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Edited Transcript of ZIXI earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Zix Corp Earnings Call

DALLAS Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Zix Corp earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm 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

* Noah F. Webster

Zix Corporation - VP, General Counsel & Corporate Secretary

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Conference Call Participants

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* Carson McCall Sippel

Cowen and Company, LLC, Research Division - Research Associate

* Michael Fawzy Malouf

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

* Timothy Elmer Klasell

Northland Capital Markets, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to Zix' Second Quarter 2018 (sic) [2019] Earnings Conference Call. My name is Brian, and I will be your operator this afternoon. Joining us for today's presentation are the company's President and Chief Executive Officer, David Wagner; Chief Financial Officer, David Rockvam; and Vice President and General Counsel, Noah Webster.

Following their remarks, we will open the call for your questions. I would like to remind everyone that this call is being recorded and made available for replay via a link in the Investor Relations section of the company's website.

Now I would like to turn the call over to Noah Webster. Sir, please proceed.

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Noah F. Webster, Zix Corporation - VP, General Counsel & Corporate Secretary [2]

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Thank you, Brian. Good afternoon, everyone, and thank you for joining our second quarter 2019 earnings conference call. With me today are our CEO Dave Wagner and our CFO Dave Rockvam. After the market closed, we issued a press release announcing our results for the second quarter ended June 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, Noah. Good afternoon, and thank you, everyone, for joining us today. The second quarter of 2019 continued the acceleration of our growth strategy as we delivered another quarter of solid results and made further progress integrating Zix and AppRiver. We achieved overall organic revenue growth of 15% and adjusted EBITDA margins of 23%, pushing right up against the rule of 40 and demonstrating that our business is moving in the right direction with improving, profitable growth.

Our annual recurring revenue, or ARR, was up 162% year-over-year. And on an organic basis, ARR was up 17% across Zix and AppRiver. I'm happy to report new company records for core Zix. Record revenue of $18.7 million representing 7% growth over last quarter, and record ARR of $78.7 million representing 6% growth year-over-year. Our sales team and channel partners continue to drive new product trials, customer wins and more cross-sells.

On the AppRiver front, our MSP partners and channel teams drove another solid quarter of ARR growth, achieving 26% organic growth over last year, led by the continued adoption of Office 365. AppRiver is the preferred supplier of Microsoft Office 365 as a result of the team's ongoing commitment delivering phenomenal support to our customers and partners and their confidence in us.

The integration overall is progressing very well. We successfully completed the most important initial product integration milestone well ahead of schedule, which culminated in the launch of ZixEncrypt and ZixArchive into the AppRiver platform, enabling our partners and customers with a single pane of glass through which to provision and build these products.

We also launched Office 365 into Zix' go-to-market team. Already by June 30, we were seeing the early signs of strong cross-selling between the 2 customer bases with more than 150 trials of ZixEncrypt and ZixArchive in the AppRiver channel and 13 closed Office 365 deals in the Zix channel. So while cross-selling, as anticipated, did not contribute meaningfully to our Q2 results, we are seeing the right early signs that cross-selling will accelerate our growth.

Overall, we're really pleased with how the team is executing, and we believe our Q2 results are a solid reflection of the growing momentum in our business. I look forward to sharing more details on our progress in outlook. 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 afternoon, everyone. As our results for the quarter demonstrate, we're continuing to build a head of steam, generating significant progress integrating AppRiver, expanding our product suite into the cloud, starting new trials, securing new customers and retaining and cross-selling our installed base. Total revenue of $45.9 million helped us exceed our revenue guidance, once again, as we continue to outperform and build a foundation for more robust profitable growth.

Turning now to our financial numbers in more detail. At the end of the second quarter, our ARR, or annual recurring revenue, totaled $193.7 million, up 162% from Q2 of last year and 17% on a purely organic basis. Zix' stand-alone ARR increased 6% organically year-over-year to $78.7 million, while AppRiver stand-alone ARR increased 26% organically year-over-year to $115 million.

