Thank you operator. Good afternoon everyone and thank you for joining our first quarter 2021 earnings conference call.

On the call today, we have our CEO, Dave Wagner and our CFO, Dave Rockvam. After the market close today, we issued a press release announcing our results for the first quarter ended March 31, 2021, a copy of which is available in the Investor Relations section of our website at www.zix.com.

Please note that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

It's important to note also that the company undertakes no obligation to update such statements. We caution you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and in this conference call.

The Risk Factors section of our most recent Form 10-K and 10-Q filings with the SEC provide examples of those risks. As more fully described in our annual report on Form 10-K for the year ended December 31, 2020, the company has been actively monitoring the COVID-19 situation and its impact on both the company and the world in which we operate.

The impact of COVID-19 and the unprecedented measures to prevent its spread are affecting our business in various ways, such as causing volatility in demand for our products, changes in customer behavior, including their spending and payment patterns, disruptions in the operations of our third-party suppliers and business partners and limitations on our employee's ability to work and travel. These factors also make it more challenging for management to estimate the future performance of our business, particularly over the near term.

During the call, we will present both GAAP and non-GAAP financial measures. Non-GAAP financial measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results.

We encourage you to consider all measures when analyzing the company's performance. A reconciliation of certain GAAP to non-GAAP measures is included in today's press release, which can be found in the Investor Relations section of our site.

Now with that, I would like to turn the call over to Dave Wagner for his opening remarks. Dave?

Thanks Geoff. Good afternoon and thank you everyone for joining us today.

In the first quarter, we delivered consistent overall results, reflecting our continuing commitment to drive profitable growth. We delivered 14% growth in revenue and ARR in Q1, along with an 18% increase in adjusted EBITDA dollars and solid cash flow from operations of $10.7 million in the quarter, which is more than double the amount we generated in Q1 of last year.

Our cloud ARR growth was 20%. Our cloud migrations are accelerating and 88% of our total ARR is now in the cloud.

These financial results reflect the increasing adoption of our secure cloud platform by partners and customers alike. Our cloud backup business is up almost was 25% since we required CloudAlly in November and is up nearly 40% year-over-year.

We have already cross-sold 64 new cloud backup partners since last November, a great indicator of our momentum and continuing growth prospects for this key technology. Our international expansion plans are right on track.

We were up 10% quarter-over-quarter in international ARR in Q1 and we are launching into the German market this month. Companies are deploying more devices, communicating on more channels, supporting more remote work and facing greater cyber threats than any other time in history.

Secure cloud provides the robust security and compliance capabilities our MSP partners and their end customers need. SMB slowed down a little bit in Q1, but the acceleration we are seeing since mid-March highlights the opportunity ahead as businesses continue their journey to the cloud with an increased focus on email security, compliance and resilience.

Now I will turn it over to our CFO, Dave Rockvam, to provide details on our financial results for the quarter. Dave?

Thank you Dave and good afternoon everyone. The first quarter of 2021 marked another period of consistent profitable growth, increased year-over-year adjusted EBITDA dollars and strong cash flow generation.

Looking at the numbers in more detail. At the end of Q1, our ARR totaled $243.6 million, up 14% from Q1 of last year.

Our cloud-based ARR grew 20% over Q1 of last year and comprises 88% of our total ARR or a record $214.3 million. New customers added in the quarter totaled roughly 3,900.

For the first quarter, our net dollar retention was 98% which represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter. Both new customers and net dollar retention were slightly lower than the last two quarters as we felt some impact from the COVID induced SMB slowdown in January and February.

This slight slowdown is right in line with the dip in the December, January and February NFIB Small Business Optimism Index which dropped from 104.7 in November to 95 in January. The index did come back up to 98.2 in March, in line with our business performance.

We have yet to see the April number but we were pleased to see a rebound in both new customers and net dollar retention in both March and April for Zix. Dave will provide more color in the context of our growth pillars, but we continue to be encouraged by our ability to grow ARR at a double digit rate and maintain solid retention rates.

Revenue for the first quarter increased 14% to $60 million from $52.4 million in the same quarter last year. The $60 million of revenue exceeded our guidance range for the first quarter.

