Q3 2020 Zix Corp Earnings Call
Let's put today's presentation or the company's president and C. babies.
Maybe let me see if David Lamb, Vice President of marketing Jeff.
Just to be funny.
Following their remarks, we will open up the call for your questions.
I would like to remind everyone that this call will be recorded and made available for replay via the link in the Investor Relations section of the company's website no.
Now I will turn the call nobody can be sure. Please proceed.
Thank you Christian good afternoon, everyone and thank you for joining our Q3 2020 earnings conference call.
On the call today, we ever CEO, Dave Wagner CFO, Dave Rockvam after the market closed today.
Issued a press release announcing our results for the third quarter ended.
September Thirtyth 2020, a copy of which is available on the Investor Relations section of our website at <unk>.
Next dot Com. Please note that during the course of this call will make forward looking statements regarding future events.
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. Its important to note 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 fall.
Looking statements contained in today's press release and on this call.
The risk factor section in our most recent form 10-K, and 10-Q with U.S.C.C. provide examples of those risks.
As more fully described in our quarterly report on form 10-Q for the quarter ended September Thirtyth 2020. The company has been actively monitoring the COVID-19 situation that's impacting both the company and the world in which we operate.
The impact of COVID-19 in the unprecedented measures to prevent it spread are affecting our business in various ways, causing volatility in demand for products change in customer behavior, including their spending type payment patterns disruptions in operations.
I've suppliers and partners and our employees ability to work and travel we expect the ultimate significance of the impact will be dictated by the length of time that these circumstances continue which would depend.
On the curly unknowable extend in duration of COVID-19 pandemic.
These factors also make it more challenging for management to estimate the future performance of our business, particularly over the near term drew.
During the call today, we will present, both GAAP and non-GAAP financial measures.
GAAP financial measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results.
We encourage you to consider all measures when analyzing the company's performance a reconciliation a reconciliation of certain GAAP to non-GAAP measures is included in today's press release, which can be found in the Investor Relations section of our site now with that I'd like to turn the call over to Dave Wagner for his opening remarks, Dave.
Thanks, Jeff Good afternoon, and thank you everyone for joining us today.
Our solid results for the third quarter demonstrate our team's continued commitment to driving profitable growth as well as our partners and end customers adoption of our secure cloud.
Delivering 15% revenue growth, coupled with 25% adjusted EBITDA margins in the quarter demonstrates the growing value zix is providing our partners through our secure cloud platform.
Pure cloud delivers comprehensive digital productivity security and compliance solutions for businesses of all sizes.
Today I'm also pleased to announce that we're taking our commitment a step further through our acquisition of cloud ally an industry leader in cloud based data backup and recovery.
Founded in 2011 cloud ally offers a robust suite of award winning ISO 27000 to one certified and GDPR HIPPA compliance solutions for Microsoft Office 365, Google Workspace share 0.1 drive Salesforce box and Dropbox.
You haven't gone through the related press release, we issued this afternoon announcing the acquisition I would encourage you to do sell for further transaction specifics and commentary.
At a high level cloud alloy expands our product suite into Microsoft office, 365 backup and recovery.
Selling a growing demand from aquifers MSP channel as well as the zix is value added reseller and direct sales channels like.
Like six cloud ally is that channel first provider serving more than 5000 customers and 2200 50000 unique users globally collectively served by 600 MSP partners.
Our two companies have highly complementary and synergistic go to market motions and end markets with virtually no overlap in our MSP partner based.
Most importantly, our combination with cloud ally will enable us to directly address and capitalize on the growing cloud backup and recovery market, which is expected to reach more than 3 billion annually by 2025. According to industry analysts Zix is transformation continues to achieved new heights, and we believe this.
Acquisition will enable us to accelerate our growth even further.
Now I will turn the call over to our CFO, Dave Rockvam to provide details on our financial results for the quarter. After his remarks I will return to discuss our core growth drivers cloud Allied and our new Chief product Officer, Dave.
Thank you, Dave and good afternoon, everyone at a high level in the third quarter, we again delivered on our commitment to drive incremental air our revenue and adjusted EBITDA dollar growth. We also produced strong cash flow from operations generated $15.1 million, bringing the total amount of cash flow from operations to 24 point.
