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Edited Transcript of ZIXI earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q3 2019 Zix Corp Earnings Call

DALLAS Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Zix Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Rockvam

Zix Corporation - VP, CFO & Treasurer

* David J. Wagner

Zix Corporation - President, CEO & Director

* Geoffrey R. Bibby

Zix Corporation - VP of Marketing

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Conference Call Participants

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* Michael Fawzy Malouf

Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team

* Nicholas Andrew Yako

Cowen and Company, LLC, Research Division - VP & Senior Analyst

* Tyler Jacob Wood

Northland Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Zix' Third Quarter 2019 Earnings Conference Call. My name is Don, and I will be your operator today. (Operator Instructions)

Joining us for today's presentation are the company's President and CEO, David Wagner; CFO, David Rockvam; and Vice President of Marketing; Geoff Bibby. Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via link in the Investor Relations section of the company's website.

Now I would like to turn the call over to Geoff Bibby. Sir, please proceed.

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Geoffrey R. Bibby, Zix Corporation - VP of Marketing [2]

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Thank you, Don. Good morning, everyone, and thank you for joining our third quarter 2019 earnings call. With me today are CEO, Dave Wagner; and the CFO, Dave Rockvam. Before the market opened, we issued a press release announcing our results for the third quarter ended September 30, 2019, a copy of which is available in the Investor Relations section of our website at www.zixcorp.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 in our most recent Form 10-K and 10-Q filings with the SEC provides examples of those risks. 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, or 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 website.

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

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David J. Wagner, Zix Corporation - President, CEO & Director [3]

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Thanks, Geoff. Happy Halloween, and thank you, everyone, for joining us this morning. The third quarter was a continuation of the same strong operating performance we've been achieving since the acquisition of AppRiver back in February of this year.

We delivered 15% organic revenue growth for the second consecutive quarter, and we expanded our adjusted EBITDA margins to 24%, with organic ARR growth of 18%. Organically, we're delivering on The Rule of 40 and inorganically, year-over-year, total revenue for the third quarter was up 168%, and adjusted EBITDA was up 116%. The 18% organic year-over-year ARR growth in the quarter means that we've crossed the $200 million ARR threshold, which is an important growth goal as we continue to achieve a greater scale that we believe will make us even stronger in the years to come.

When we acquired AppRiver, our strategic goal was to become the leading provider of cloud, e-mail security, compliance and productivity solutions for companies of all sizes. So as pleased as I am with the growth and profitability we are delivering as a larger company, I'm even more pleased with how our year-to-date 2019 results validate our progress towards our strategic goal. There are 3 things, we believe, leading into the acquisition, belief number one, businesses are moving mailboxes to the cloud and are looking for partners to help them with that transition.

Validation point. Along with our channel partners, we added over 54,000 net new cloud mailboxes in Q3 alone. Belief number two, cross-selling opportunities between security, compliance and productivity are strong. Validation point number one, the Zix sales team closed almost 4,000 Office 365 mailboxes in Q3, which is up from less than 2,000 in Q2. Validation number two, the Zix sales team attached our new products to 47% of new customer add-ons in the quarter. Validation three, AppRiver customers and partners more than doubled their number of ZixEncrypt and ZixArchive trials to more than 350 in Q3 from about 150 in Q2.

Belief number three, 2 leading e-mail security companies would be better together. Validation point number one, 2 quarters in a row, we've exceeded the top end of our revenue guidance, delivering organic ARR growth of 17% in Q2 and then 18% in Q3. Validation number two, achieving 24% adjusted EBITDA margins in just our second full quarter after the acquisition. And validation three, the level of collaboration and the amount of product enhancement we are delivering also demonstrates that we're better together.

I look forward to spending more time sharing validating metrics from our Q3 results, but first, I'd like to turn the call over to our CFO, Dave Rockvam, to provide more details on the financials for the quarter. Dave?

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David E. Rockvam, Zix Corporation - VP, CFO & Treasurer [4]

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Thank you, Dave, and good morning, everyone. As our results for the quarter clearly demonstrated, we are firing on all cylinders, and we are continuing to recognize meaningful financial benefits as well as operational and sales process efficiencies as we move forward in our ongoing integration with AppRiver.