In Q1, as in the past, we saw the majority of all new customers onboard to the Zix Secure Cloud platform. In the first quarter, those new Zix Secure Cloud customers averaged 1.6 services per mailbox, which is above the 1.31 average we currently have across the company.

We believe this bodes well for our strategy of providing a strong user-friendly platform that makes it easy to add more Zix solutions, ultimately making us more valuable and stickier to both our partners and customers. Our adjusted gross profit for the quarter was $30.1 million or 50.1% of total revenue.

This was an improvement on a dollar basis from $29.2 million or 55.7% of total revenue in Q1 of last year. Gross margin dollars in the period were impacted due to the continued strength of our productivity products and the accelerated rotation to the cloud during the quarter.

We anticipated our customers moving their hosted exchange email to Microsoft 365 platform in Q1. However, our programs exceeded our plan.

Our ability to assist our MSP partners and direct customers as they move to the cloud continues to make us even more valuable partner to them. The macro acceleration of the business cloud journey and increased focus on email security give us confidence we can continue to capture meaningful growth opportunities well into the future.

Moreover, our current base of more than 5,000 partners and 90,000 end customers provide us a built-in growth opportunity to attach Zix's organic higher margin products and we do expect to grow gross margin dollars in Q2. Our adjusted R&D expenses for the first quarter of 2021 were $5.4 million, or 8.9% of total revenue.

This compares to $4.9 million or 9.3% of total revenue in Q1 of last year. The year-over-year dollar increase for the quarter was primarily amortization due to certain development projects we completed in the quarter.

We would anticipate R&D expense to continue to increase during the year. We don't expect this to be in current cash expense increases but the amortization of past projects that are being deployed on Secure Cloud.

While these expenses impact our net income and EPS, they are adjusted out of our EBITDA. Our adjusted selling and marketing expenses for the quarter were $10.5 million or 17.4% of total revenue compared to $10.6 million or 20.3% of total revenue in Q1 of last year.

The lower selling and marketing expenses as a percentage of total revenue reflects the benefits of our lower cost of customer acquisition from our high velocity sales model and the success we are having in winning new customers and wallet share gains from our active MSP partners. For the first quarter of 2021, our adjusted general and administrative expenses were $4.1 million or 6.9% of total revenue, which was down from $4.6 million or 8.7% of total revenue reported in Q1 of last year.

On a GAAP basis, we recorded a net loss attributable to common shareholders of a loss of $4.8 million or a loss of $0.09 per fully diluted share. The $0.09 loss for the quarter compares to a net loss attributable to common shareholders of a loss of $3.1 million or a loss of $0.06 per fully diluted share in Q1 of last year.

The change in the quarter was primarily driven by higher stock-based compensation over the prior year. Our first quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $7.9 million or $0.15 per fully diluted share, which was in line with our guidance.

This compares to $6.7 million or $0.12 per fully diluted share that we reported in Q1 of last year. And finally, our adjusted EBITDA for Q1 2021 totaled $13.1 million, an increase from $11.1 million we reported in Q1 of last year.

As a percentage of total revenue, adjusted EBITDA for Q1 2021 was 22%, which was in line with our guidance and compares to 21% in Q1 of last year. Cash flow from operations for the first quarter of 2021 with $10.7 million, an increase of 142% or $6.3 million over Q1 of 2020.

The increase in cash flow from operations was primarily driven by the continued focus on the business operations and continued careful working capital management. CapEx and other intangibles for the first quarter of 2021 were $5 million, which consisted primarily of normal business capital purchases and capitalized internal use software development.

Billings for the first quarter of 2021 totaled $62.3 million, up 12% from $55.8 million in Q1 last year. Turning to our balance sheet.

We ended the quarter with $23.7 million in cash. In addition to our strong cash position, we also have $25 million available for borrowing under our revolving credit facility.

The company also repurchased approximately $2.1 million worth of the company's stock as part of our equity management program on vesting shares. In terms of our capital structure and debt metrics, we had $211.5 million of total debt on our balance sheet at the end of the quarter.