$2 million on a year to date basis.
Looking at our numbers for the quarter in more detail at the end of Q3, our air or totaled $222.3 million up 11% from Q3 of last year our.
Our continued and sustained air growth is being driven by our customers move to secure modern workplace, which put significant emphasis on cloud adoption.
We are pleased that our cloud based EHR our grew by 19% over Q3 of last year and now comprises 86% of total air or $190.3 million.
New customers in the quarter totaled over 4500 up 22% from Q3 of last year for the third quarter. We had just over 99% net dollar retention, which represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter we.
Continued to be pleased that in this unprecedented environment, we were able to grow our air already double digit rate and maintain good retention rates with our customers.
Which we believe demonstrates the mission critical role that our solutions fill with our customers Dave will provide more color on our net dollar retention in the context of our growth drivers shortly.
Revenue for the third quarter increased 15% to $54.8 million from $47.8 million in the same quarter last year, the $54.8 million of revenue exceeded our guidance range for the third quarter.
In Q3, we continued to see the momentum from the Q2 launch of secure cloud with nearly all new customers on the M. M. MSP side of the business onboarding onto the new platform well on the zix direct and partner side, we saw 80% of all new customers onboard onto the secure cloud.
October continued that momentum with secure cloud onboarding on the zix side at 97% so.
Secure cloud customers now consume 1.29 services for mailbox, which is up from 1.26 in Q2 2020.
In total our customers averaged 1.1 services per customer. So we know when we get them on to secure cloud they consume more services. We think this bodes well for our strategy and providing strong user friendly platform that makes it easy to add more solutions, ultimately, making us more valuable and stickier to our partners and cost.
Of course.
Shifting back to the BNL, our adjusted gross profit for the quarter was $29.5 million or 53.8% of total revenue, which is an improvement on a dollar basis from $28.5 million or 59.6% of total revenue in the third quarter of last year.
On a quarter over quarter percentage basis. This is down from 54.7% last quarter due to the continued strong growth of office 365 products, which carry a lower margin than most of our six IP based products.
Our adjusted R&D expenses for the third quarter of 2020 were $5.2 million or 9.5% of total revenue compared.
Compared to $4.8 million or 10% of total revenue in Q3 of last year.
The year over year dollar increase for the quarter was primarily due to certain development projects, which we completed in 2020 and we are now beginning to amortize into expenses.
Because the majority of our solutions are now cloud based we continue to capitalize a meaningful portion of our development effort.
As we move as we see more of these projects go into production, we will continue to see increases in their amortization. This.
This growth in amortization will not impact our EBITDA, but it will have an impact on overall R&D expense and net income.
In the near term, we don't expect to be increasing R&D head count, but would expect to see R&D increase on an expense dollar basis compared to a cash spend basis.
Our adjusted selling and marketing expenses for the quarter were $9.7 million or 17.6% of total revenue compared to $9.5 million were 19.9% of total revenue in Q3 of last year, but.
The lower selling and marketing expenses as a percentage of total revenue reflects the benefits of our lower cost of customer acquisition from our high velocity sales model and the success, we're having winning new customers and wallet share gains from our more than 4450 active MSP partners.
For the third quarter of 2020, our adjusted General and administrative expenses were $3.4 million or 6.2% of total revenue.
It was down from $4.6 million or 9.6% of total revenue reported in Q3 of last year.
Much of this decrease is associated with the cost acquisition. The cost actions. We took in April of this year and the continued continued vigilance on expense management.
On a GAAP basis, we reported a net loss of $725000 versus a loss of $1.6 million in Q3 of last year.
On a GAAP basis, we reported a net loss attributable to common shareholders of a loss of $3 million or a loss of five cents per fully diluted share.
The five cents loss for the quarter compares to a net loss attributable to common shareholders of a loss of $3.7 million or a loss of seven cents per fully diluted share in Q3 of last year.
Our third quarter non-GAAP adjusted net income before deemed dividends and acquisition related expenses and excluding deferred tax was $9.2 million or 17 cents per fully diluted share, which is a penny above our guidance.
Compares to $6.7 million or 13 cents per fully diluted share we reported in Q3 of last year.