On a combined company basis, cloud-based ARR now makes up over 79% of total ARR. For Q2, we had 101% 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, growth in the new customers and early success in cross-selling drove another quarter of record ARR on a stand-alone Zix and AppRiver basis. Revenue for the second quarter increased 162% to $45.9 million from $17.5 million in the same quarter last year. With $45.9 million of revenue, we exceeded our guidance for the quarter. The total overall organic across Zix and AppRiver was 15% during the quarter, which, once again, was at the high end of our implied growth guidance. Zix' organic revenue growth for the quarter was 7%. Organic ARR and revenue growth for Zix stand-alone were negatively impacted by some cleanup regarding a few legacy OEM relationships that we are winding down. Without this adjustment, Zix' stand-alone organic revenue growth would have been more in line with Q1.

Our adjusted gross profit for the quarter was $27.9 million or 60.8% of total revenue, which was an improvement on a dollar basis from $13.9 million or 79.2% of total revenue in the second quarter of 2018. Similar to last quarter, our adjusted gross margin percent for Q2 was down year-over-year. As a reminder, this is largely due to AppRiver's third-party products, which generally carry lower margin than Zix' stand-alone business.

As many of you know, during the quarter, we acquired the assets of DeliverySlip, one of the small third-party providers, which should provide a small increase in gross margin going forward. With the initial integration milestones complete, we believe we're in a solid position to maintain these margin levels within our long-term model range of 60% to 65%.

Our adjusted R&D expenses for the second quarter of 2019 were $4.8 million or 10.5% of total revenue compared to $2.8 million or 15.8% of total revenue in the second quarter 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 $1.8 million in Q2, 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 $9.8 million or 21.3% of total revenue compared to $5.1 million or 29% of total revenue in Q2 of last year. The increase in selling and marketing expenses on a dollar basis was largely due to the inclusion of AppRiver. For the second quarter of 2019, our adjusted general and administrative expenses were $4.5 million or 9.7% of total revenue compared to $2.6 million or 14.8% total revenue reported in Q2 of last year.

As a reminder, because of the significant scale we achieved with AppRiver, we anticipate adjusted operational expenses as a percentage of revenue to continue to decline over the next couple of years in accordance with our long-term model.

On a GAAP basis, we recorded a net loss of $7.1 million or $0.13 per fully diluted share compared to a profit of $1.8 million or $0.03 per fully diluted share in Q2 of last year.

Our second quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $5.8 million or $0.11 per fully diluted share, representing an increase of 51% from the $0.07 we reported in Q2 of last year.

As we mentioned in our prior earnings call, we expected the acquisition of AppRiver to be accretive to EPS starting in Q2 2019 and that is exactly what happened just one quarter after the close of the acquisition.

And finally, our adjusted EBITDA for Q2 2019 totaled $10.7 million, increasing 143% compared to the $4.4 million we reported in Q2 of last year. As a percentage of total revenue, adjusted EBITDA for Q2 2019 decreased 180 basis points to 23.4% from 25.2% we reported in Q2 of last year. On a sequential basis, however, adjusted EBITDA margin increased 360 basis points from 19.8% in Q1 2019.

Our performance, combined with the margin pickup from the acquisition of DeliverySlip, is allowing us to increase our Q4 adjusted EBITDA target to 25% from 24% we had previously.

Cash flow from operations for the second quarter of 2019 was $1.7 million. At the end of Q2, we had $11.3 million in cash, and our total debt was $178.4 million reflecting the 5-year $175 million term loan we entered into as part of the AppRiver acquisition and an additional $10 million from the delayed draw loan for the acquisition of DeliverySlip. We believe we have ample room to pay down this debt while still investing in the company's growth and executing our long-term vision, which is supported by our strong cash flow generation ability, projected adjusted EBITDA growth, significant net loss carryforwards and the step-up in evaluation we received from the AppRiver acquisition.