Our trailing 12-month adjusted EBITDA of nearly $53 million reflects a leverage ratio of approximately 3.5 times adjusted EBITDA at the end of Q1, putting us well below the maximum permitted leverage ratio of 4.75 for the quarter. Shifting gears to our financial guidance for the second quarter of 2021, which is based on current market conditions and expectations.

In Q2, we currently expect revenue to range between $61.2 million and $61.6 million. Our revenue forecast for the second quarter of 2021 implies a 15% growth rate compared to Q2 of last year.

We are forecasting fully diluted GAAP loss per share attributable to common shareholders to be in the range of a loss of $0.09 and a loss of $0.08 and fully diluted non-GAAP adjusted earnings per share attributable to common shareholders before deemed dividends and excluding deferred tax benefit expense to be $0.14 for the second quarter of 2021. We are currently forecasting adjusted EBITDA to be approximately 22% of forecasted revenue for Q2 2021.

The per share guidance figures are based on an approximate basic share count of 57 million shares for Q2 2021. Based on our current visibility, we are increasing our revenue guidance for 2021 to be between $248 million and $250.5 million, representing an increase of between 14% and 15% compared to 2020.

We also expect fully diluted GAAP loss per share attributable to common shareholders to range between of a loss of $0.36 and a loss of $0.33 for the year. On a non-GAAP basis, adjusted earnings per share attributable to common stockholders is expected to range between $0.58 and $0.60.

Adjusted EBITDA is forecasted to be in a range of $56 million or approximately 22% of total revenue for 2021 and a year-over-year increase of approximately 10% compared to fiscal year 2020. The per share figures are based on an approximate basic share count of 55.5 million for 2021.

As a reminder, fiscal 2021 guidance includes an increase of about $3 million of expenses in 2021 related to travel, compensation and marketing which were reduced in 2020 due to COVID-19. Based on our current outlook, we expect to generate continued strong free cash flow in 2021.

We are forecasting approximately $9.5 million in interest expense on our bank credit facility and other interest-bearing items for 2021. In summary, as we execute this strategy, we believe our 100% subscription business, favorable profitability profile and strong cash flow generation positions us well to meet our manageable debt obligations and achieve our adjusted EBITDA guidance of $56 million.

This completes my financial summary. For a more detailed analysis of our financial results, please refer to today's earnings release as well as our 10-Q, which we plan to file by May 10.

Also visit our Investor Relations website to view our most recent investor presentation. Dave?

Thanks Dave. Our financial results underscore the growing role Zix is playing in empowering businesses of all sizes with technology to drive cloud adoption, facilitate digital transformation and protect communications.

As we noted on our last call, 2021 will be a year transformation for Zix. Our transformation plan is built on the same three growth pillars.

New partner and customer acquisition, partner and customer add-ons and retention. I will take a few minutes now to provide updates in each of these areas.

Beginning first with new partner and customer acquisition. In Q1, we added about 3,900 new customers, of which approximately 89% were added by our MSP partners, which was up slightly from 88% last quarter.

Some key MSP partner wins in the quarter included a new U.K.-based MSP who once consolidated Office 365, cloud backup and advanced threat to a single trusted provider with superior support. We had another win with a U.K.-based MSP who recognized the value of being a Zix partner and the benefits of consolidating a cloud backup and Office 365 with security auditing into one provider.

They have already moved nearly 1,000 seats on to our cloud backup solution and we have an opportunity to sell more to this partner as this relationship continues to grow. Three of our top five new partner wins included cloud backup in the quarter.

All five of our top new partner wins were international with three in U.K. and two in Germany, the latter being a major focus for us this year.

While we are just getting started with our expansion into Germany, our early traction is encouraging and validates our investment thesis. Broadly speaking, vendor consolidation by partners is a growing trend and Zix's MSP partners are realizing tremendous value from our broad portfolio of products focused on their most critical security and compliance needs.

On the value-added reseller and direct side of the business, our top five wins in the quarter included four in healthcare and one in finance. Turning to our second growth pillar, which is sales to existing partners and customers.

A key source of growth driver is sales to existing customers through partners. In the first quarter, sales to existing customers through MSPs accounted for 44% of the MRR increase in the quarter, which compares to 46% last quarter.