And finally, our adjusted EBITDA for Q3, 2020 totaled $13.8 million, an increase of 19.9% from the $11.5 million, we reported in Q to Q3 of last year.
As a percentage of total revenue adjusted EBITDA for Q3, 22020 was 25.1% compared to 24% in Q4 of last year Q3 of last year.
We had a really strong cash flow generation quarter in Q3, 2020, we generated $15.1 million of cash flow from operations.
Which was up 128% or $8.5 million over Q3 last year for.
For the nine month period, we generated $24.2 million of cash flow from operations, an increase of 205% or $16.3 million over the same period last year.
Capex and other intangibles for the third quarter 2020 were $4.7 million, which consist primarily of normal business capital purchases and capitalized internal use software development.
We expect Capex and other intangibles to be approximately $18 million to $19 million for the full year 2020.
We also expect adjusted depreciation and amortization to be approximately $9.2 million for the full year 2020.
Billings another measure of the health and growth of our business totaled $54.6 million for the third quarter of 2020 up 18% from $46.2 million in Q3 of last year.
Turning to our balance sheet, we ended the quarter with $23.7 million in cash an increase of 68% or $9.6 million from $14.1 million at the end of the prior sequential quarter.
In addition to our strong cash position. We also currently have $25 million available for borrowing through our revolving credit facility.
This year, we have required or canceled approximately $2.7 million of our own shares as part of our employee equity Awards program, which does consume more cash but helps to limit dilution.
Switching gears to the acquisition of cloud Allied, which we announced earlier today.
In addition to the market opportunity, which Dave will touch on momentarily, we expect cloud I like to be highly accretive from a financial perspective, it's 100% subscription business and favorable profitability profile provide us with a predictable adjusted EBITDA and cash flow to augment our already robust financial base.
For the fiscal year, ending December 30, Onest 2025 allies projected to generate a standalone basis, approximately $8 million in a R.
And at the end of 2021, we expect them to be on a quarterly EBITDA run rate of $500000 per quarter.
In connection with the acquisition, we modified our existing senior secured term loan by adding additional borrowings of $35 million, bringing the total outstanding debt under our credit facility to $212.2 million the.
The maturity date remains February Twentyth 2024, and carries the same interest rate currently LIBOR, plus 3.25%, which.
Which is subject to future step downs as leverage reduces.
Additionally, we used a portion of the additional term loan borrowings to repay all existing draws under the revolving credit facility, which will leave us with $25 million and capacity under the revolver.
On a pro forma basis, taking into effect the cloud I'll acquisition as of December 30, Onest 2020, we expect to have more than $20 million of cash and cash equivalents and total debt under the credit facility of $212.1 million at the end of 2021.
Longer term, our strong unlevered free cash flow generating capabilities aided by cloud ally will reliably allow us to service our debt obligations and execute our growth strategy.
Now turning to our financial guidance, which is based on current market conditions and expectations and are subject to various important cautionary factors, including risks and uncertainties associated with COVID-19 pandemic.
For the fourth quarter of 2020, which includes partial contribution from cloud ally. We currently expect revenue to range between $56.4 million and $57.4 million, which includes approximately $1 million of contribution from our acquisition of cloud ally on November five 2012 and takes into account the GAAP required.
Third revenue discount.
Our revenue forecast for the fourth quarter, 2020 implies a 12% to 14% growth rate compared to Q4 of last year.
We are forecasting fully diluted GAAP earnings per share attributable to common stockholders to be in a range of a loss of nine cents and a loss of eight cents.
And fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and acquisition related expenses and excluding deferred tax benefits or expense to be in the range of 16 to 17 cents for the fourth quarter of 2020.
We are currently forecasting adjusted EBITDA to be approximately 25% of forecasted revenue for Q4 2020 the per share guidance figures are based on an approximate basic share count of 55.3 million shares for Q4 2020.
Based on our current visibility we have increased our revenue range for the full fiscal year 2020. We are currently forecasting revenues range between $217 million and $218 million, representing an increase of between 25 and 26% compared to 2019, we.
We also expect fully diluted GAAP loss per share attributable to common shares to stockholders to range between a loss of 28 cents and a loss of 27 cents for the year.
On a non-GAAP basis adjusted earnings per share attributable to common stockholders is expected to range between 60 cents and 61 cents.