CapEx and other intangibles for the quarter were $2.8 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 capitalization -- for capitalized software related to AppRiver's cloud development and normal business capital purchases. We expect depreciation and amortization to increase to approximately $6 million. This increase is related to new lease accounting standards. These are costs that are still hitting our income statement, both on a GAAP and non-GAAP adjusted basis, but they are now considered depreciation, so they are added back into our EBITDA calculation.

Backlog for the quarter was $91.4 million, up from $73.2 million in Q2 of last year. For the second quarter of 2019, total billings were up 7% to $46.3 million. Billings growth is a little slower this quarter mainly due to some significant multi-year billings that occurred in Zix' second quarter of 2018 that weren't available for billing this quarter.

Now for the third quarter and full year 2019 financial guidance. We currently anticipate revenue for the third quarter to range between $47 million and $47.5 million. We are also forecasting fully diluted GAAP earnings per share to be between a loss of $0.04 and $0.02 and fully diluted non-GAAP adjusted earnings per share to be between $0.12 and $0.14.

The financial outlook includes a required GAAP adjustment on the deferred revenue acquired from AppRiver for purchased revenue accounting, which has a negative impact on our revenue of approximately $1.1 million. We expect revenue of approximately $48 million to $50 million in Q4 of 2019, which is increasing the endpoint -- the midpoint of our initial estimate of $47 million to $50 million. As mentioned earlier, we are also increasing our adjusted EBITDA margin estimate for the fourth quarter of 2019 from initial 24% to 25%.

In addition, we are tightening our target ARR range to approximately $204 million to $209 million at fiscal 2019 year-end, increasing the midpoint to $206.5 million from the previous midpoint of $205.5 million. This new range of $204 million to $209 million represents an organic growth rate of approximately 13% to 16% year-over-year. For the full year 2019, we are increasing our revenue guidance to range between $170 million and $172 million, which represents an increase of between 141% and 144% compared to revenue in 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 for purchased revenue accounting, which has 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 $0.24 and $0.21, and we are increasing our fully diluted non-GAAP adjusted earnings per share to now be between $0.44 and $0.46 per share for the fiscal 2019. At a midpoint of $0.45, the increased non-GAAP adjusted EPS for 2019 represents an increase of 36% compared to the $0.33 we reported in 2018, again, showing the highly accretive nature of the acquisition.

I do want to highlight a few accounting treatment changes that are impacting our revenue and earnings for the full year. First, our Q2 2019 guidance was predicated on preliminary valuations of the AppRiver asset. Upon closure of Q2, we are close to finalizing the valuations, and our Q3 and our Q4 guidance reflects that. The overall impact of all of this was a deeper discount on the AppRiver deferred revenue haircut of about $600,000. Given the strong performance of the business, we were able to make this up and still raise the guidance for the year. The purchase price accounting for AppRiver is generating higher depreciation and amortization, and higher GAAP expense than we originally forecasted, and this is driving us to a GAAP loss in Q3 and Q4, where we initially thought we would see a slight GAAP profit.

Because of this expected GAAP loss, we are using only basic share count to calculate expected EPS in Q3, Q4 and for the full year. The proper share count for Zix will be approximately 53.3 million shares in Q3 and approximately 53.5 million shares in Q4. All in all, this means that $0.03 of the $0.04 increase is from the fact that we're using the basic share count. The other $0.01 is from the continued strong performance of the business.

In summary, Q2 saw the successful continuation of our high velocity sales model, the power of our attach strategy and the adoption of our product suite, all against the backdrop of the industry's increasing migration to the cloud. We are encouraged to see these important value drivers of our business coming together seamlessly, which are helping us drive higher shareholder value and achieve 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 our Form 10-Q, which we plan to file by August 9. Also visit our Investor Relations website, investor.zixcorp.com, to view our most recent investor presentation. Dave?