Now let's talk about the numbers in more detail. At the end of the third quarter, our ARR totaled $200.3 million, up 167% from Q3 of last year and 18% on a purely organic basis. On a combined basis, cloud-based ARR now makes up over 80% of total ARR.

For the third quarter, we had just over 102% net dollar retention, which represents our renewals, plus our new sales into the installed base divided by the renewals that were available at the beginning of the quarter. Our strong gross dollar retention of over 90%, growth in new customers and continued success in cross-selling drove yet another quarter of record ARR. Revenue for the third quarter increased 168% to $47.8 million from $17.9 million in the same quarter last year. With $47.8 million of revenue, we exceeded our guidance for the quarter. Total organic revenue growth across Zix and AppRiver was up 15% during the quarter, which once again was at the high end of our implied growth guidance from the time of the AppRiver acquisition.

Due to the movement of many of our Zix customers and MSP partners onto the AppRiver platform, the Zix versus AppRiver revenue and ARR split has lost their integrity from an external reporting perspective, and therefore, will no longer be disclosed. The good news is that the AppRiver platform is a much better place for these MSPs and small customers, and we anticipate better future retention and cross-sell as a result of these changes.

Our adjusted gross profit for the quarter was $28.5 million or 59.6% of total revenue, which was an improvement on a dollar basis from $14.2 million or 79.6% of total revenue in the third quarter of 2018. As expected and similar to last quarter, our adjusted gross profit margin percent for Q3 was down year-over-year. As many of you know that have been following us and following our story, this is largely due to our distribution of Microsoft's productivity suite, which carries lower margins than our proprietary solutions.

The Microsoft productivity suite provides Zix and AppRiver a unique solution set for the market and is an excellent, low-cost lead-generation tool for our higher-margin security portfolio. Our adjusted R&D expenses for the third quarter of 2019 were $4.8 million or 10% of total revenue compared to $2.6 million or 14.7% of total revenue in Q3 of last year.

The year-over-year dollar increase was primarily due to the inclusion of AppRiver. This increase was partially offset by the capitalization of internal use software of about $1.5 million in the quarter, associated with new features and functions added to our hosted platforms across both Zix and AppRiver. Our adjusted selling and marketing expenses for the quarter were $9.5 million or 19.9% of total revenue compared to $4.8 million or 27% of total revenue in Q3 of last year.

The increase in selling and marketing expenses on a dollar basis was largely due to the inclusion of AppRiver. For the third quarter 2019, our adjusted general and administrative expenses were $4.6 million or 9.6% of total revenue compared to $2.3 million or 12.8% of total revenue reported in Q3 of last year. We're pleased with the continued success we're achieving with Microsoft. Although these sales drive lower gross margins, they represent strong lead generation for us, which contributes to a lower cost of sales.

As a result, this should balance out in our P&L as we attach higher gross margin proprietary solutions. And with the significant scale we're achieving with AppRiver, we anticipate adjusted operating expenses as a percentage of revenue to continue declining over the next couple of years. On a GAAP basis, we recorded a net loss attributable to common shareholders of $3.7 million or a loss of $0.07 per fully diluted share compared to a profit of $2.5 million or $0.05 per fully diluted share in Q3 of last year.

Our third quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $6.7 million or $0.13 per fully diluted share, representing an increase of 43% from the $0.09 fully diluted shares we reported in Q3 of last year. And finally, our adjusted EBITDA for Q3 2019 totaled $11.5 million increasing 116% compared to the $5.3 million we reported in Q3 of last year. As a percentage of total revenue, adjusted EBITDA for Q3 2019 was 24% compared to 29.8% we reported in Q3 of last year. On a sequential basis, however, adjusted EBITDA margin increased 60 basis points from 23.4% in Q2 2019.

