Zix Corporation (NSYE: ZIXI)
Analysts: Xiwei Ma, Yongtong Li, Li Ren
Current Position: 1000 shares @ $4.68 (Mar 27, 2017)
Recommendation: Hold
Company and Business Overview:
Zix Corp(NSYE: ZIXI) was incorporated in Texas in 1988. It entered the encrypted email market in 1999. The company provides three services —email encryption, data loss prevention (DLP), and bring-your-own-business (BYOD). At the end of 2016, Zix has built strong partnership with global IT leaders CISCO and Google, and provided service for 15,000 customers. A Large portion of revenue is derived from customer subscription fees, and Zix has a renewal rate of more than 90%. However, the company has a relatively young management team, which may bring uncertainty to its business. It is also critical for such a technology company to keep pace with rapid technology changes.
Macroeconomics and Industry Overview:
Zix’s business highly relies on email transactions, and stricter regulation standards on data security drive the use of encrypted email. In addition, growth in digital business transactions and adoption of cloud-based offerings increases customer needs to prevent insider fraud and data theft. All those conditions show a growing market. However, Zix faces intense competition in market, and the trend of company consolidation may result in stronger competition in the future.
Financial Analysis:
Zix’s revenue has been increasing from 2011 to 2014, though at a declining rate.Due to Google’s technical issues in 2013, Zix’s revenue growth dropped significantly in 2014as Google reduced its orders. As orders from Google picked up again in 2015, Zix’s revenue growth recovered. ROE growth decreased from 2012 to 2014 because of the increase in R&D and SG&A for the launch of new services of DLP and BYOD in 2013. Zix enjoyed huge tax benefits from 2010 to 2013, but paid income tax since 2014. In 2012, ROE growth increased significantly because the utilization of tax benefit. The company has no debt in the past five years and growing amount of cash on hand.
Valuation:
1. multiples and M&A analysis: As Zix is a small market cap company, it is hard to find comparable companies as they have large market cap and provide broader services than Zix. Therefore, we thinkthe multiples valuation method will overprice Zix. We believe that Zix is an attractive M&A target because it has no debt and lots of cash. It is a leader in email encryption industry with small market cap. Zix focus on small and mid-size customers, which helps the acquirer to expand market reach.
2. DCF projection: We forecast our revenue growth rate using 4 factors: GDP growth rate, inflation rate, worldwide email users growth, and company specific growth rate. We assumed most of other items grow in proportion of forecasted revenue. Because deferred tax assets (DTA) are really important toZix, we make two scenarios analysis where DTAcan be used to deduct the tax payment or not. We assumed70% of DTA can be used to deduct tax in scenario two, because 10K states that the DTA is very likely to be realized. The firm value is $4.1 per share using discount rate12.26% and terminal growth rate 2.5%. Although the implied price from projection is lower than the current stock price, it does not mean that the stock is overpriced. Because our estimation is conservative, and DCF does not take future expansion potential and M&A premium into account.
Recommendation:
In conclusion, Zix is a leading company in the growing email security industryand it is an attractive M&A target. Zix has been repurchasing common stocks and seeking favorable acquisition to expand its product portfolio. Also, the technical analysis reveals that the stock price line is just below 50 days moving average line, but above 200 days moving average line, which means we can wait until more information comes. We give our recommendation: HOLD.