusion of Greenview Data in our results versus their absence a year ago. The increase was also due to continued investments in our core encrypted e-mail solution with particular emphasis on our rapidly growing hosted service and a Zix centralized platform.

Our adjusted selling and marketing expenses for the quarter were $4.9 million or 30.1% of total revenue compared to $4.9 million or 33% reported in Q2 of last year. This quarter's adjusted selling and marketing expenses included cost associated with transitioning to and implementing our Customer Success model as well as marketing into the broader e-mail security market with our ZixProtect product portfolio.

For the second quarter of 2017, our adjusted general and administrative expenses were $2.2 million or 13.1% of total revenue compared to $1.9 million or 12.5% of total revenue reported in Q2 of last year. G&A is up over last year due to our investment in new systems to modernize our business processes and the addition of a Head of Corporate Development. Both investments are integral to our strategy to grow the company via our build-partner-buy strategy.

Regarding income taxes, our Q2 GAAP expense includes the recognition of a $554,000 excess tax deficiency related to stock options exercised during the quarter as recorded by 2017 implementation of ASU 2016-09. They are not anticipated when determining our estimated effective tax rate, but are instead discrete items in the reporting period in which they occur. Due to our NOLs, this has no cash impact. We estimate our effective GAAP tax rate will be approximately 38% for the year. Our overall tax expense is also largely noncash due to our NOLs. Going forward, we expect the cash component of our taxes to remain in line with prior quarters.

On a GAAP basis, we generated net income for the second quarter of $1.1 million or $0.02 per fully diluted share, which was double the amount we reported in Q2 of last year and consistent with our guidance for the period. As I mentioned earlier, the ASU 2016-09 implementation did cause a $554,000 noncash impact to our results, which accounted for a full $0.01 of GAAP net income in the quarter.

Our second quarter non-GAAP adjusted net income was $3.5 million or $0.06 per fully diluted share. $0.06 per share was consistent with our guidance for the period as well as the amount we reported in Q2 of last year.

And finally, our adjusted EBITDA for Q2 2017 totaled $4.2 million compared to the $3.9 million we reported in Q2 of last year. This was an increase of 8% from last year and would have been even higher except for recognizing a full quarter of Greenview Data expenses, but only partial revenue for this period. As a percentage of total revenue, adjusted EBITDA for the quarter declined from 26.3% to 25.9%. On our last call, we emphasized that our adjusted EBITDA margin, though, higher at the time, would move closer to 25% in the second quarter. Looking ahead, however, we reiterate that we expect adjusted EBITDA margin to move back to 28% in the second half of 2017, which is in line with our longer-term model.

Within our 2017 operating model, we do have approximately $2.5 million of depreciation, which is adjusted out of our adjusted EBITDA calculation.

Cash flow from operations for the second quarter of 2017 was $3.1 million. We continue to maintain a strong balance sheet with $29.5 million in cash and no debt. The increase in cash from the prior quarter amount of $23.4 million was largely due to $3.1 million in cash flow from operations and $3.9 million gained as a result of company insiders, exercising certain stock options that were close to expiring.

In April of this year, our Board of Directors approved a share repurchase program that allows us to purchase up to $10 million of our common stock, subject to certain conditions. One of those conditions includes a strike price under which our share repurchase program activates. Although, we intended to repurchase shares, the price remained above the threshold through June 30. However, we have purchased shares between the end of the quarter and today. Along with the board, we'll continue to evaluate the shareholder return of buybacks as well as organic and inorganic investment opportunities to balance our capital allocation to maximize return.

CapEX for the quarter was $800,000, which included additional capital the standup Greenview Data capabilities in our Dallas facility, costs associated with our business systems implementation and normal business capital purchases. We expect capital for the year to be between $2.4 million and $2.7 million.

Our backlog, which represents the dollar value of committed contracts was $77.8 million as of June 30, 2017, which was down slightly from $80.9 million as of the same date last year. Our decrease in backlog in total orders reflects the shorter-term commitment associated with our new customer pricing in bundled offerings, a large number of multi-year renewals last year that weren't available for renewal this year, and we have experienced a couple hundred basis points reduction in our renewal rate from last year's particularly strong year.

From our deferred revenue, we expect to recognize approximately $46.4 million or 60% as revenue over the next 12 months. You can see the impact of shorter-term contracts when you compare the 60% of revenue recognition of deferred over the next 12 months to last year's 55%. Meaning that 12-month backlog was up 5% year-over-year. We also saw an increase in total billings for the quarter over last year.

