Q2 2021 Zix Corp Earnings Call
Good morning, and welcome to <unk> second quarter 2021 earnings Conference call. My name is Carmen and I'll be your operator today joining us for today's presentation are the company's president and CEO David Walkner.
CFO, David Rock band and Chief Marketing Officer, 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 a link in the Investor Relations section of the company's website.
Now I would like to turn the call over to Geoff Bibby surplus speaking.
Thank you operator, good morning, everyone and thank you for joining our second quarter 2021 earnings conference call on the call today, we have our CEO, Dave Wagner CFO day Rockville.
Before the market opened today, we issued a press release announcing our results for the second quarter ended June 30th 2021, a copy of which is available on the Investor Relations section of our website at <unk> Dot com.
Please note that during the course of this call we will make forward looking statements regarding future events and the future 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 also 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 forward looking statements contained in today's press release and in this call the.
The risk factors section in our most recent form 10-K, and 10-Q filings with the SEC provides examples of those risks.
Growth and 17% annual recurring revenue growth.
Annual recurring revenue or <unk> totaled a record $252.4 million at quarter end, providing us with visibility to a solid second half of the year.
Cloud <unk> increased 24% year over year $225.6 million.
Or 89% of total IRR and reflects <unk> transformation into a cloud first company.
Operationally, we migrated more than 1900 encryption customers to our secure cloud platform in Q2.
This accelerating secure cloud adoption is helping our partners and customers be more productive secure and compliant.
In turn we are deepening our partner and customer relationships and enhancing their experiences.
Which is enabling us to layer on additional services more effectively.
Cloud ally is continuing to perform exceedingly well validating our M&A thesis from reflecting cloud backups increasingly critical role within a secure modern workplace we continued.
To grow cloud backup.
At approximately 50% year over year as we take advantage of the strong secular tailwind of protecting increasingly valuable cloud datasets from ransomware and employee era.
We launched secure cloud into the German market this quarter, adding 16, new German partners and the short weeks since our launch the.
The encouraging acceptance we've seen in this new market is validation of our investments in Germany and in the international expansion more generally.
Before I go further I will now turn the call over to our CFO, David <unk> to provide details on our financial results for Q2 day.
Thank you, Dave and good morning, everyone. The second quarter again demonstrated our ability to continue driving profitable growth.
In addition to robust revenue on AOR performances, and strong cash flow generation, we delivered meaningful gross margin dollar expansion in the period, highlighting our success in layering on organic higher margin products.
Looking at the numbers in more detail.
At the end of Q2, our <unk> totaled $252.4 million up 17% from Q2 of last year.
Our cloud based <unk> grew 24% over Q2 of last year and comprises 89% of our total air or were a record $225.6 million.
New customers added in the quarter totaled roughly 5232.
For the second quarter, our net dollar retention was 101, 4%, which represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter.
101, 4% is the highest level, we have seen since pre COVID-19 and we're pleased to once again be above the 100% plus level.
Revenue for the second quarter increased 18% to $62.8 million from $53.3 million in the same quarter last year, the $62.8 million of revenue exceeded our guidance range for the second quarter.
In Q2 as in the past we saw the majority of all new customers on board to the Zick secured club platform, given we are running over 95% and the only meaningful cohort of customers not coming on to secure cloud are mostly our single license desktop users we won't be highlighting this metric in the future. We are pleased that just 1.
Year or past the launch of secured cloud the adoption has been so strong secure cloud has helped us move from 1 to 4 services per customer in the second quarter of last year to 132 services per customer at the end of Q2.2021. This additional attach is driving revenue and gross margin growth and we feel is a trend that will continue to be.
Build as our customers and partners continue to gain more and more value from our solutions and platform.
Our adjusted gross profit for the quarter was $31.3 million or 50% of total revenue.
This was $2.1 million or <unk> or a 7% improvement from $29.2 million in Q2 of last year, and an increase of $1.3 million over Q1 of 2021.
This quarter's gross margin dollar performance was our highest level of growth since the first full quarter after acquiring App River.
We feel confident in building on this trend as we go throughout the rest of the year.
Our ability to assist our MSP partners and direct customers as they move to the cloud continues to make us an even more valuable partner to them the macro acceleration of the business cloud journey and increased focus on email security gives us confidence, we can continue to capture meaningful growth opportunities well into the future.