Cash flow from operations for the third quarter of 2019 was $6.6 million, up 284% from the second quarter. At the end of Q3, we had $10.1 million in cash, and our total debt was $178.3 million, reflecting the 5-year $175 million term loan we entered into as part of the AppRiver acquisition and a $10 million delayed draw loan for the acquisition of DeliverySlip we completed in Q2. We believe we have ample room to pay down this debt while still investing in the company's growth and executing on our long-term vision.

This objective is supported by our strong cash flow generation ability, projected adjusted EBITDA growth, significant net operating loss carryforwards and a step-up in depreciable tax basis we received from the AppRiver acquisition. CapEx and other intangibles for the quarter were $3.3 million, which consisted primarily of normal business capital purchases and capitalized internal use software development. We now expect CapEx and other intangibles to be approximately $10 million for the full year 2019.

The additional CapEx and other intangibles is primarily for capitalized software related to AppRiver's cloud development and normal business capital purchases. We expect adjusted depreciation and amortization to increase to approximately $6.4 million for the full year 2019. Backlog at the end of the third quarter was $90.7 million, up from $74 million at the end of Q3 last year. For the third quarter 2019, total gross billings were up 117%, while total organic billings were up 4%. It's important to note that organic billings growth was slowed this quarter, mainly due to changes over the last year in our OEM relations. We expect these differences to work their way through by the end of the year.

Now turning to our financial guidance for the fourth quarter and full year 2019. We currently expect revenue for the fourth quarter 2019 to range between $49 million to $50 million, which is increasing the midpoint of our guidance, our prior estimate of $48 million to $50 million. We also continue to expect our adjusted EBITDA margin for the fourth quarter 2019 to be 25%.

Additionally, we are forecasting fully diluted GAAP earnings per share to be between a loss of $0.03 and a loss of $0.02 and fully diluted non-GAAP adjusted earnings per share to be $0.14. As a reminder, our financial outlook includes a required GAAP adjustment on the deferred revenue acquired from AppRiver, which has a negative impact on our Q4 revenue of approximately $700,000. In addition, we are tightening our target ARR to approximately $205 million to $209 million at fiscal 2019 year-end, increasing the midpoint to $207 million from the previous midpoint of $206.5 million.

This new range of $205 million to $209 million represents an organic growth rate of approximately 14% to 16% year-over-year. For the full year 2019, we are increasing our revenue guidance to range between $172 million and $173 million, which represents an increase of between 144% and 145% compared to fiscal 2018. On a pro forma organic basis, this would be between 14% and 15% growth for total Zix and AppRiver. As a reminder, our revenue guidance includes a required GAAP adjustment on the deferred revenue acquired from AppRiver, which had a negative impact on our 2019 revenue guidance of over $4.6 million.

Our fully diluted GAAP earnings per share guidance is now expected to be a loss of between $0.25 and a loss of $0.23 and our fully diluted non-GAAP adjusted earnings per share to be between $0.44 and $0.45 for fiscal 2019. This represents an increase of between 33% to 36% compared to the $0.33 we reported in 2018, again, showing the highly accretive nature of the AppRiver acquisition.

In summary, our continued successful integration progress and enhanced cross-selling efforts drove another quarter of double-digit organic revenue and ARR growth. With our first 2.5 quarters of solid execution, we are becoming more and more confident that we can maintain this level of growth combined with an investment level that would put us right on The Rule of 40 metric, which we believe helps us drive higher shareholder value as well as achievement of our 3- to 5-year vision of profitably scaling the business.

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 current quarterly report on Form 10-Q, which we plan to file by November 8. Also visit our Investor Relations website to view more recent investor presentation. Dave?

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David J. Wagner, Zix Corporation - President, CEO & Director [5]

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Thank you for the financial overview, Dave. I will now review our progress, executing our strategy to become the leading provider of cloud e-mail security, compliance and productivity solutions for companies of all sizes in the context of our 3 main growth drivers. Then I will provide an update of where we are with the DeliverySlip integration before we open the call for questions.

As a reminder, our 3 growth drivers are new orders to new customers, sales to existing customers and increasing retention.

Our first growth driver is new orders to new customers.