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

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Thanks for fast overview, Dave. Now I will review our progress executing our growth strategy as an integrated company in the context of our 3 main growth drivers, then I will provide an update on where we are with the AppRiver 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. Our largest 5 new customer wins in the quarter provide an interesting window into the early cross-selling success we're seeing. Consistent with Zix' traditional success in compliance-oriented verticals, 4 of the top 5 new customer wins in the second quarter were in the health care vertical while the fifth was in the finance vertical. Particularly encouraging in our top 5 wins was the high amount of attached business we generated, 1 of our top 5 new customer wins purchased all 4 of our major solutions: encryption, direct protection, archiving and Office 365. Another purchased the Zix suite bundle that includes 3 solutions, 2 deals were for threat protection and encryption and one purchased stand-alone encryption. In total, the top 5 customers purchased an average of 2.4 solutions, demonstrating our success increasing attach rates, which is our strategic focus.

Also interesting is how the ability to work with AppRiver to add Office 365 allowed 1 of these top 5 deals to be accelerated from Q3 into Q2. This particular customer had already selected Zix suite to enhance the security of their Office 365 environment, but was waiting on a project to implement Office 365 for the deployment of the Zix Solutions. Following an introduction to the AppRiver sales engineering team, this customer became confident in their team's ability, empowered by our phenomenal care, to successfully accelerate their Office 365 project.

So while this early win is anecdotal, it does support our thesis that the combination of the 2 companies will accelerate our business. On the AppRiver side, we continued to win new customers, both in terms of adding new MSPs and adding new end customers. With respect to adding new customers, we conducted more than 8,000 trials for the second consecutive quarter and added over 4,300 customers on a net basis. And our trial to conversion rates remain over 90%. With respect to MSPs, we added 140 new MSP partners bringing our total number of monthly transacting AppRiver partners to over 4,200. In Q2, we had one partner increase our MRR from just $400 per month to over $7,500 per month as a result of moving their business to M 365 with AppRiver and adding advanced threat to all of their customers' mailboxes.

Some of you may not be aware that M 365 is O 365 plus Windows 10 and Microsoft Advanced Security. This partner's decision to position our advanced threat protection along with Microsoft's Premium SKU supports our thesis and the Gartner thesis that customers will be demanding additional layers of protection to complement their Microsoft mailboxes.

Another U.S.-based MSP received e-mail security training in March and added 5 customers, totaling more than 4,000 of MRR in the second quarter alone. Our region experiencing the most growth again in Q2 was the U.K., which doubled in the first half of the year to more than $1 million of ARR. We are pleased with our early success in EMEA, and we plan to invest more there for additional growth.

We continue to experience strength across the board. But as you can see from the growth in our productivity business, Office 365 is leading the charge. Total productivity ARR is up 5.7% quarter-over-quarter and 23.4% year-over-year. This is net of a modest expected decline in Secure Hosted Exchange. Our encryption ARR is flat quarter-over-quarter, largely as a result of the cleanup of an OEM arrangement that Dave mentioned. But it's up 6.5% year-over-year. Advanced Threat Protection is flat in terms of number of users quarter-over-quarter, but is up 5% in ARR quarter-over-quarter and more than 40% year-over-year. The lack of increase in licensed users is primarily the result of a price increase that was implemented in Q2. As a result of the modest price increase, we are seeing, as anticipated, increased churn at the customer level. However, we are also seeing the anticipated increase in average revenue per user that is more than offsetting the losses.

Now let's take a closer look at our second growth driver, which is sales to existing customers. Consistent with recent prior quarters, we are seeing about 60% of our Zix ARR increases coming from existing customers as a result of our cross-selling success.