As Dave mentioned, we saw a decline in sales to existing customers in Q1 from what we experienced in Q3 and Q4. The good news is that the sales to existing customers began to recover in mid-March and April sales to existing customers were the strongest month for the such orders since we have owned AppRiver.

Our interpretation of this modest slowdown in Q1 is that it was a result of the COVID surge we saw in late winter and that the March, April recovery bodes well for our outlook. In terms of our top five add-ons through our VAR and direct sales team, three were in healthcare and two were in banking.

The largest was a meaningful six-figure add-on for an encryption-only customer. We also secured a meaningful add-on with a financial institution who licensed Zix products, including cloud backup.

Moving to our third growth pillar, increasing retention. Total company net dollar retention was down slightly to 98% in Q1 from 100% both last quarter and in Q1 last year.

Gross retention at the company level remained over 90%, consistent with historical trends. Our net dollar retention was impacted in the quarter due to lower sales to existing customers as discussed earlier and also due to churn and Microsoft Hosted Exchange or HEX.

The rotation from HEX to Office 365 accelerated in Q1 for two reasons. First, it appears that more cloud email migrations were planned for early 2021 than normal.

So we saw a seasonal work from home induced acceleration. And second, the program we instituted earlier this year to proactively market our HEX to Office 365 migration capabilities probably accelerated migrations as well.

To be clear, the rotation to the cloud remains a point in our favor and we are leaning into it. Our cloud retention rates remain very strong and our overall net dollar retention in April was back over 100%, driven predominantly by the strongest months for AppRiver since we acquired the business in 2019.

Our increased topline guidance for the year reflects all of these factors. Our acquisition of CloudAlly was very well timed and has performed exceedingly well since joining Zix last November.

In fact, CloudAlly's ARR has hit record levels each of the last three months and they recently secured their largest deal in company history, which was a six-figure ARR win. Cloud data backup is playing an increasingly critical role within a secure modern workplace and we have a leading solution to address that growing need.

We are seeing strong attach rates and adoption of cloud backup by our partners. In summary, we believe Zix is well positioned.

Our cloud momentum has us on track to realize our goals for 2021 including delivering $56 million in adjusted EBITDA while also setting us up for more success as we continue to focus on profitably growing the company to $500 million of ARR by 2025. That concludes our prepared remarks.

Operator, we are ready to open the call for questions. Operator?

Thank you. And congrats on the upside in the quarter and the $3 million guidance increase at midpoint, that's fantastic.

Just to be clear, I know you said there is a lot of the different drivers there. But simplistically, AppRiver versus core offering which one was the bigger driver here?

You are talking about at the whole company level, that's really primarily how we looked at it, Nehal, Those trends that we talked were real consistent across all parts of the business. Really good momentum, especially later in the quarter and here in April and kind of across all parts of the business, just a little bit of SMB draw down in January, February period.

Okay. Go ahead.

The other thing that we call out was the hosted exchange, which was just a little dip for us. And when you think back, it makes a lot of sense that cloud rotation that happened in 2020, lot of customers were waiting to year-end to make that change and we further incented that change.

So that was the one other thing that was just kind of a different business trend than the rest of the business. So those are the ones we highlighted, Nehal.

I see. Okay.

But what do you think is behind the acceleration in the month of March? Is it easier comps?

Or is there something more fundamental going on there?

That's why we use those NFIB stats. So we just feel like it was really a market thing.

I don't know what other SMB players are at. But we really thought it was just really tightly correlated to market.

April, as you know, was a superstrong month in the SMB segment of the economy. We certainly saw that.

Got you. Okay.

And great to hear about the great success that you are having with CloudAlly. Do you think that has anything with the news items of accelerating ransomware across the cyber security universe that's driving that?

Or do you think there is something else that's driving that?

No. I think I you are exactly right.

The ransomware and recognizing the value of the cloud data workload is that's what we talked. First part of COVID is just rotation, work from home which did drive a lot more cloud adoption.

And that's why we also think it was really well timed. We were close our partners through that period and close to our customers in recognizing that's where they would be going next as they come out to this new hybrid workplace with a lot of cloud data workloads.

