ZIX CORPORATIONOCTOBER 15, 2013Dan Ballantine, Alexander Johansson & Ye Liang

Agenda

Introduction Holding Information Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation

Zix Corporation

Leading Provider of Email Encryption Designed for Regulatory Compliance and

Protecting Sensitive Communication 1 in Every 5 U.S. Bank and Hospital

Products & Services: ZixGateway / ZixMail – Sender Service ZixAccess – Receiver Service ZixDirectory

World’s Largest Shared Email Encryption Community

Zix Research CenterSource: MarketLine, Zix 2012 10-K

Current Holding

April 17, 2012 Acquired 2,000 shares @ $2.89/share Cost basis = $5,780

October 15, 2013 Current holdings 2,000 shares @

$4.85/share Market value = $9,700 Annualized HPR = 41.22%

Source: Yahoo Finance

Macroeconomic Overview

Unemployment Rate

BYOD Catalyst 4 Out of 5 Employees Use Their Own Devices At Work

Sensitive Information Concerns

Source: Bureau of Labor Statistics, Ribbit

Macroeconomic Overview

HIPAA Compliance Health Insurance Portability and Accountability Act Covered entities: health plan, health providers,

health care clearinghousesAlso applies to business associates of covered entities

Requirements: privacy, security, and transaction standards regarding health care patient information

Deadline for compliance was September 23, 2013 Continued need for protection as more patient data

is stored and transmitted electronically

Source: Lorman, American Physical Therapy Association, US HHS

Stock Market

Source: Google Finance

Industry Overview

What is Software Industry? Components

System Software Operating Systems Network and database management Other

Application Software General business productivity and home use

application Cross-industry and vertical market applications Other

Source: MarketLine Industry Profile

Industry Overview

Source: MarketLine

Industry Growth

Source: MarketLine

Industry Life Cycle

Steady growth in sales as product acceptance widens

Source: UIUC BADM 449

Industry Forces Analysis

Source: MarketLine

Industry Forces Analysis

Buyer Power: MEDIUM High switching cost, open source

substitutes available, large population of customers

Supplier Power: MEDIUM Highly differentiated inputs, low threat of

forward integration Rivalry Among Existing Competitors:

MEDIUM Differentiated products, fast industry

growth, many competitorsSource: MarketLine

Industry Forces Analysis

Threat of New Entrants: MEDIUM Low capital intensive, high labor intensive,

trusts in certain sub-markets Threat of Substitutes: MEDIUM

Cheap or free open source alternatives that update more frequently and quickly, capability issue with the alternatives

Conclusion: Moderately attractive industry

Source: MarketLine

Company Overview

Products and Services:

New to the Family in 2013ZixONE; byod

Source: Zix Corporation Website

Company Overview

Strategy: Differentiation Highly specialized in data protection Software-as-a-Service (SaaS)

Revenue method: Annual service subscription fee Pricing is fixed per sender each year 75% of deals are 3-yr contracts with an

average of 2.5 years Cash generally collected annually upfront Retention of 90%+ of revenue

Source: ZixCorp Investor Relations

Company Overview

Source: Zix Corporation Investor Relations

Product Life Cycle

Steady growth in sales as product acceptance widens:•Demand increases as business related online communication expanding•Products reach out to wider range of audience

Source: UIUC BADM 449

Business Risk Analysis

Changing regulations on internet privacy Main customers subject to political

factors Rapidly growing technologies bring

uncertainty Dependent on strong human capital Existing and potential big players End user preference Hacker population brings challenges

SWOT Analysis

Strengths Weaknesses- No long-term debt- Strong cash position- Growing product base- Subscription business

model

- Operating losses in past 5 years

- Forced to exit business segments in the past few years

Opportunities Threats- Healthcare compliance

(HIPAA)- Increased emphasis on

security of data and communication

- BYOD trend in the workplace

- Big data trends

- NSA security threats- Increased hacker issues- Rapid technological

change

Management Outlook

Optimistic about subscription business model coupled with over $60 million backlog

Enthusiastic about September release of ZixOne to address the BYOD segment

Concerns over increased SG&A expenses in 2013 due to increased sales force

Recognized increased competition from companies such as McAfee and Cisco Systems

Source: Zix Corporation Q2 Earnings Call

Recent Financial Information

Source: Zix 2012 10-K, Zix 2010 10-K

Recent Financial Information

Source: Zix 2012 10-K, Zix 2010 10-K

Current Stock Information

Source: Capital IQ, Yahoo Finance

Metric Value

Current Stock Price

$4.85

Trailing P/E

36.62

Forward P/E

20.70

Market Cap ($ millions)

$297.00

Financial Analysis

2008 2009 2010 2011 2012Current Ratio 0.83 0.82 1.54 1.29 1.32 Quick Ratio 0.77 0.76 1.42 1.13 1.16 Cash Ratio 0.74 0.72 1.34 1.10 1.11

2008 2009 2010 2011 2012Operating Profit Margin -21.42% -14.88% 15.56% 27.73% 20.63%Net Margin -19.41% -14.47% 125.45% 59.13% 25.38%ROA -28.03% -22.68% 95.80% 31.24% 13.72%ROE (Book Value) 683.67% 269.44% 184.78% 43.11% 18.49%

2008 2009 2010 2011 2012Debt/Assets 0.92 0.89 0.25 0.23 0.22 Debt/Equity NM NM 0.36 0.30 0.30 Interest Coverage NM NM 233.91 1,511.00 8,943.00