At the end of the second quarter, our ACV or annual contract value totaled a record $65.2 million, up 10% from Q2 of last year. As a reminder, because of our shift to selling bundled offerings, we will not be breaking out our ACV by product. However, from an industry perspective, the breakdown of our ACV was 50% from health care, 28% from financial services, 7% from government and 15% from other verticals. ACV by vertical is for Zix-only customers and does not yet include Greenview Data.

Shifting gears to our financial outlook for the third quarter ending September 30. Our continued industry leadership at e-mail encryption coupled with our bundled e-mail security solutions and solid execution on the Greenview Data acquisition, has us positioned well for the second half of the year. We currently anticipate revenue in Q3 to range between $16.7 million and $16.9 million, representing an increase of 9% to 10% compared to the Q3 of last year.

We are forecasting fully diluted GAAP earnings per share to be between $0.02 and $0.03. And fully diluted non-GAAP adjusted earnings per share to be $0.07. We are reiterating our revenue guidance for 2017 to range between $66.2 million and $66.7 million. This represents an increase of 10% to 11% compared to revenue in fiscal 2016. We are also reiterating our fully diluted GAAP earnings per share guidance to be between $0.10 and $0.12 and our fully diluted non-GAAP adjusted earnings per share to be $0.28 for fiscal 2017.

The combination of our strong ACV growth, increasing revenue recognition from our deferred revenue and our success entering new markets this quarter continues to demonstrate the strength of our business and our ability to execute as a leadership team. Our 100% subscription-based revenue model provides us with quarterly predictability that affords us the ability to focus on customer needs and invest -- customer needs and investments necessary to continue to drive profitable growth into the future.

This completes my financial summary. For a more detailed analysis of our financial results, please reference our Form 10-Q, which we plan to file by August 8. Dave?

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David J. Wagner, Zix Corporation - CEO, President and Director [5]

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Thanks, Dave. Now turning to our second quarter performance and progress as it relates to our strategic framework, which we refer to as our 7 growth pillars. Q2 saw another strong performance for pillar 1, which is securing new customer orders through our direct and indirect sales channels. Our corporate and enterprise teams led the way for another period of healthy first year orders, which was driven by ZixProtect, ZixArchive and ZixHosted.

Greenview Data also had a solid quarter of new first year orders. Greenview Data's new first year orders combined with the contribution from ZixProtect and ZixArchive caused new first year orders from Greenview Data's solutions to more than double on a sequential basis.

Looking at our new first year orders breakdown for the quarter, 44% were delivered through our direct sales efforts, 35% through VARs and MSPs, 18% through our OEM partners and 3% from web sales. We continue to win new customers versus the competition as we enhance our capabilities and presence in the cloud.

A quick review of our top 5 new customer-wins for the quarter will give you some insight into what's driving pillar 1. Excluding our largest transaction with Cisco that I will cover when I discuss pillar 2, our top 5 new customers included 2 nonprofit organizations, a financial institution, a medical equipment and supplies company, and a healthcare consulting firm.

Four of the 5 were not previously using e-mail encryption in a meaningful way. One of the 5 was a competitive displacement.

The displacement was driven by our solution's ease-of-use, coupled with our lexicon's compliance filtering and in-depth reporting capabilities. Importantly, the introduction of ZixProtect and the new bundled pricing associated with it, were also instrumental for landing a couple of the top 5 wins.

Our second pillar is to accelerate our growth with our OEM partners, Cisco and Google. As I mentioned earlier, OEMs contributed 18% of new first year orders during Q2, up from 5% in the year-ago period. The increase was predominantly driven by a large transaction with Cisco, while the other OEMs remained on track. During Q2, we secured a large U.S. federal government agency contract with Cisco. This is, by far, our biggest win with Cisco, adding over 100,000 mailboxes on ZCT or ZixGateway with Cisco Technology. We're extremely pleased with this win. The momentum it's generating within Cisco and the opportunity for additional business in the U.S. federal market. Total orders for Cisco exceeded $1 million this quarter, as their new first year orders increased more than 6-fold year-over-year. It's further encouraging that we have several other 6-figure deals in the pipeline with Cisco. Although, we're still in the early phases of this partnership and we still can't count on consistent quarterly first year orders contribution, we are encouraged with the steady progress we're making and the overall pipeline our side-by-side selling efforts are building.

With Google, our partnership remains on track with new first year orders consistent with prior quarters and the same quarter a year ago. We launched an updated offering with Google in March that we are rolling out to the existing base to help further improve our win rates and retention with Google's end customers.