So we think it's still really early for backing those up. We are seeing great success, continued the number one workload is, of course, Office 365.

But sales force really right behind that is the second biggest cloud data we are backing up.

I see. Okay.

And my final question is that, it's great to see that you are guiding, I don't know if you are guiding, but targeting $500 million in ARR by calendar 2025. If I see that on a five-year basis, that gets a 16% CAGR.

So you did have a slight acceleration in this most recent quarter. Is it fair to assume that you are expecting continued acceleration to this subscription rate by the end this year?

Yes. So obviously, we are very pleased with the acceleration that we are seeing.

When we talked about the $500 million, we were leaving a little bit room for inorganic work as well. So at 15% where we are today, there is $30 million of acquired ARR that would get us to the $500 million.

So that's exactly how we are looking at it. Building momentum, continuing to look for tuck-in technology that can further accelerate that rate and accelerated through it.

Okay. Great.

Thank you.

Thank you Nehal.

Hi guys. This is Nick Mattiacci, on for Chad Bennett.

Thanks for taking our question. So have you guys started to migrate legacy customers on to Secure Cloud?

Are you seeing customers use this as an opportunity to add additional products? And then just overall, do you see the number of services per mailbox continue to tick up?

How should we think about having on impact on net retention and gross margin?

Okay. I will take the first part of the question and let Dave come back in on the attach rates and the gross margin dollars.

So we are seeing an acceleration of the migrations to secure cloud. As you know, Nick, we finished up with that work late 2020 to get all of the best features of, what we will advanced email encryption into Secure Cloud.

So that's the migration point for our customers. That coupled with just the cloud rotation, to give you kind of a sense of how that's accelerated.

A year ago, we touch these customers all the time and a year ago it was about 20% wanting to move to the cloud in the next 12 months. We have 60% of the customers we touched year-to-date moving to the cloud either now or within the next quarter or two.

So we timed well to have that capability ready, timed well in order to enhance that cross-sell. And then the other big migration cohort happening now that's going really well is that over 2,000 SMB hosted customers are moving across with great success as well.

So that program is moving are really well. Thanks for checking in, Nick.

And I will let Dave kind of hit the cross-sell.

Yes. On the attach, it's going well.

We always want more. We are looking at that growing a couple hundred basis points, couple hundred tenths of points every quarter.

So we were 1.31 in total. We would like to see that get close to 1.4 towards the end of the year.

So we are working towards that with the team as far as we look at cross-sell. Getting the U.K.

team, continuing to focus on the additional products that they now have to sell, especially when you look at the CloudAlly add-on. That brings a lot of opportunity for cross-sell.

Launching in Germany this month. We are really excited about that and the teams we have been able to bring on there to get the cross-sell going in Germany as well.

So we got that. And then the gross margin dollars.

We look for gross margin dollars increasing in the next couple of quarters. As Dave said, we had that significant HEX to Office 365 rotation this quarter, early in the quarter, which was great because we retained a lot of those customers.

It flattened the gross margin a little bit in January, February on the dollar side but with what we are seeing in March and April, we are looking for that to pull back up in the second quarter. So we would expect to see gross margin dollars increasing.

A big part of why we can maintain that $56 million of EBITDA for year-end.

Got it. Thank you.

And then a year ago, now we are talking about customers downgrading to lower price Office 365 SKUs. I was just wondering if kind of saw any similar impact in the quarter over that that you are talking about SMB?

Yes. That's a very good reminder.

And it was different that time. It was not, the churn was super solid.

We did not see that price sensitivity. It' just a slowdown in the addition of seats in the installed base.

That was a good questions. It was not due to skewing down like we did last March.

Okay. Got it.

Thank you.

It was a great question.

Thanks. So just to be clear, the reason why the gross margin declined this quarter was because the acceleration to cloud migration, acceleration of cloud from basically hosted exchange to the cloud hosted.

Is that correct?

That's right. Yes, that's right.

It's the Office 365 carries a little bit lower gross margin for us. So as that the rotation happened, it brought the gross margin dollars down.

