Zix Corp (NASDAQ:ZIXI)

Just got a court ruling that says that the Rpost patent against zix is valid
http://production.broadcastnewsroom.com/article/RPost-Patents-Validated-by-California-Federal-Court--1839459

Rpost wants them to cease using its technology, but without this techology zix will go under in less than a year. Zix needs the time stamping authentication to comply with HIPPAA regulations.

Low Cap Value

No insider has bought zixi stock in 2 years!

David Cook, founder, former CEO and board member quit in Jan after hearing about Rpost lawsuit. Sold all of his shares. Stock has plummeted since.

I expect to see negative revenue growth in this quarter. I also expect that the RPost reexam will re-affirm Rpost's patents and that zix will not be allowed to do sender authentication and time stamping. This will drive them out of business since they only have one product.

I look to early next year to be the point where the stock will really flounder.

Zix is an amazing company. When I came across it, I figured it was another company. But no, Zix had the biggest interest coverage ratio I'd ever seen. That sparked my interest. Zix also has the advantage of being older than their main competitor Trend Micro. I like Zix a lot, and I intend to hold on to it for a while.

Finally, the Fool gets it!

Two negative articles.

Not surprising. Virtually no growth this year.
Year to year growth is deceptive - zix omits e-prescribe revenue last year which they shut down at year end.
Zix has deliberately omitted to tell its shareholders about serious patent suit brought about by Rpost, a competitor who wants to shut it down.
New first year orders down by 25%.
In earnings call, zix admittted SYMANTEC is serious competitor. (SYMANTEC bought PGP last year and is eating into new zix orders).
No buys by insiders for 2 years.
Zix founder, David Cook quit board in January and sold all of his stock.
This is a no-brainer.

Revenue growth is nearly gone. 3Q is announced to be 1% over 2nd quarter, which was 1% over the 1st quarter of this year.

Zix has not diversified. They put their cash into a stock buyback at $3.5 which only served to cover up the massive dilution due to overpaid management getting fat stock options.

Zix's founder, David Cook quit the board 6 months ago and sold all of his stock.
No insider has bought stock in 2 years.

Dead meat.

With constant growth in revenue and EPS and such a low P.E Ratio, i see this stock becoming a big company in the next 2-4 years. hopefully, since i am invested in them, they either buy someone up or someone buys them up

About this Company
Zix Corp is a leader in email encryption technology. They are a smaller company with a market cap of less than $270mm. Their customers include 1 in 5 hospitals in the USA, 1300 financial institutions, and many other companies and is offered as OEM by companies like google and Symantec.

Products
Everything Zix does focuses around email encryption. This is a fantastic long term growing market as governments continue to force companies to encrypt their emails. Between HIPPA, HITECH, GLBA and other goverment regulations, they are now calling out email encryption as required.

So how does it work? Basically they have 2 options, option 1 is your download and install a program that integrates with your outlook on your computer. When you would normally send an email, you click a little button that sends it as an encrypted email. When the receiver gets the email, they just get a link to a webpage where they must register. After registering, they can securely view the email and reply.

The even cooler product they have is called their gateway. This product sits after the sender's email server, and automatically detects emails that need to be encrypted and automatically encrypts the needed ones. This same system can scan over 200 file types and detect attachments that need to be encrypted based on the companies policies. When delivered the same applies, the user just registers (or types their password if they already registered) and sees the email.

The best part about their solution is that all the keys are stored on the cloud and shared with other gateway users which is not only a huge buzzword and massive growing market (expected to double in size in 4 years), but it means that if both the sender and receiver are customers, the receiver get the email delivered in their inbox, with no need to login to a portal. This is a huge deal!

On top of everything else, they offer everything on an OpEx basis.

Growth Potential
So, not only do we have cloud, we have a growing market for encryption, we have an OpEx offer, but every time a new user registers, they store their company data as a lead. The sales pitch is great, "Mr IT director, I see over 4000 people from your company already use our product, in fact, they are unable to see emails directly in their inbox and are spending a collective X hours a year. We can save you $x a month in wasted resource time, make your system easier to use, and on top of all that, handle all of your email encryption compliance needs. Oh, and on top of that, our product is best in breed."