During the third quarter, we saw demand for all of our solutions from customers in many industry and size profiles. Notably, one -- only one deal within healthcare, and only one was in finance, our traditionally strongest verticals. The other 3 were a homebuilder, a charitable organization and a restaurant chain. What these latter 3 have in common is that they are all enhancing their compliance posture to better protect the financial or healthcare data in their custody. The largest win in the quarter was a mid 6-figure deal with one of the largest nonprofit healthcare systems in the U.S. to provide encryption and outbound compliance filtering for its more than 100,000 employees.

This customer left Zix in 2018 as a result of cost concerns associated with the migration to Office 365. 15 months later, they moved their cloud e-mail to G Suite and recontracted with Zix. This win highlights both the value of the Zix solution for our customers and also the importance of supporting all-mail environment.

The new finance vertical win during the quarter was a regional bank who purchased 3 services, encryption, threat protection and Office 365. As I mentioned, the other 3 top 5 wins in Q3 came from a variety of different industries. As many of you know, we are historically strong in compliance-oriented verticals, so to see growing demand from a variety of other verticals is a positive sign for us. Also notably, it was the first time that a Zix archived customer made the top 5 as a stand-alone offering, demonstrating the traction that we're seeing with that solution.

We are also continuing to see strong momentum with our MSP partners. We added approximately 1,500 net new customers to the AppRiver family in Q3, bringing our total number of AppRiver end customers to more than 66,000. We also added 29 net new partners, bringing our total number of monthly transacting AppRiver partners to 4,251. The AppRiver MSP motion is a try-and-buy model, where we and our partners drive demand to our portal for the end customer to start a 30-day free trial.

We, again, conducted more than 8,000 trials for the third consecutive quarter, and we have now conducted more than 27,000 trials year-to-date, which is up 36% from the same period last year. The other great thing about our try-and-buy model is that we enjoy extremely strong conversion rates of about 90%. Now let's take a closer look at our second growth driver, which is sales to existing customers. Two of the top 3 add-ons came from the government vertical. Two were in healthcare. And the final add-on was in the finance vertical. Our top add-on customer, which was in healthcare, purchased Office 365 as well as encryption and advanced threat protection. Our second-largest add-on was a county government that purchased archiving, advanced threat and Office 365 to augment their existing ZixEncrypt solution.

One of the other top 5 add-ons was for ZixArchive, and the last 2 add-ons expanded their existing ZixEncrypt deployments. In total, of the top 5 add-on group, they increased to an average of 2.2 solutions per customer, demonstrating, again, our success in increasing attach rates.

Looking at our results for the third quarter by solution area, productivity ARR increased by 7% sequentially to $87.6 million, which represents an increase of 23% year-over-year. Average revenue per user or ARPU of $103 was essentially unchanged from last quarter. Net of churn, as I mentioned, we added more than 54,000 mailboxes in the quarter. Encryption ARR was essentially unchanged sequentially at $72.8 million and was up 6% year-over-year. ARPU was down 2% sequentially to $17.96, primarily as the result of the volume pricing granted to the largest new customer win.

Our encryption seats grew by $61,000, again, net of churn. Advanced threat protection ARR actually decreased 2% or $300,000 to $22.8 million in the quarter. This decrease was primarily the result of the price increase that I mentioned on last quarter's call. Our ARPU was up 2% quarter-over-quarter to $13.34 and was up 18% year-over-year contributing to the 26% total year-over-year growth in this solution category.

I think it's worth mentioning that approximately 220,000 of the 1.7 million advanced threat seats are on the Roaring Penguin solution that AppRiver acquired before we acquired them. We may experience excess churn of these seats as we migrate this mostly on-premise customer base to the cloud over the next 4 to 5 quarters. Our emerging category grew 8% quarter-over-quarter to $17.1 million of ARR, driven by growth in both our archiving business and in Total Defense, our consumer endpoint business.

Moving on now to our third growth driver, increasing retention. As Dave mentioned, our total company gross retention was 102%, up from 101% last quarter and was over 100% for the third consecutive quarter. Increasing retention is one of the key drivers of our increasing overall revenue and ARR growth. So we are really pleased with the success we're having to date as a larger combined company. As we continue to process the more tightly integrated company, we plan to continue to migrate more partners and customers to the new AppRiver-based platform.

