Scott Miller of Greenhaven Road Capital: Long on Zix Corporation

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Scott Miller of Greenhaven Road Capital, InvestPitch presentation produced by sumzero and Institutional Investor on the long case for Zix Corporation (NASDAQ:ZIXI).

Also see: Judy Krandel of Juniper Investment: Long on CafePress

Elevator Pitch

Zix Corporation (NASDAQ:ZIXI) is a high quality business with 95% + customer retention rates, regulatory tailwinds, in a four player industry with one of the players exiting. There is optionality on two new products that are transitioning from only expense to profit contributors over the next two years as Zix cross sells to their 9,000+ existing customers.

Investment Thesis

Zix Corporation (NASDAQ:ZIXI) is a small, growing, mission critical, high-quality business with very high customer retention rates (95+%), contracted revenue, high gross margins, regulatory tailwinds, and the ability to cross-sell new products to their 9,000-plus customers. The current GAAP financials mask the true profitability of the business as new product development temporarily depresses earnings. ZIX has a solid balance sheet with no debt and 12% of the market capitalization in cash.

Primary Product

Established in 1998, Zix Corporation (NASDAQ:ZIXI) was originally in the healthcare business, providing an e-prescription platform to healthcare organizations. Gradually, the business migrated away from prescriptions towards encrypted e-mail and fully exited the prescription business in 2010. The Zix Corporation e-mail encryption system emphasizes ease of use. The person sending the e-mail does not have to actively encrypt the e-mail by remembering to press a certain button. Instead, the e-mail encryption product has a series of filters that are set by the client and determine if an e-mail needs to be encrypted.

A very basic example is that words such as “confidential” will trigger encryption. The company has spent several million dollars a year on R&D and has built more complex algorithms than encrypting “confidential.” Once an e-mail is sent, it is routed through Zix Corporation (NASDAQ:ZIXI)’s $50M data center. If the intended recipient is registered in the Zix directory, then they will receive the e-mail and be able to read the content without any action on their end. There is never any additional action required by the user. Sending an encrypted e-mail is the same as sending a regular e-mail. All of the work is done by the filtering technology. Only recipients not registered in the Zix directory have to do anything to receive the e-mail. With more than 38 million registrants in the Zix directory, more than half of received e-mail requires no action by the recipient. As the Zix directory grows, this percentage will continue to increase.

H/T Curry Goat

Scott Miller of Greenhaven Road Capital: Long on Zix Corporation

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