Adjusted EBITDA is forecasted to be in the range of $51.2 million and $51.8 million or approximately 24% of total revenue for 2020, and a year over year increase of between 29, and 32% compared to fiscal year 2019.
The midpoint of this range is down $500000 from prior guidance, mainly due to slightly higher variable compensation due to higher revenue performance than the company had been forecasting for most of the year.
Our adjusted EBITDA guidance of $51.2 million to $51.8 million implies a leverage ratio of approximately 3.7 at the end of Q4, putting us comfortably below our maximum permitted leverage ratio of 4.75 per year end 2020.
The per share figures noted earlier, our based on approximate basic share count of 54 million shares for 2020.
Based on our current outlook, we expect to generate continued strong free cash flow in Q4 2020, we are forecasting approximately $2.2 million in interest expense on our bank credit facility in Q4.
Looking ahead into 2021, we also like to provide some early modeling information.
First the revenue related to the acquisition of Clat ally will add approximately $1.5 million of revenue in Q1 2021.
This takes into account the deferred revenue just count on cloud allies revenue, which will improve throughout the year as we as you as we fill those customers and can recognize the full value of their EMR.
On the cost side remember that the first quarter normally includes a slight decline in profitability and cash flow for the company as our first quarter includes increases in costs associated with payroll taxes sales and marketing investments for the year and the timing of payments of our annual bonus program as well as retention bonuses associated with our.
Positions.
Also on the cost side as I mentioned earlier R&D expense will increase due to the amortization of capitalized software development costs on secure cloud and other cloud based development projects from 2012. These additional costs will impact 2021, s., but will not impact EBITDA growth.
This completes my financial summary for a more detailed analysis of our financial results. Please refer to today's earnings release as well as our 10-Q, which we filed today also.
Also visit our Investor Relations website to view, our most recent investor presentation.
Thanks, Dave I will now review our execution of strategy in the context of our three primary growth drivers after which I will continue my discussion of why cloud ally was the perfect acquisition for us and what it means for our business going forward.
So starting with our first growth driver, which is new customer acquisition, we had some noteworthy wins in the quarter on both the zix and AEP River sides of the business.
First on the direct bar side, our top five wins in the quarter were in our traditional industries, including two in healthcare to in finance and one in government.
All five wins include email encryption and all five wins involve displacing a competitive solution are.
Our largest new customer we ended Q3 with a six figure deal in the finance vertical this customer selected zix, stating that they determined that to the best of breed compared to our most notable competitors.
We averaged two products per new customer and our top five new customer wins in the quarter and 88% of all new logo wins in the quarter were deployed on secure cloud.
On the MSP partner side, we added 54 net new transacting partners in Q3, which compares to the 60, we added in Q2, bringing our total to 40 507 at the end of the quarter in Q3, we added approximately 170 net new customers per week, bringing our total.
Our customer count on the AP River side of the business to more than 75000.
Our sales momentum on both the direct and indirect side of our business picked up from Q2 levels into Q3 and continued into the current quarter as well.
As we shared on our last call we had achieved more than 4300 trials.
Our second highest monthly total in July just behind June total October trials were just short of July levels.
IP trials for Q3 accounted for 27% of the total trials in the quarter and we achieved a new record for IP trials in October.
In terms of our second growth driver, which is sales to existing customers in Q3, our top five add ons to our bar in direct sales team included two in healthcare one in banking, one an education and one in construction we.
We also had a broad mix of solutions represented in the top five including two an encryption and to office 365 add ons.
On the MSP side sales to existing customers accounted for 47% of the monthly recurring revenue or more increases in the quarter, which compares to 22% in the prior quarter and 41% in Q3 of last year.
Moving onto our third growth driver increasing retention our top five renewing customers by air are in Q3 were all cloud customers and 50% of our total renewing customers in the quarter were in the healthcare space.
We also had a strong government renewal quarter that included renewals from six longstanding government customers, including one that first became a customer in 2002.
As Dave mentioned, our total company net dollar retention was 99% in Q3, which was up from 96% in Q2, and just shy of our historical 100% plus level.
It's worth pointing out that our net dollar retention was impacted slightly in the quarter due to a $300000 decline related to the planned end of life of our Xbox one product absent. This change we would have been at the 100% level.