Pillars 3 and 4 focus on selling additional seats and add-on products into our installed base. I mentioned on our prior call that the launch of ZixProtect expanded our capabilities, enabled us to bundle our offerings to provide one comprehensive platform e-mail security solutions for our customers. Q2 was a strong validation of our strategy and the sales potential of these new offerings. As I mentioned earlier, we closed more than 40 ZixProtect and ZixArchive transactions during the quarter. Approximately 70% of the transactions were add-on to existing Zix customers.

Interestingly, all, but one of the new customers also purchased ZixProtect as a bundle with one or more additional products. Overall, we are encouraged with the attach rates we're seeing for all of our products, and we'll continue to expand further into our installed base with our bundled offerings.

Moving to the fifth growth pillar, which is increasing renewal rates. Our renewal rate was back over 90% in Q2, which is consistent with our long-term trends. We are, however, on a year-to-date basis experiencing renewal rates that are lower than last year, which was exceptionally strong. The year-over-year decline is due to a couple of anomalies like the large nonrenewal last quarter, a large M&A this quarter and some pricing pressure in select accounts. Nevertheless, we achieved our 90%-plus target in Q2, and we expect to stay over 90% for the rest of the year.

Our sixth pillar is to invest in our core e-mail security solutions. Building off the strong momentum generated last quarter, our hosted customer base grew by 92% year-over-year, evidencing our advance into the cloud. A noteworthy investment in Q2 was made in [ZixCentral]. ZixCentral is a management platform that integrates the Zix solutions with the Greenview Data offerings to create a single view for centralized administration and reporting. We are also working on several additional capabilities for ZixCentral, which will allow us to create even stronger customer relationships and drive even higher attach rates, while maintaining our gold standard experience. Leveraging our agile development model, these advancements will be ongoing incrementally delivered. Investments and innovations like these position us well to further build out our capabilities to create value-add opportunities for our customers and to expand our market position in the broader e-mail security space.

And finally, our seventh pillar relates to exploring English-speaking international markets that present us with attractive opportunities for profitable growth. As we mentioned on our last call, our international efforts are moving slowly due in part to the delay of the enforcement of the POPI Act in South Africa. As a result of the slower international progress and the expanded North American opportunity presented by our broader solutions set, we will be adopting a more opportunistic approach to international expansion for a time, while we focus on our highest return opportunities.

So now that we walked through 7 pillars, I'd like to spend a moment or 2, further discussing the progress we're making as a team on our first acquisition. As I've been saying since I joined, the biggest opportunity we have at Zix to create additional value for our shareholders is in pillar 4, providing additional services to our existing customers. The planning we've worked -- we did with customers and prospects confirmed a strong preference to purchase a broader range of e-mail protection services from one vendor. As the absolute gold standard for end-user experience, compliance, security, service and availability, Zix is uniquely positioned to deliver exceptional customer value to a meaningful subsegment of the market. The leadership team and I could not be more pleased with the early progress we're making with the Ann Arbor team, the acquired technology and the adoption of our expanded solutions set by the market.

Delivering exceptional customer value and, therefore, shareholder value always starts with people. And we are pleased with the contributions of the new Zix team members in Ann Arbor and the way that their colleagues in other locations have embraced them. The team worked tirelessly, not only to dramatically increase sales, but to also successfully training the entire sales engineering team to further expand our ability to scale the solution to more customers in future quarters. Our model anticipated 16 ZixProtect transactions in our first quarter post-acquisition and didn't anticipate getting to 40 transactions until Q4, which demonstrates just how meaningfully the team has exceeded our early expectations.

The teamwork demonstrated, while building a consolidated product roadmap has also been exceptional. ZixCentral, our single web interface for administering all of a customer's Zix services is being accelerated with core elements of the Greenview Data offering. We also completed an independent benchmark test of the capability of ZixProtect against many of the leading brands in the Gartner Magic Quadrant. The independent lab found ZixProtect to be as effective as any of them at detecting and stopping advanced malware attacks, which again bodes well for our opportunity with the expanded solution.

As a final example, the rapid progress we're making on integrating the Ann Arbor team, we successfully completed the replication of the Greenview Data cloud service in our Dallas Data Center, and are now routing traffic through our primary data center. This will improve availability and scalability of the service as we continue to scale and expand to more of our customers.

I share these details to help you, as shareholders, see evidence of the impact our strategic transition is having on the business. The leadership team and I are proud of the team and we're excited about the opportunities that lie ahead. Our growth strategy for the second half of the year remains focused on executing on our 7 growth pillars. Q2 was a pivotal quarter for us in terms of igniting the customer adoption of our newer solution and making notable headway in our expanded total addressable market. While we are still in the early phases of our next stage of profitable growth, it's nice to be executing ahead of our plan and to having solid strategy in place to build on our consistent track record of generating profitable growth.