I think it was down $100,000 quarter-to-quarter. But we have saw that got off a little bit in March and April.

So we are looking at that to grow in Q2 and the subsequent quarters.

Right. And can you explain why that's a long term positive?

So the long term positive, Nehal, I think it is a very clear positioning of Secure Cloud as a platform for MSP partners to consolidate these services. So the higher margin HEX we have known for a long, long time but that's not the future.

The future is the cloud solutions for productivity, security and compliance that we provide including Office 365. So that's the growth area we are leaning into and that profit flow from HEX is one that we are managing transition.

I am sorry. When you HEX, can you just explain what that means basically?

I am sorry. hosted exchange and we call it HEX.

It's H-E-X. My accent is coming through, sorry.

H-E-X, HEX.

Got you. Okay.

And so this gives you the clear position to move customers to Secure Cloud and therefore attach additional services and I think they get some additional data, at least on the what the trials were which is the route towards adding the additional services. Can you run through that data in terms of how that's proceeded from last quarter to this quarter and maybe over the past few quarters as well?

I will take a cut at that. We didn't have it in the script.

So the trials are tightly correlated, obviously, with the net seat adds. And so trials were off a little bit as we described in the net seat numbers in that December is always a low trials month because IT folks take the time off.

So it was the January, February, trials were down. March saw a really nice increase, which led to the best April since we have had AppRiver.

So that's kind of the trial rotation window. And it's just a month.

It precedes the seat adds by a month.

Okay. So then what other metrics that give you confidence that you will be able to attach additional services as customers migrate from hosted exchange to cloud based subscription?

Okay. Good.

So thank you for that clarification. So going back to the package that we put together for our SMB clients into our installed base, not our partner's installed base, the direct portion of our installed base, we have been marketing a package to them that moves them to what we think is the best offer, which is the Office 365 productivity suite plus advanced threat plus archive and encryption, if they are a compliance-oriented buyer and on that cloud backup.

So stacking together at least three services with that migration offer. And we have done more hosted exchange or on-prem exchange to Office 365 migrations, probably than any company in North America.

We are over 19,000 migrations. We are really good experts at that.

And so that's a real strong capability that we have that these customers in migration value.

Okay. All right.

And then there is also this on-premise email exchange, HEX? Do you think that's also been a driver of the accelerated migrations that you are seeing?

So I actually think, well I know, that we do a fantastic job on behalf of our partners and our customers operating the hosted exchange servers. We have a team that's been doing that for a long time and really, really best-in-class.

We collaborated really closely with Microsoft on that. Our partners and customers, our partners in particular, were really complimentary of the work we did, the communication we offered.

And the SMB customers tended not to be as aware of what was going on. So we think it's more of an opportunity for us with that capability we have for some of the mid-market buyers who haven't yet moved to be there is a really good option.

But I think what you are alluding to, Nehal, is that the on-premise exchange servers that are still in existence, those are going to get a really, really hard look for upgrade this year, which I think will help contribute to further acceleration as an expert in making those migrations happen. We will have the slight offset that we have talked about.

We have our own hosted exchange customers that we are working to migrate as well. But the partner side of that is holding in quite well.

And so anyway, it's a balance with the overall, we think, the net positive because we do some of these migrations.

Got you. Okay.

And then finally, for Dave Rockvam. You did say that you have confidence that gross profit dollars will increase Q-over-Q into the second quarter.

Can you review the reasons on why that is?

Yes. It has to do with the March and April sales that we saw.

So we had the Office 365 really bump up with the hosted exchange in January and February. We continue to see the growth of Office 365 into March and April for sure .And we saw gross margin dollars there.

But then we also continue to see growth in the IP products. And that's where we are seeing the gross margin dollar increase.

So we are pleased with the March and April numbers that we have seen. Now that we are May 5, we have confidence we will grow gross margin dollars this quarter and in the coming quarters.

Great. Thank you very much.

Thank you Nehal.

Thank you Nehal.

Well, thank you, Howard and thank you, everyone, for joining Zix first-quarter earnings call. We look forward to speaking to you again in early August with our Q2 results.

And I hope you all have a great evening.