We have approximately $650000 of air our remaining from this product, which is scheduled to taper off through next year.
Since the end of the quarter, we've seen our net dollar retention remain near the 100% threshold.
Today secure cloud is a leading solution, enabling partners and end customers to try to achieve a secure modern workplace secure cloud provide small and mid market enterprises with unparalleled productivity security and compliance all from a single platform.
The increase of remote work is making uninterrupted access to an organizations cloud data vital for employee productivity.
Remote work is also creating larger attack surfaces, enabling more attacks bigger breaches and a greater need for data restoration following a breach which brings me to the strategic nature of the cloud outweigh acquisition, we announced earlier today.
I would like to take a few minutes to share with you why I am so excited to add cloud ally in cloud backup and recovery to our solution set and ultimately into secure cloud.
There are three main reasons I really like this acquisition number one it fills the number one partner request of what they want to buy next from Zap River number two cloud backup is an exciting and fast growing market, which is highly complimentary and is a natural extension of our current solutions and.
Number three in cloud ally, we have added an extraordinary team of talented cloud first partner first technology developers and professionals, who share our vision of building superior products that are highly effective easy to use and deploy and backed by phenomenal customer service.
Over the summer we did a comprehensive survey of our partner community of that 229 respondents 59% had a current incumbent office 365 backup vendor and 41% had yet to select a backup provider for their customers.
The respondents 55% indicated that they would be likely to resell cloud backup from Zacks.
And 34% said that they were 80% or more likely to resell office 365 backup from zix within two years as you can see from the survey data, we expect to create a lot of shareholder value from cloud backup as we work to double our cloud backup air are over the next three years.
Beyond office, 365, and perhaps even more exciting is our entry into the cloud backup space more generally the total backup market is estimated by Gartner has to be $6.3 billion growing at 2.5% annually today. The cloud backup segment represents about 20% of the total.
Our $1.3 billion growing 25%.
With office 365 backup representing nearly half of that cloud backup market at $600 million.
We are focused on the large and growing officethree hundred 65 market and we are excited that cloud ally has solutions today for Google markets.
Salesforce box and Dropbox each of these cloud applications represent meaningful additional growth opportunities for six and our partners. When you step back and think about it the rapid adoption of cloud based applications and the increasing value of the datasets in those applications you can see.
A lot of room for future growth.
Which bridges me to my final point, we're really impressed with cloud allies born in the cloud architecture, they've assembled a world class technology team has built products based on scalability.
And we'll first ease of use and data residency.
All attributes to integrate very well with our strategy for secure cloud.
Backup and recovery is a critical component of a secure modern workplace and adding cloud backup and recovery will further improve our position with our partners and the work with them to capitalize on the digital transformation, our joint end customers require in our increasingly work from anywhere where.
World, We're really excited to add the cloud allied team to the Zix corporate family.
Speaking of new team members I'm also pleased to announce our new Chief product Officer, Brian often.
As we think about our long term growth, we see our secure cloud delivering value to partners and customers at the platform level at.
At the application level and through intelligence and data gathered from the vast amount of information we will be processing achieve.
Achieving this vision will require a product leader that can bring together product development and product management into a seamless organization with a shared technology strategy and product strategy.
Ryan's most applicable experiences come from his 14 years at Mcafee.
Mcafee, Ryan held engineering leadership positions across a wide range of security products before progressing to become the general manager of Mcafee Security management business unit under Ryan's leadership.
Mcafee achieved the top Gartner magic quadrant rating for their endpoint security business you had several acquisition integrations earned experienced building cloud platforms and big data analytics projects. All experiences we expect to leverage as we continue to grow and scale our business at six.
Digital transformation initiatives are continuing to proliferate and we are well positioned to capitalize on a new work from anywhere world with cloud ally Zix is even better positioned for profitable growth higher attach rates and the opportunity to capture an even greater share of the multibillion dollar business communications.
Market.
That concludes our prepared remarks, operator, we're ready to open the call for questions.
Operator listen gentlemen.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question will come from Chad Bennett from Craig Hallum. Your line is open.
Great. Thanks for taking my questions nice job on the quarter guys.