We had great success transitioning hundreds of customers last quarter. We will be transitioning hundreds more this quarter and then thousands in the first half of next year. We believe the migration to the newer platform will ultimately result in higher retention and attach rates but could cause some churn in the shorter term. All in all, we are really pleased with our improving customer retention and see it as another validation of our core strategy.

I'd like to focus my final remarks, sharing more detail on why I see our Q3 results as validating our core investment thesis around AppRiver. Of course, our success, selling more than 54,000 net productivity seats primarily through our MSP partner base, resulting in 7% sequential growth and 23% year-over-year growth in productivity, supports our first core assumption that e-mail boxes will continue to rotate to the cloud.

The second core assumption was our ability to cross-sell. As I mentioned earlier, the number of ZixEncrypt and ZixArchive trials more than doubled quarter-over-quarter. That's nice early support of our cross-sell opportunity. The cross-sell examples that I'd like to spend a little more time drilling into though are the Office 365 cross-sell into the Zix customer base. In the third quarter, we closed 27 Office 365 accounts through the Zix channel, up from 13 in the second quarter. Of the 27 Office 365 accounts in the third quarter, 9 were net new accounts and 18 were sales into the installed base. There are a couple of key points of validation in these wins. First, the number of wins was up more than 100% quarter-over-quarter, demonstrating that the market is responding to this packaging. Second, 2/3 of the 27 wins were dark to cloud projects, meaning that prior to contracting with Zix AppRiver, the customer was still running an on-premise exchange server.

This validates our preacquisition survey work, showing that the majority of Zix' customer base is still on-premise for their mail server and that they are looking for a trusted partner to support their transition to the cloud. The third point of validation is around our partner first strategy.

In the third quarter, we added 10 existing Zix partners to our community of partners that can resell the Office 365 bundles, including the Zix IP. We were not expecting this level of partner traction this soon, and we are also pleased with the support Microsoft is providing in our focus to expand our channel program.

The fourth point of validation is the attach opportunity. The average number of services for these Office 365 add-on customers is 2.8 versus our overall average of 1.2, clearly demonstrating the opportunity for us to continue to drive our attach rates higher.

The great results above are being achieved only as a result of the high level of collaboration and teamwork between all of my Zix and AppRiver colleagues. I get to see every day how well the Zix AppRiver team is executing to deliver phenomenal value for our partners and customers. These results are a little harder to demonstrate objectively, but I do think it's important that you hear about some of the major accomplishments the team is driving that will come to market in 2020. As an example, I'd like to share more about our DeliverySlip acquisition integration.

Not only have we delivered strong retention rates for our existing customers with net customer revenue retention of 97%, but we are also beginning the cross-selling motion of large file transfer earlier than anticipated with 9 customers that the Zix go-to-market team added in Q3. We are getting really strong feedback from the Zix customer and partner base about this added capability.

We completed the migration of the technology fully under Zix AppRiver control and into our data centers in Q3, and the road map has been [flushed] out, giving us confidence that we will deliver a Zix-branded, integrated large file transfer capability in Q1 with exciting further enhancements coming from the quarters ahead.

In conclusion, the third quarter was another major step forward with many key milestones validating our strategic direction. We are continuing to make great progress as one combined larger team and the combined efforts of our go-to-market team are driving increased sales activity across both go-to-market motions and increasingly, across our complementary product offerings.

With our organic ARR growth expanding to 18% last quarter, we have the visibility to increase our full year 2019 guidance. And heading into the end of the year, we expect to improve our profile of profitable growth through enhanced cross-selling and increased attach rates. This success should allow Zix to continue revenue growth and profitability improvements into 2020 and beyond. That concludes our prepared remarks. Operator, we're ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Now our first question will come from Mike Malouf from Craig-Hallum.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [2]

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Really well done on this integration so far. With regards to that, I'm wondering if you could frame for us just a little bit of the opportunity with the Zix selling of Office 365. That was always sort of in your back pocket with regards to the ability to cross-sell that direction. And I'm just wondering if you could go over your sort of current thoughts about the size of that opportunity as you've had a little bit of experience here. And then if you could also tag on to that as you look into DeliverySlip and putting out a Zix-branded large file transfer product out, how significant that could be for 2020 if you're successful?