Liquidity Ratios

Profitability Ratios

Solvency Ratios

Financial Analysis

2008 2009 2010 2011 2012A/R Turnover 35.15 49.60 31.43 37.25 51.89 Days Sales Outstanding 10.38 7.36 11.61 9.80 7.03 A/P Turnover 26.51 12.24 7.52 13.17 16.97 Days Payable Outstanding 13.77 29.81 48.53 27.71 21.51 Fixed Asset Turnover 12.37 14.02 15.22 17.19 18.80 Total Asset Turnover 1.44 1.57 0.76 0.53 0.54

2008 2009 2010 2011 2012Tax Burden 100.78% 101.53% 794.67% 211.48% 121.53%Interest Burden 89.91% 95.77% 101.44% 100.83% 101.24%Operating Profit Margin -21.42% -14.88% 15.56% 27.73% 20.63%Asset Turnover 144.39% 156.76% 76.36% 52.83% 54.06%Leverage (24.39) (11.88) 1.93 1.38 1.35 ROE 683.67% 269.44% 184.78% 43.11% 18.49%

Activity Ratios

DuPont Analysis

Comparable Companies

Source: Capital IQ

Company Ticker (Exchange)

Market Cap ($millions)

Tucows Inc. TCX (AMEX) $105.44

Axway Software S.A. AXW (ENXTPA) $594.36

Fortinet Inc. FTNT (NASDAQ) $3,446.84

Trend Micro Inc. 4704 (TSE) $5,029.95

Proofpoint, Inc. PFPT (NASDAQ) $1,039.23

USA Technologies Inc. USAT (NASDAQ) $53.17

Zix Corporation ZIXI (NASDAQ) $291.49

Stock Performance

Source: Yahoo Finance

Comparable Company Analysis

Source: Capital IQ

Target CompanyTicker Symbol (Exchange)

Price/Book Value

Forward TEV/Sales

Forward TEV/EBITDA Forward P/E

Zix Corporation ZIXI (NASDAQ) 4.62x 5.14x 16.35x 20.70

Comparable CompaniesTucows Inc. TCX (AMEX) 4.75x 0.78x 10.47x 15.00 Axway Software S.A. AXW (ENXTPA) 1.84x 1.75x 10.97x 18.54 Fortinet Inc. FTNT (NASDAQ) 6.07x 4.60x 20.97x 37.20 Trend Micro Inc. 4704 (TSE) 4.00x 3.32x 12.79x 23.82 Proofpoint, Inc. PFPT (NASDAQ) 27.50x 6.71x NM NMUSA Technologies Inc. USAT (NASDAQ) 2.61x 1.18x 6.42x 25.00

Comparable StatisticsHigh 27.50x 6.71x 20.97x 37.20 Median 4.37x 2.54x 10.97x 23.82 Low 1.84x 0.78x 6.42x 15.00 Mean 7.79x 2.62x 13.80x 23.64

Comparable Company Analysis

Source: Capital IQ

Multiple Low Median High MeanPrice/Book Value 1.89$ 4.50$ 28.32$ 8.03$ Forward TEV/Sales 0.29$ 1.79$ 5.35$ 1.86$ Forward TEV/EBITDA 1.35$ 2.57$ 5.25$ 3.33$ Forward P/E 3.45$ 5.48$ 8.56$ 5.44$

Implied ZIX Share Price

Multiple Weight Implied ZIX Stock Price

Price/Book Value 25% 8.03$ Forward TEV/Sales 25% 1.86$ Forward TEV/EBITDA 25% 3.33$ Forward P/E 25% 5.44$

ZIX Implied Stock Price 4.66$

Discount Rate

Source: Yahoo Finance

CAPM

Risk-Free Rate 2.64%Market Risk Premium 6.00%5-Year Beta 0.41

CAPM Cost of Equity 5.12%

Year Actual1 2.23%2 112.57%3 -36.25%4 16.94%5 67.59%

Total Realized Return 171.51%

Arithmetic Annual Return 32.62%Geometric Annual Return 22.11%

Annual Realized Returns

Discount Rate

Share Price 4.76$ Shares Outstanding (thousands) 61,240.00 Market Value of Equity 291,502.40$

Debt -

Percent Equity Weight 100.00%Percent Debt Weight 0.00%

Cost of DebtCost of Equity

CAPM Cost of Equity 5.12% 50.00%ZIX Realized Return 22.11% 50.00%

Cost of Equity 13.62%

Tax Rate 38.0%

WACC 13.62%

Weighted Average Cost of Capital

Cost of Equity Weightings

DCF Analysis

2013E 2014E 2015E 2016E 2017ETerminal

ValueNet Income 12,615 14,794 18,002 21,460 25,309 Depreciation 1,430 1,472 1,504 1,532 1,558 Capital Expenditures (1,500) (1,525) (1,550) (1,575) (1,600) Changes in Net Working Capital

Less Increases in A/R (130) (107) (115) (46) (121) Less Increases in Inventories - - - - - Plus Increases in A/P 247 227 278 340 361

Free Cash Flow 12,662 14,860 18,119 21,710 25,507 247,484 Present Value 11,145 11,512 12,354 13,029 13,473 130,725

Discount Rate 13.62%

Calculation of Implied Share Price Terminal ValueImplied Enterprise Value 192,238$ Terminal Growth Rate 3.00%Less Debt -$ Plus Cash $22,988Implied Market Cap 215,226$

Implied Share Price 3.51$

Zix Corporation Discounted Cash Flow Analysis ($ thousands)

Decision Drivers

Strengths Strong cash position and improving balance

sheet Well positioned in health care segment Additional BYOD segment growth

opportunities Concerns

Strong recent stock performance Internet and data privacy threats Operating losses in the past

Recommendation

Valuation Summary Current Stock Price: $4.85/share Comparable Companies Valuation:

$4.66/share DCF Valuation: $3.51/share

Recommendation: HOLD

Questions?