So I was just hopping between calls and I looked at the M&A press release, and I didn't see an actual purchase price associated with cloud Allied do you did you offer that up on the call.
I know, it's approximately $30 million on the purchase price okay.
And and just.
I guess in terms of.
Thinking about that business guys.
Guys I mean that.
You are correct to cloud backup market is a very.
Exciting market.
And for sure complementary to what you do and you indicated that based on your survey results you believe some demand or significant demand is here just in the base, but I guess, it's also just my experience here, it's pretty competitive space and.
I think you guys are somewhat used to that but just can you talk about the competitive landscape. There real quick that at least you are familiar with today.
Yes, so I think you're right.
It is competitive of course, our vendors who have been around a long time and.
The good part of having the on Prem side, a backup which.
It creates challenges on the cloud backup. So we're really really pleased that we were very intentional about cloud to cloud backup. This is a a pure born in the cloud always in the cloud backup platform. So we think.
That were really really well positioned.
As we said in the press release to handle cloud based workloads, that's where the growth is and we think by zeroing in on that on an asset that was focused on the cloud backup and Thats really going to help us out a lot. The second thing if you remember back.
Back to the strategy around the AP River acquisition, just under two years ago, we recognize that the move to cloud starts with.
Officethree hundred 65, and grabbing those customers the partners as they lead and customers.
From on Prem to the cloud that's the point at which.
That resiliency message the importance of being secure and compliant data that message resonates and so.
We think that we really are going to differentiate with where we sit in the partner ecosystem.
As the productivity provider of choice is one of the largest csps in the country and increasingly in the world, We think thats going to be a really nice competitive positioning as well and then we love the idea of as you pointed out it's not just office 365 office 365 at about half the cloud backup market.
Today, but you know these these data sets in Salesforce and box and Dropbox are increasingly.
Getting high value.
Employee data in those workloads and.
That being able to restore that data back to courts point in time makes an organization much more secure much more productive and we really think it's a great great new customer and attach opportunity for us.
No great color and then maybe one follow up for me just on secure cloud I mean the.
Yeah, do you attach rates or you know kind.
Kind of penetration rates continued to be you know.
Very strong either.
And on the Zix core business are going up quite a bit sequentially I guess when will we.
I know, it's an interesting.
Interesting times and difficult environment, but when do we think that that kind of moves the needle on on net retention or net expansion. So to speak do because obviously the the product attach rates you gave the metrics go up when you can get someone on secure cloud do you think we are close to being able to talk about.
Out again in a somewhat normalized environment net retention kind of north of 100%.
Yes, Thats certainly the goal and we think we will get back there.
As the current.
Economy recovers as our attach opportunities improve I did give the October number which is just a very small hair under 100 at this point so things that remain really strong and steady since June for us and we do expect things to expand as the economy expands.
Hopefully in next year.
Great nice job on the quarter guys.
Yes, I appreciate that Jack Thank you.
Thank you again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
The next question is from Andrew came from called Securities. Your line is open.
Hi, there. Thanks for taking my question. So if you could just give us a little bit more color and so.
The quarter end.
Seen any of that.
Customers that originally took seats away from their deployment due to wane off at the onset of Covidien seeing them come back.
Add services back or add more seats as they start to add back personnel.
Yes, that's a great question and we were really clear about that.
Between Q2, I guess in early Q3 and.
That's what we saw that brought US 96 back then to that over 99%.
In Q3, and those metrics and that pace has stayed really really steady through October so we're seeing a really steady.
Good environment not like the environment, we were in Q4 last year, but we see a real steady.
Environment course, that's on our monthly renewal customers on the annual renewal customers. The cobot impacts are so we're still doing renewals on on annual renewal customers who may have.
Smaller workforce is now than they did at our last renewal and those will continue to work their way through the cycle.
Between now and March April timeframe.
That's a little less than 40% of our of our air are so we feel that we are seeing the recovery in the monthly billing customers, where they consistently back.
Balanced by the and when you have customers, who are still adjusting a little bit as we walk them through the annual renewal process.
Great and then just looking at the acquisition can you give us an idea the breakout of their revenues how much of that's derived from Microsoft 365 versus the other platforms and our broken out geography was.
Yes, they've done a really nice job of course getting into the cloud backup market.