We will also be investing in initiatives beyond organic growth, including share repurchases and acquisitions as part of our balanced capital allocation strategy. We believe this approach not only positions us to succeed in the near term, but also over the course of the next several years, as we continue to elevate the Zix brand across the broader e-mail security landscape.

And with that, we're ready to open the call for your questions. Tikia.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Mike Malouf of Craig-Hallum.

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Unidentified Analyst, [2]

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This is [Eric] on for Mike. So with those new products of the Greenview acquisition, I think you said that there was a 70-30 breakdown between current and new clients. I was wondering if you guys expect that, that ratio to continue or just how you see new clients being a part of those new products?

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David J. Wagner, Zix Corporation - CEO, President and Director [3]

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That's a great question. 60-40 new to existing is our typical mix. So this is really weighted towards the install base, which is what we expected. And so we expect to continue to penetrate our base. I'm actually quite pleased with the very first quarter out having as much as 30% net new. And interesting as I said, all but one of those net new transactions was in a bundle, which to me really reaffirms our strategy of getting higher value from each customer transaction with a broader solution.

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Unidentified Analyst, [4]

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Okay, great. And then that new win with the U.S. Federal government agency. Was that a direct result of your renewed effort to sell side-by-side with Cisco? Or did that kind of -- was that -- has that been in the works for a bit. Just kind of wondering the momentum that's coming off that new renewed effort with Cisco?

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David J. Wagner, Zix Corporation - CEO, President and Director [5]

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Yes, that's a great question, Eric. And that's one -- we would not have won that account outside of this relationship with Cisco. But it's one that both teams worked together with Cisco in the front and the sales engineering team at Zix -- and the sales team at Zix side-by-side, making sure that the value proposition with ZCT solution was well-understood by the customer. So that's one that was side-by-side and worked on for several quarters.

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Unidentified Analyst, [6]

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Okay, great. And then I know you touched on your pipeline with Cisco a bit. Is there any other color you can add to that in terms of number of deals or timing involved with them?

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David J. Wagner, Zix Corporation - CEO, President and Director [7]

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Just -- I'll just add that we've been working more deliberately and intentionally in a side-by-side modes since last -- probably in the last November, and the pipeline is building -- you can tell from the results, it's not yet consistent, which is where it'll be when we're ultimately successful. But teams are working really well together and the pipeline is building. As I said in the script, we have a few 6-figure deals in the pipeline going forward, and we're seeing some pockets at Cisco begin to get adept in the technology where they may be able to begin to do repeatable deals on their own. But we're still in the early stages and still focusing on engaging with them to lead larger accounts through the buying process and winning accounts.

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Operator [8]

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Our next question comes from Joe Maxa of Dougherty & Company.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [9]

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On the ZixProtect and ZixArchive transactions. It was included in 2 of your top 5, which is -- sounds pretty promising. I'm wondering about the others. 44 transactions, were they typical size transactions or smaller customers, larger, who is really adopting it so far?

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David J. Wagner, Zix Corporation - CEO, President and Director [10]

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Yes, they're typically sized in our corporate accounts. So we're really initially focusing on accounts with 2,000 mailboxes and below, not that the solution isn't great, but we wanted to scale in a structured manner. So we're not seeing as much in our large accounts at this time because we're not focused there. And other than that, it's right across our base, as I said, one of the things I was really excited about is every single wrap in the -- what we call the corporate team that focuses 2,000 mailboxes and below. Every single one of them had a sale, a couple -- several of them had 5 or 6. So we're really finding that -- what we hope to find, which is a real natural synergy with the broader bundle across all of our base.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [11]

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You did have it in 2 large accounts. Is that correct?

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David J. Wagner, Zix Corporation - CEO, President and Director [12]

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We did interestingly have an archiving in over 2,000 in -- we had 2 over -- in 2 of the large accounts, as I said in the top 5. Yes.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [13]

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Okay. And how much of the decline in your backlog is related to the shorter length contracts you've been talking about?

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David J. Wagner, Zix Corporation - CEO, President and Director [14]

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We think almost all of it. When we -- we've done 2 things. One is we're working to increase the velocity of the transactions. And so we've adjusted when we made the major adjustment to the pricing. We've adjusted so that there is not as much incentive to go longer term. And that's really the change we've seen -- a movement from the low 20s to the high-teens in terms of our average contract length over the last couple of quarters.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [15]

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Did you say low teens?