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David J. Wagner, Zix Corporation - President, CEO & Director [3]

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Those are great questions, Mike. So as we framed the Office 365 cross-sell into the Zix installed base, we built our initial assumptions looking at the 1.3 million encryption customers in accounts with less than 250 users. And so that opportunity translated to $20 million to $25 million of ARR.

What we're seeing in the first whatever it is now 40 accounts sold is we're seeing an average mailbox size of closer to 150 on average. So we're seeing better traction into slightly larger customers than we would have originally expected. So we're still early in 40 transactions, but it's looking like 250 was lower than where we'll see good traction. I would expect to see -- I would actually expect to see the average coming down as we get into more and more accounts. But the fact that we're running an average well over 150 tells me that we can move up higher than just the 250 in lower accounts that we originally modeled.

So that would, to me, indicate some upside over time in that area.

Moving on to the large file transfer question. As I talked about when we closed that transaction, the survey work prior to that acquisition, suggests there's an opportunity for really high attach rates for large file transfer to the existing Zix offer, and we are getting really good feedback as we introduce this capability to customers. We are the place where -- Zix are the place where they expect to get that functionality. Had a meeting yesterday with a partner who has really big roots into the title industry, and she's conveying real appetite for this. And that segment that, of course, is very subject to wire transfer fraud and needs strong protection of their information. So that is a little bit ahead of schedule, and I'm expecting good things from that as we head into the back half of next year.

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Operator [4]

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Our next question comes from Tyler Wood from Northland Securities.

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Tyler Jacob Wood, Northland Capital Markets, Research Division - Analyst [5]

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When you talk about the trials of the Zix security you're selling back into the AppRiver base, are those still all this free trials at this point? Or should we expect that to start showing up in billings in 2019? Or will we have to wait for 2020 for those to turn from trials to signings?

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David J. Wagner, Zix Corporation - President, CEO & Director [6]

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No, the trials turn to orders on the 31st day unless they're canceled. Our overall rate is 90% conversion. So we're not at that 90% yet. We've got a lot of partners trying it and then backing out, but the conversion rates are strong. So we're seeing early numbers, but encouraging to me, even though the absolute numbers aren't really big or even meaningful yet from an ARR perspective, we are seeing the existing customers once they convert, adding more and more users. So it's building a nice snowball effect. So we are on track with what we expected in terms of cross-sell. We're really honing our messaging and our marketing work as we come into the fall, to accelerate those trials further. But I don't expect a material ARR impact in this year, and I expect that to move in more materially next year.

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Tyler Jacob Wood, Northland Capital Markets, Research Division - Analyst [7]

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Great. That's helpful. And then just higher level on the Office 365 opportunity. How penetrated do you think Office 365 mailboxes are within the SMB market more broadly? And then anything worth mentioning on Microsoft's strategy in terms of securing those with their own stuff?

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David J. Wagner, Zix Corporation - President, CEO & Director [8]

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Yes. So those are both great, both great questions. We had a pretty thorough survey into the Zix base prior to acquisition that has us seeing 30% to 40% of our mailboxes to the cloud. So the majority is still on plan. We don't have as tight a survey work into the smaller customer base through the AppRiver MSPs, but the accelerating mailbox ads that we're seeing would indicate that we're in the -- still in the early middle innings on the smaller business as well. So we see a really strong appetite for this transition to the cloud. As I mentioned in the script, one of the things that's becoming more and more clear to me is the value that the AppRiver implementation and support team provides to our partners and end customers as they make that transition. An end customer is going to make that transition once. A smaller partner may make a mailbox migration once or twice a year. And we are there with the black belts have done nearly 1 million mailbox migrations to really support them, add a ton of value in the overall Microsoft ecosystem. And now having met nearly monthly with the Microsoft go-to-market leadership team, we're now understanding how well they see us fitting into their ecosystem as providing this value as a hyperscaler, it would be their term, as a hyperscaler into the SMB, SMC and SME space.

