Zix Corp. ( Nasdaq - ZIXI ) -- Hard to Read

Zix Corp. (ZIXI $3.25) is a leading provider of email encryption services.  Approximately 50% of revenue is generated by the health care industry, which is required by law to scramble patient records when they are transmitted over the Internet.  The financial industry provides another 25%.  Legal documents represent a large part of the rest.  Last year Zix expanded its product line with a cloud based system that inspected every email and attachment that left a corporation's network.  If key words or phrases were identified the message was sequestered for review by an administrator.  The company also launched a bring-your-own device ("BYOD") cloud based system last spring.  That service allowed employees to access email accounts and other corporate files with their mobile phones, without actually storing any data on the phone itself.  Zix hoped to displace competitive technologies that loaded software directly onto the employee phones.  When suspicions arose the boss could look at everything on the phone and even wipe it clean.  Zix's approach kept everything in the cloud.  It looked like a winner.

In the wake of Edward Snowdon's revelations it appeared the encryption line would expand its reach, as well.  Despite expanded marketing efforts, though, none of the company's products have shown any acceleration.  In fact, new orders unexpectedly hit an air pocket in the September quarter.  Revenues are recurring.  And the renewal rate is high.  So reported results are likely to stay intact.  But a major upswing has become a less certain outcome.

Zix probably will report some good quarters over the next 2-3 years.  And even the bad quarters won't be terrible.  New orders in the September period, as low as they were, probably exceeded cancellations on existing contracts.  Widespread adoption of the technology may never happen, though.  Corporate technology spending is tight.  There are lots of competing programs.  Encryption is certain to be used for critical applications.  But it may turn out to be one of those good ideas that never completely catches on.

The stock price is near where we originally recommended it.  Our advice is to sell the stock and redeploy the proceeds in a Special Situation with better defined growth prospects.

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