Zix Corp (NASDAQ:ZIXI) came out with its Q4 2013 results yesterday (Feb 18) after market close. We are excited by the opportunity in the BYOD (bring your own device) market which lies ahead of the company, with the launch of ZixOne service. On the numbers front the company delivered yet another quarter of growth, both in revenue and earnings. While that is something the company shouts out in each quarterly call we would like to today focus on the new products and concerns around Google related revenues and where could Zix Corp be headed over the coming quarters. Our last analysis had ranked ZIXI stock at 4.1/5, which indicates the investment attractiveness of the stock.
ZIX Corp Q4 2013 and beyond
Let’s first take a look at the company’s performance in Q4 2013. The table below shows the Y/Y revenue and earnings growth in Q4 2013, which was healthy.
|2012 Q4||2013 Q4||YoY Growth|
|EPS (earning per share)||0.05||0.06||20%|
The Q4 2013 revenue growth of 5.3% pales in comparison of to 18.2% in Q4 2012, even though it was marginally ahead of the higher end of the guided range of $11.9-$12.3 million. So even before we move ahead into costs and earnings, here is why we think the revenue growth was better than it appears, even at the minimalistic growth of 5.3%. The revenue growth was negatively impacted by a temporary disruption in the revenue stream attributable to Google. Excluding the Google sales for both the comparable periods puts Q4 2013 topline growth at 21% Y/Y, which we believe is more in line with what we can expect this company to grow at. Going ahead, with the addition Google back to the revenue mix, topline growth of 12%-15% is the growth we are looking at over the course of FY 2014. However the topline growth could be higher in case of traction in the new ZixDLP and ZixOne solutions.
Moving on to costs and profits, the company saw reductions in total operating expenses as the company reached a flux point, with the focus shifting from research and development expenses in 2013 to sales and marketing expenses in 2014. The overall operating margin saw a significant expansion, reaching 28% percent of revenues in Q4 2013. The margin isn’t something significant as the profit margins in Q3 2013 were low on account of increased investment activity in that quarter. Let’s look at Zix corp’s costs as a percentage of revenue over the last few quarters.
|2012 Q4||2013 Q1||2013 Q2||2013 Q3||2013 Q4|
|Research & Development||20.8%||22.2%||21.0%||19.2%||17.2%|
|Selling, General & Admin||48.5%||56.2%||46.7%||38.1%||39.3%|
The company is at a stage of taking its two new products to the market and seeing a rise in sales, advertising and marketing expenses in 2014 is what we expect.
The cash flow from operations was healthy at $3.5 million in Q4, for a total cash flow from operations of $13.3 million in 2013. The cash balance at the end of the quarter was healthy at $27.5 million.
Another positive from the quarter was the reduced exposure to Google in terms of new first year orders with Google accounting for 11% of new orders in 2013, 60% lower exposure as compared to 2012.
Actual performance v/s estimates
The table below summarizes the Zix Corp's actual performance v/s estimates, as on Streetinsider.com
|Analyst Consensus||Guidance Midpoint||Actual|
|Revenue (in millions USD)||12.23||12.10||12.31|
The reported revenue, at $12.31 million was marginally ahead of the higher end of the company’s guidance ($12.3 million) as well as analyst consensus estimates. The actual earnings numbers were more in line with analyst consensus estimates and the high end of the company guidance.
The negative impact of Google revenues continues to remain a concern and we hope that, as stated by management, the Google revenue stream will be back to full steam in Q1 2014. Zix corp currently trades around a TTM (trailing twelve months) price to earnings multiple of 26 (based on Feb 19 closing price) which we believe is attractive in relation to the growth opportunities over the next one year. Long term outlook is positive with constant and steady topline growth in the coming quarters. The success of the latest offerings will be crucial to drive revenue growth to higher levels. Earnings growth will also be driven by profit margin expansions once the sales investments in the new products begins to pay off, which can be expected later in 2014 or early next year. In the meantime the stock will be on our radar and we shall update you on any long term investment opportunities which may open up here. Keep reading to see our latest updates on ZIXI.
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