Economic Moat
An economic moat, for those of your wondering, is the competitive advantage that makes it difficult for their competitors to compete with them.
Zix's economic moat is the fact that they already have 27 MILLION registered users. The more gateway devices they deploy, the more people's emails they can receive without logging in to a website. That makes them able to sell not just on their technology, but on the fact that this is the industry standard device and anything else requires you to log into some website. As they already have a 20% market share in healthcare, they are the obvious choice. No one else has the shared keys, meaning with EVERY OTHER provider, you MUST both login for everyone sending emails using their service, but you require the people you send emails to to login as well. I really forsee a significant monopoly which drives great pricing power.

Subscription Business
The Zix business model is something I am very familiar with as it has alot of similarities with the hosting industry which as I completely understand. The trick with subscription model is that while your profit margin is VERY high, you must sell enough to cover your sunk costs. Once you break the sunken costs, you are VERY profitable moving forward. The cost of revenues is only 19.5%, that means the profit margin is over 80%. That is AMAZING. Every sale they make will add a ton of profits!

The Numbers
Market Cap: 265MM - This Stock is considered MicroCap meaning that a large number of institutional investors are unable to invest in it for a variety of reasons. First the large institutional investors need to be able to invest millions and millions of dollars in a single stock in order to justify the time needed to make an educated trade. With Micro-Cap stocks, they are often unable to invest enough to justify the research costs due to maximum ownership limitations.

EPS: 0.66c - This is the first year that Zix was profitable, because they have already broken through the sunken cost threshold, I think we will see a huge growth here as on boarding additional customers will not require a large amount of additional costs.

P/E ratio: 6.08 - Flat out, this is very good, very cheap.

Debt:
Zix has very little debt, and actually is sitting on around 25mm in cash. I love good cash and little to no debt.

Catalyst:
Zix is going to be announcing their quarterly earnings. I think we will see a nice increase in sales which will bump the earnings and cause the stock to jump. As the market cap gets larger, it should attract the attention of more institutional investors causing a large amount of demand. I am long on this stock and see a lot of growth in the next few years.

This stock will wither because of the onerous patent suit brought on by Rpost. Rpost has asked for an injunction barring zix from using its ideas.

Until the lawsuit is resolved, big investors and potential suitors will stay away.

This will make the stock stagnant.

Worse case - zix loses and shuts up shop.
Alternative possible scenario is zix paying up $40-50M in damages, which will necessitate a fourth toxic PIPE.

The market will jump from here. Martin Armstrong. Rebuying ones sold before.

recycle

Zix just got sued for patent infringement by RPost, a competitor.

RPost has aggressively sued several multinationals recently.

They have been known to drive competitors into a forced merger under their terms.

Bad news for zix.

ZIX BEING SUED FOR PATENT INFRINGEMENT!

This could put them out of business.

The suit is in very plaintiff friendly, Marshall Texas by RPost Holdings, a competitor.

Lawsuit could cost $5-7M, settlement maybe $20-40M, if rpost even wants to settle. They may simply deny zix a license and drive them out of business.

Nobody will buy zix now.

Fourth quarter revenue from continuing operations of $8.8 million, an increase of 24.6%, year-over-year
Full-year revenue from continuing operations of $33.1 million, an increase of 25.2%, year-over-year
Fourth quarter GAAP net income of $.54 per share, an increase of $.54, year-over-year (1)
Full-year GAAP net income of $.62 per share, an increase of $.69, year-over-year (1)
Fourth quarter Non-GAAP net income of $.04 per share, an increase of $.02, year-over-year
Fourth quarter Non-GAAP income from continuing operations of $.03 per share, an increase of $.01, year-over-year
Full-year Non-GAAP net income of $.13 per share, an increase of $.12, year-over-year
Full-year Non-GAAP income from continuing operations of $.11, an increase of $.02, year-over-year
Cash flow from operations for the year ended Dec. 31, 2010, of $7.2 million, an increase of $6.6 million, year-over-year
Cash and cash equivalents of $24.6 million, an increase of $11.3 million for the year ended Dec. 31, 2010

Sure Takeover Target or atleast $10 price tag for sure, bought at $1.30 in 2008

ZIXI is playing smart by signing contracts with major businesses and government agencies. It will boost earnings and growth

Zix has lost it's way and there are others out there that can do it better.

Outlook good