So that all feels really good. Microsoft is a great company, executing great things, and they'll continue to build good products. Security will continue to be important to them and a focus, but they understand and fully support a broad ecosystem of ISBs, they always have, to help with specialized use cases. So most acutely, our ZixArchive can archive Slack and Teams and LinkedIn, channels that the Microsoft archive doesn't support and in some cases, probably will never support.

And so we're adding real value in compliance-oriented use cases on top of the Microsoft solution. And they see that as really beneficial to building out their ecosystem. So we sit in a position where we support Microsoft on both sides of what they're trying to do. On the SMB side, we enable this onboarding transition support and ongoing care of the customers that they don't have coverage for. And on the higher end, we provide really strong specialized use cases for security and compliance that they don't need or want to build into their core system. And if you think about the finance vertical and the healthcare vertical, there are lots and lots of medium-sized businesses, SMEs, SMCs and SMBs that need that level of compliance and security as regulations advance, as cybersecurity concerns become more acute down market. So we really like our position, and Microsoft appears to like it as well.

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Operator [9]

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(Operator Instructions) Our next question will come from Nick Yako from Cowen & Company.

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Nicholas Andrew Yako, Cowen and Company, LLC, Research Division - VP & Senior Analyst [10]

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Could you comment on the international business and how you're thinking about the opportunity outside the U.S.? And then maybe where you are in terms of the build-out and any additional near-term investments you plan on making?

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David J. Wagner, Zix Corporation - President, CEO & Director [11]

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It's a great question, Nick. Thank you. So international is still really early stages for us. I mentioned on the last call that we had doubled our U.K. ARR in the first half of the year and that team continues to execute really well. It is doubling from $1 million to $2 million. So adding $0.5 million per quarter of ARR. They remain on that trend. We added, I guess, a few people to that team late in the summer. Building for 2020, continued growth. And so we feel good, really good about that team. We feel really good about how our value proposition and platform supports our customers in Europe, and we see the European transition to the cloud being earlier in -- earlier in the transition with more -- with a longer term. So we will be making measured investments to extend our international presence, but I would expect them to be measured investments in the coming year.

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Nicholas Andrew Yako, Cowen and Company, LLC, Research Division - VP & Senior Analyst [12]

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Okay. That's helpful. And then maybe just a quick follow-up. Dave, you mentioned a billings drag from OEM. Just wondering if you could provide any more details around that and when that should normalize?

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David E. Rockvam, Zix Corporation - VP, CFO & Treasurer [13]

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Yes, we would expect it to normalize early next year. In 2018 and then in the beginning of the year of 2019, we were ramping down on the Cisco, Google and Symantec in particular OEMs as we moved away from that as part of our strategy, moving more towards the MSP model being the best model for the go-forward Zix AppRiver platform.

So in 2018, as we ramped those down, we did see some incremental billings to kind of finish those off. So we're kind of bumping up against those numbers as they were kind of done as more, I guess, a larger onetime kind of billing. And then this year, those billings kind of came through a little more -- as those customers move to our direct platform, those come through a little bit more across the quarters. So that kind of cleaned up. And then the Symantec piece. We've got a handshake on having that cleaned up for the quarter.

So we didn't end up doing any of the billings as we wrapped that up. It's going to end up in a good position where this $1.5 million of ARR that we have there, we'll have for quite some time in the future with the way we're closing it off, and it's finishing up almost exactly where we planned it in Q2. So we feel good about that.

So we'll come through that by the end of the year as those finish up and expect it to start moving up better in the coming quarters from there.

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Operator [14]

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At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Wagner for his closing remarks.

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David J. Wagner, Zix Corporation - President, CEO & Director [15]

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I'd just like to thank everybody, again, for joining us early this morning. We wish you a great and productive day.

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Operator [16]

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Thank you for joining us today, Zix' Third Quarter 2019 Earnings Call. You may now disconnect.