Our largest add-on during the quarter was with a community-based hospital chain. This existing ZixEncrypt health care customer added 3 additional services in the quarter: archiving, threat protection and mobile device security or ZixOne. It's exciting to see them value the full breadth of our offerings to improve their already strong security and compliance posture. 2 of the 4 remaining add-ons were in health care, while the other 2 were in the finance vertical. The average number of licenses for our top 5 add-on customers in the quarter was 2.6 licenses per customer. Again, a good sign of our early cross-selling success.

Across both the new customer wins and add-ons, we are pleased with the strength of the penetration of our Office 365 products. Our premise that customers prefer superior support from a single vendor is being validated by our early success. MSP Partners and Zix customers also see the key differentiators of our mailbox migration expertise and services. I think it's also worth noting that I've had the opportunity to have 3 different multi-day in-person meetings with Microsoft executives during the last 60 days. I am pleased with how much Microsoft go-to-market team recognizes the value that AppRiver's delivering for their Office 365 partners and end customers. And how they are enthusiastically supporting the acquisition of AppRiver by Zix as it further strengthens their coverage into the mid-market. We are looking forward to the potential for Zix to deepen our partnership with Microsoft.

Moving on now to our third growth driver, increasing retention. Stand-alone Zix retention for the quarter was again just shy of our 90% target. Looking at the net dollar retention, which includes add-on, our net dollar retention was approximately 98%, demonstrating our continued success in cross-selling into our installed base. The 100 basis point reduction from Q1 was almost entirely due to the OEM adjustments that Dave mentioned earlier.

AppRiver's retention rate was over 95% in the quarter, and net dollar retention was greater than 100% for the third quarter in a row. I'll now spend some time providing an update on our integration of AppRiver before we open up the call for questions.

We've made incredible progress on our key initiatives of becoming one company with one culture and one integrated brand. Earlier this month, we wrapped up 3 comprehensive third-party facilitated engagement of our culture, our brand identity and our customer support organizations. We will be working to activate new core values across the entire company beginning in August, and we will be refreshing our brand identity and website later this summer.

We are also continuing to advance the combined company product road map that captures the best of both Zix and AppRiver and that drives the most value for our partners and customers. Building upon the successful delivery of the 100-day plan goals, we are now shifting our attention to some of the more complex deliveries and milestones necessary to achieve the second level of synergy. We completed our third 10-week R&D planning increment as a combined company, and I'm pleased that we will be making meaningful progress in bringing our 2 advanced threat platforms together in the next 10 weeks.

As a result, we are confident in meeting or exceeding our 18-month objective for complete alignments of these 2 products. The platform integration will take more time, but we are progressing well on that also. From a product perspective, the most important thing is that we have already completed the actions necessary to begin to realize our cross-selling benefits. The early start in Q2 with more than 150 pilots of Zix products by the AppRiver channel and the 13 early Office 365 wins in the Zix base give us confidence that we will see even further progress in the second half of this year.

I'd like to take a moment to thank all 505 of my colleagues for the remarkable amount of work that they've accomplished in the past 5 months to make this integration successful. As much as the results speak for themselves, I'm even more proud of the high level of collaboration, respect and professionalism that has been demonstrated every step of the way. In short, we've accomplished a lot already this year from strong financial results to closing and now integrating a significantly accretive acquisition. We have positioned our business to drive even stronger growth and margin as we now operate at a much higher level of scale.

In conclusion, Q2 was another important milestone for Zix as the first full quarter as a new company with AppRiver. From the same quarter a year ago, we increased revenue by 162% and adjusted EBITDA dollars by 143%. We delivered 15% organic revenue growth, 17% organic growth in our annual recurring revenues and achieved EBITDA margins of more than 23% right on the rule of 40.

Our first half performance allowed us to increase our second half guidance that has us well positioned to capitalize on the significant cross-selling opportunities ahead of us to further accelerate the business.

