Zix corp (NASDAQ:ZIXI), a provider of email encryption and data loss prevention services, is due to announce its Q4 2013 results after market hours on Feb 18. Zix corp has reported 19 consecutive quarters of revenue growth, an achievement which the management does not fail to mention with every passing quarter. However, a deeper analysis reveals some facts, which are a concern as we head into the Q4 2013 ER (earnings release) tomorrow.
Zix corp has been growing consistently over the last 5 years. Well, this is a fact the management will say loud and clear in each of its earnings release. Let’s look at two facts; Firstly at $12.25 million revenue in Q3 2013, the quarter was the biggest for the company in terms of revenue. A good thing for the most part except, in terms of revenue growth, the company’s best run rates seem to be behind it, a huge concern considering the current levels of revenue. The Q3 2013 Y/Y revenue growth of 11% lagged the company’s 5 year CAGR, which is a huge concern at the current levels. It will be interesting to see what kind of growth it will report in the Q4 ER, but topline growth will be one key number in the quarterly release. The table below displays the company’s revenue growth and earnings per share (EPS) over the last four quarters.
Let’s now take a look at the company’s profitability, one fact which has remained a strength at Zix corp.
|Q4 2011||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Net Income Margin||151.4%*||23.6%||25.6%||17.6%||34.1%**||4.8%||15.8%||26.0%|
* Includes a $12 million income tax benefit
** Includes a $2.4 million income tax benefit
The company has historically maintained a consistent bottom line which is reflected in the average operating margin of 21.3% over the last 12 quarters. The margins dipped in the first half of 2013 before recovering considerably in Q3 2013. The Q3 2013 improvement in margins was on account of cost control mainly in selling and general expenses, which reduced to 38% of revenues as against 45.5% of revenues in Q3 2012.
Key numbers in Q4 2013 earnings release
The key numbers in the ER on Tuesday will be the revenue growth rate vis-à-vis the Q4 2012 growth rate of 18.2%. Is the business losing steam or will the revenue run rate pick up? Another important number will be operating margin. We will consider something around 25% to be a healthy margin while anything under 20% will be a disappointment. The key to the operating profit margin will be the selling, general and administrative expenses, and it will be interesting to see whether or not the management can keep them under check. Apart from these two numbers, markets are ever excited by the battle of actuals v/s estimates and it will no different with Zix corps ER.
Let’s take a look at what the street expects the company to report on Tuesday.
|Analyst Consensus||Guidance Midpoint|
|Revenue (millions of $)||12.23||12.1|
According to streetinsider.com, the analyst consensus estimates for Zix corp is Q4 EPS of 6 cents on revenue of $12.23 million. The consensus estimate represents a Y/Y revenue growth of 5% (red flag) and earnings growth of 20%. The consensus estimate lies in the high end of management’s revenue guidance of $11.9 - $12.3 million and earnings range of 5 cents – 6 cents per share.
The company will have to report significant revenue beat in order to report Y/Y revenue growth even close to Q4 2012. We view any growth rate of lower than 15% will be a long term concern, even though the market may react favourably to the huge earnings beat it would represent. Revenue growth of close to 15% on the minimum and operating margins close to 25% is what we would like to see, though the topline growth of 15% looks highly unlikely, unless we are in for a big surprise. Come Tuesday and we will update our outlook on Zix corp based on the Q4 2013 numbers. Until then goodbye and happy investing!!
To see Zix corp’s latest stock price movement, click here (NASDAQ:ZIXI)