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David J. Wagner, Zix Corporation - CEO, President and Director [16]

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I'm sorry, low 20s to high-teens, is what I thought I said.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [17]

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Maybe I just heard you wrong.

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David J. Wagner, Zix Corporation - CEO, President and Director [18]

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And then Dave went through some data to help you with that in terms of the number we disclosed of our 12-month revenue from backlog, which is up 5% year-over-year.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [19]

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Okay. And you reduced your pricing on the shorter term contracts to get you that more rapid turnover?

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David J. Wagner, Zix Corporation - CEO, President and Director [20]

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That's right. We decreased the incentive to go to 3 years. So it's a combination of lowering the front end and raising the 3-year price.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [21]

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Okay, understood.

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David J. Wagner, Zix Corporation - CEO, President and Director [22]

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We've got less discount, for 3 years lease (inaudible) .

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [23]

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You want more touch points so you can hit them with more stuff every year versus 3 years.

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David J. Wagner, Zix Corporation - CEO, President and Director [24]

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Exactly.

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Joseph Anderson Maxa, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Disruptive Technologies & Select Equity [25]

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Okay, sounds good. Last thing, how should we be thinking about new first year orders for Q3. What's the pipeline look like today?

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David J. Wagner, Zix Corporation - CEO, President and Director [26]

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We're expecting a good quarter. Q3s tend to be lower than Q2. And Q4s are higher. Q3s tend to be lower, just following the trend, but we'd expect to be up year-over-year. We'd expect to see continuing strength in ZixProtect and ZixArchive driving through. So yes, things are looking good.

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Operator [27]

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(Operator Instructions) Our next question comes from Michael Kim of Imperial Capital.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [28]

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Just going back to the ZixProtect bundles. Are we going to takeaway that most of the new and existing customers were taking the plus bundle. And can you comment on the take rate for the premium bundle?

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David J. Wagner, Zix Corporation - CEO, President and Director [29]

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So I can. We had -- premium bundles remained very strong. So almost everybody continues to take the lexicon. I'm trying to remember the exact number. And so if we had 28%, we probably had 3 or 4 not take the premium bundle for the DLP, with a vast majority are continuing to keep the compliance oriented nature of the solution and a strong lexicon. Were in that -- in the vast majority of the sales.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [30]

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Got it. And were these typically head-to-head e-vals or were you displacing incumbents or on balance where the majority of the customers migrating from an on-prem appliance?

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David J. Wagner, Zix Corporation - CEO, President and Director [31]

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So it was a mix. As you know, almost everybody has some sort of e-mail protection advanced threat anti-spam service in place. So we would have been displacing somewhere, some everyplace. A lot of times, the customer was very reinforced, and we had known from our surveys that the single vendor for the solution was something they were looking for. And so it was really them looking at their core service. One of the big opportunities is not everybody was on a renewal cycle, obviously, for their archiving or advanced threat piece when we contacted them. And so that remains an opportunity as renewals come up to hit more accounts. So good across-the-board in terms of, just general displacements, I wouldn't -- it definitely wasn't an on-prem necessarily, I wouldn't call it that and it was kind of broadly across competitors, wasn't one that we're picking off.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [32]

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Got it. And then just on the renewal rates. I think you mentioned, you called out a couple hundred basis points headwind. Do you think maybe something has changed in the market? Or do you continue to sort of view it as sort of unusual events, whether it's a customer bundle or an M&A? Should we kind of see the renewal rates kind of move back to normalized or historical levels next year?

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David J. Wagner, Zix Corporation - CEO, President and Director [33]

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So, we're on historical levels. Last year was exceptionally strong and we would have liked to retain that exceptional strong performance. We think this year will be more around what our Q2 was, over the 90%, and not yet back to last year. There are several anomalous factors, some larger M&As. We've got a couple we think will come through yet. Later in the year, when we know companies have come together, we were expecting them to be bringing their Zix renewals together later in the year. So we're expecting to stay around where -- our Q2 for the rest of the year, and then I think we'll be able to push out from there after these -- what appear to be more anomalous M&As clear out of way.

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Operator [34]

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Thank you. At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Wagner for his closing remarks.

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David J. Wagner, Zix Corporation - CEO, President and Director [35]

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Well, I'd just like to thank everybody for taking the time to join us today and for your support of Zix. Have a good evening.

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Operator [36]

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Thank you for joining us today for Zix' second quarter 2017 earnings call. You may now disconnect.

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