Now with that, we're ready to open the call for your questions. Brian?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Mike Malouf with 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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Great. Well done integration, it's really nice to see. If I could just start off, it's pretty easy to see how the integration and cross-selling -- I'm sorry, the cross-selling of Zix products over to the AppRiver can be achieved. But I'm wondering if you could just delve a little bit deeper into the opportunity of Office 365 into the Zix' customer base? And how you're going to approach that? And you've had a little bit of time now. And if you could just give us a sense of how much impact or potential there would be over the next couple of years? That would be helpful.

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

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Okay. That's a great question, Mike. And so the trials, as you mentioned, of the AppRiver platform are progressing, and that's a seamless, frictionless motion that needs to be augmented by better awareness in marketing -- in channel marketing and sales activities that we're endeavoring to do. On the Zix side, the positioning of Office 365 is already going very well. We've just launched the Office 365 SKUs into the Zix selling channel in the middle of May, and we already had the 13 closed transactions just in the first 6 weeks. So that's good. What we're finding so far is consistent with the survey results we got prior to the acquisition that suggests that, that 19% of our customers would be highly likely to buy Office 365 within 24 months from Zix. And a similar but slightly lower percentage interested in a Secure Hosted Exchange from Zix.

So the potential to me remains attached at that 19% at the very high end to our customers with less than 500 mailboxes. So to be clear, the way the Microsoft licensing works, 500 users and above, the pricing is really consistent no matter the channel that the end customer buys from or through. As you move above 1,000 users. And for sure, by 5,000 users, Microsoft is offering enterprise license agreements that makes it less practical, but not impossible, less practical for customers to value the -- that what we can provide. So we're really looking at the $1.3 million -- 1.3 mailbox -- 1.3 million mailboxes we have in the hands of customers with less than 250 mailboxes to be our target for that high attach rate.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [4]

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Okay. Great. And the 13 that you've closed so far, are those all in that target number?

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

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Yes. I mean we -- it was just really early days. We're in the hundreds of seats, not thousands of seats, sold in the first 6 weeks, and we'll be looking to grow that obviously quarter-over-quarter, as we move forward.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [6]

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Okay. Perfect. And then just a follow-up. Now that you've put the companies together, I know that the first -- I guess you wouldn't necessarily call it a hole, but certainly the added product that you had was the large file transfer. Have you seen any more out there that you think you want to include in there? Or is there some more you think acquisitions or tuck-in acquisitions that you think might help you? Or do you think you have it right now and we just kind of run with it in over the next couple of years?

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David J. Wagner, Zix Corporation - President, CEO & Director [7]

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We're really pleased where we are now that DeliverySlip large file transfer business. We did have 2 small cross-sells earlier than we thought we'd have. That's going to be a really complementary piece of technology, particularly into the Zix space. And of course, it's the product that's been offered through the AppRiver base. We're now offering that side-by-side with ZixEncrypt in the AppRiver platform. So we feel really good about where our position is today. We continue to scan and be aware of the ecosystem around us for highly accretive opportunities, but we feel really good about the set of solutions we have for our customers today.

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Operator [8]

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And our next question will come from the line of Tim Klasell with Northland Securities.

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Timothy Elmer Klasell, Northland Capital Markets, Research Division - MD & Senior Research Analyst [9]

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First question is, Microsoft just has historically had a great relationship with AppRiver. Now that you guys have been together for a little bit and maybe through -- obviously, through some meetings, maybe you can tell me where do you expect to see most of the cross-selling for the M 365. Is it ATP into that base? Or maybe you can sort of say where you walked away from those meetings with Microsoft being the most excited?

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David J. Wagner, Zix Corporation - President, CEO & Director [10]

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That's a great question. And -- so from Microsoft's perspective, the addition of the Zix IP in the way they looked at it to address edge cases in compliance-oriented verticals for HIPAA compliance on their outgoing e-mail, for FINRA compliance on -- from broker-dealers, for connectors outside Microsoft and even Microsoft connectors for things like Teams and Skype. These are things that they feel are really good complements to their technology, and we'll be working with them more closely on how we position them as complementary value-add for the partners. So they're excited about a true sell with partner with value-added technology to put on top of what AppRiver already was and is one of the very top leading CSPs in the productivity modern workplace environment.