Between you know between really early in early and and have done a nice job of covering the core applications and office 365 has been the the lion's share of.
There.
Their backup market they have nice customers, a nice amounts of customers on each of those.
[noise] platforms, I discussed, but I'd say, it's almost 80% office 365 in there and their partner customer base.
And then on a geography basis, they're not quite 50% you asked and then over 50% rest of world. So they have a nice international component as well.
Great appreciate the color thanks on Sankar.
Thank you Andrew.
Thank you again, if you have a question at this time. Please press Star then the number one on your telephone keypad again that is star one.
Our next question is from you how choppy from Northland. Please proceed.
Oh, yeah, thanks and.
Congrats on a strong quarter, especially the free cash flow really nice the well above our estimate.
So for the December quarter, excluding the $1 million from crowd ally.
The midpoint revenue guidance is up 2% tier two which is stronger than the guidance that you provided for September quarter of up 1% to its here.
Dave Wagner I think you've already alluded to this but I just want to verify that does this mean that you guys are seeing an improving environment and if so what are the indicators are giving you this incremental cost from relative to a quarter ago.
Yes kind of also going to piggyback on Andrews question about linearity right, we talked about in on the July or the June quarter earnings call.
That we had a very strong a record trials in June and.
Strong July which is our second highest so we were able to tell you on the call that we felt good about things right. In Q4 Q3 because of those trials, we saw that revenue come in or start to come in in the in July then.
Then having that strong July made a good August so.
We continued to see strength in the quarter rights. When we see that saw that building. Your August would have been a little wouldn't have been as high of a quarter high of a month of trials because of vacations across Europe and the US specifically, but then September came back nicely and that'll change into revenue in October so as far as the quarter goes.
Yeah, we saw.
Good momentum and traction throughout Q3, which allowed us to get a little bit more a little bit stronger guidance and feel for trick for Q Q4, and then adding on top the $1 million from cloud ally pushes us over the top end of what we said so I think we are at 2% to 10% to 17 in April.
So when we guided and brought that up just a little last quarter and then this quarter with the results. We saw in Q3 able to bring it to bring it up the rest of the way to get to the top end of that revenue range.
Okay, Great and then I want to drill a little bit more into these trials, especially the app for customers that are challenges that security IP.
What's the typical characteristics of the.
Companies are that our Carlyn gsix security IP that aren't already in approve of customer.
Yes, so the average customer size is right around 25 mailboxes. So these on average our smaller customers in of course the IP.
Satisfactorily encryption archive tend to work better at the larger end customer side. So when you get into the into the zix IP they tend to be slightly larger, but we're still talk and nail on that on the AP River platform averages in that you know in the 20 to 30.
Range and not larger customers I mean, AP River does have some large customers, we have partners, who work up into into the thousands of users, but a lot of small businesses over 75000 small businesses.
All over the country and increasingly.
In the UK.
Our that our that customer base, they tend to be on the smaller side.
And these customers that are on the smaller side because they already have an existing secure email gateway provider.
So we're we're garnering a high end customers.
A lot of different ways, a lot of times, we recruit a new partner the new partner well that's.
Thats will be a great opportunity for us to to make sure that there.
Positioning additional security and compliance products as they come across and so.
Yeah, we collect customers there, we gather new customers from the exchange too.
Office 365.
Motion and so we we attach.
Bear as well that the attach rates, we would like to be higher. So there were still in that in the yen as based AD the ad.
Anywhere in the 1.1 total probably 1.2 on after a secure cloud side, so we need those to grow higher and.
And we're getting them higher mentally every month, but they're inching higher supposed to.
Racing Iron were continuing.
I'm really happy with that trend and and the trajectory and were.
We're staying on it, particularly being successful with the newer customers and the newer partners coming onto the ecosystem.
Alright, thank you.
Thanks now with this.
At this time this concludes our question and answer session.
I would like to turn the call over back to Mr. Wegman for his closing remarks.
Well. Thank you all very much for taking the time to join US for our Q3 earnings call on the very exciting announcement of the.
Extension of the company into a cloud back and recover with cloud Allied we look forward to speaking with you all are early in 2021.
Thank you for joining us today for sits as third quarter. It's when it's funny earnings call you may now disconnect.
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