And what we also add with Zix, as I mentioned, is better coverage into the mid-market buyer where Microsoft feels their coverage is less than perfect, and we -- they feel that it's an additive part of the equation as well. And I didn't understand that as well 90 days ago, as I do today, after having spent that time with the Microsoft go-to-market executives. So we're really excited about positioning the complementary technology and specialized use cases. We're excited about extending Office 365 into the Zix base. And then finally, in terms of percentage attach, of course, advanced rep leads the charge in terms of where we expect them the most attacks. We believe that every mailbox should have a second layer of protection, no matter how good Microsoft's coverage gets. I think it'd be good to have a second layer of protection as a best-in-class practice.

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Timothy Elmer Klasell, Northland Capital Markets, Research Division - MD & Senior Research Analyst [11]

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Okay. Perfect. Perfect. And then just one quick follow-up. You mentioned the OEM cleanup maybe caused a little bit of drag this quarter that you overcame, but was some extra drag. How long do you expect that to last? Will that last into next quarter or 2 quarters? Or how long will that drag be there?

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David J. Wagner, Zix Corporation - President, CEO & Director [12]

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So I think it's a one quarter bump down. It's a long-standing partnership. They made an adjustment in the way that we're working together. We're down to really only one meaningful OEM partnership, and that's, of course, with Symantec. We would expect it to continue. We do not expect it to grow. And so it's one that would not a growing revenue stream, but we don't expect a bump down like we experienced this past quarter again.

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Operator [13]

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

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Carson McCall Sippel, Cowen and Company, LLC, Research Division - Research Associate [14]

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This is Carson on for Nick. Congrats on a solid quarter and the successful integration thus far. I had 2 quick ones here. So last quarter, you signed the largest deal in the company's history, has that opened up any new doors or opportunities that maybe you weren't included in, in the past? And do you have the potential for similar-sized deals in the future?

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

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So on that one, those are going to be, as I said, last quarter, they're going to be inconsistent. We're making progress on a small pipeline of big deals, but they won't be consistent, but they'll be intermittent as they are large and so many large opportunities like that.

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Carson McCall Sippel, Cowen and Company, LLC, Research Division - Research Associate [16]

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Okay. And that makes sense. And then shifting gears a bit. Could you discuss what DeliverySlip brings to your portfolio in addition to the margin benefit? And then as a follow-up to that, as you look to build out the new combined portfolio, has your thinking around the build versus buy model changed?

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David J. Wagner, Zix Corporation - President, CEO & Director [17]

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So thank you, again, for asking that question about DeliverySlip. It tends to get lost. In that same survey we did of our customer base last December, before the acquisition of AppRiver, large file transfer was the #1 identified adjacency that our customers were looking for us to have a product in, so bringing that solution into the fold, first and foremost, to mitigate any disruption to the AppRiver go-to-market motion, those hundreds of partners and thousands of customers that accumulated. That was job 1. That's done and going well. Job 2 is the enhancement of that code base to segment it into what we perceive are the 3 proper segments of value: large file transfer, digital signing and e-mail encryption. And so that R&D work is progressing, and we would expect a release in Q1, that will start to allow us to have a Zix branded large file transfer application that's getting integrated into the product suite.

In the meantime, it's a product that's been available for 8 years with thousands of customers, it is available for sale. It's just in a separate -- today, it's a separate log in, different look and feel, but again, available for sale. So it's going to be a great add-on for our customers, and especially as we move into 2020 and we're able to take advantage of that fully integrated product we expect to have later in 2020. That's why I think it's a really special solution for our customers.

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Operator [18]

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And I'm showing no further questions over the phone. So now I'd 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 [19]

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Well, thank you all for joining us this evening. Have a great evening, and I look forward to sharing additional progress with you in October.

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Operator [20]

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