Moreover, our current base of more than 5600 partners in over 100000 end customers provide us a built in growth opportunity to attach <unk> organic higher margin products.
Our adjusted R&D expenses for the second quarter of 2021 were $5.7 million or 9% of total revenue.
This compares to $5.2 million or 10% of total revenue in Q2 of last year.
The year over year dollar increase for the quarter was primarily amortization due to certain development projects, we completed in the quarter.
We anticipate R&D expenses to continue to increase during the year.
We don't expect this to be in current cash expense increases, but amortization of past projects that are being deployed unsecured cloud.
While these expenses impact our net income and EPS. They are adjusted out of EBITDA.
Our adjusted selling and marketing expenses for the quarter were $10.9 million or 17% of total revenue compared to $10.1 million or 19% of total revenue in Q2 of last year.
The higher selling and marketing expenses on a dollar basis reflects the pickup in travel and trade show activity by our sales and marketing teams and increased direct and partner commissions due to increased revenues.
On the other hand, the decline in 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 are having winning new customers and wallet share gains from our active MSP partners.
We do expect to see increases in selling and marketing the rest of the year as we continue to lean into the growing opportunity we are seeing in the market.
For the second quarter of 2021, our adjusted General and administrative expenses were $4.5 million or 7% of total revenue, which compares to $3.4 million or 6% of total revenue reported in Q2 of last year.
On a GAAP basis, we reported a net loss attributable to common shareholders of a loss of $5.3 million or a loss of <unk> <unk> per fully diluted share.
<unk> net loss for the quarter compares to a net loss attributable to common shareholders of a loss of $4.1 million or loss of <unk> <unk> per fully diluted share in Q2 of last year.
The change in the quarter was primarily driven by higher stock based compensation over the prior year.
We did incur severance expenses as a result of the elimination of approximately a dozen positions from the organization. These changes were made predominantly to better align our workforce with changes in work as a result of Covid work from home and hybrid work.
Our second quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $7.9 million or <unk> 14 per fully diluted share which was in line with our guidance.
This compares to $8 million or <unk> 15 per fully diluted share that we reported in Q2 of last year.
The slightly lower net income compared to last year is due to the increase in amortization of R&D projects that were completed during the past 12 months. These.
These are noncash impacting on the quarter and the amortization is removed as part of our adjusted EBITDA calculation.
And finally, our adjusted EBITDA for Q2, 2021 totaled $13.3 million, an increase from $12.7 million, we reported in Q2 of last year.
As a percentage of total revenue adjusted EBITDA for Q2, 2021 was 21% which was in line with our guidance and compares to 24% in Q2 of last year.
Cash flow from operations for the second quarter of 2021 was $14.7 million, an increase of 212% or $10 million over Q2 of last year the.
The increase in cash flow from operations was primarily driven by continued focus on the business operations and continued careful working capital management.
Capex and other intangibles for the second quarter of 2021 were $3.7 million, which consisted primarily of normal business capital purchases and capitalized internal use software development.
Billings for the second quarter of 2021 totaled $60 million up 15% from $52.8 million in Q2 last year.
Turning to our balance sheet, we ended the quarter with $33.9 million in cash, which was an increase of over $10 million from the first quarter of 2021. In addition to our strong cash position. We also have $25 million available for borrowing under our revolving credit facility.
In terms of our capital structure and debt metrics, we had $211.3 million of total debt on our balance sheet at the end of the quarter.
Our trailing 12 month adjusted EBITDA of nearly $53.5 million reflects a leverage ratio of approximately 3.3 times adjusted EBITDA at the end of Q2.
Putting us below the maximum permitted leverage ratio of 4.5% for the quarter.
Shifting gears to our financial guidance for the third quarter of 2021, which is based on our current market conditions and expectations and doesn't take into account potential market changes such as increased COVID-19 activity or the delta variance.
In Q3, we currently expect revenue to range between $64 million $64.4 million.
Our revenue forecast for the third quarter of 2021 implies a 17% growth rate compared to Q3 of last year.
We are forecasting fully diluted GAAP loss per share attributable to common stockholders to be in the range of a loss of <unk> <unk> and a loss of <unk> and.
And fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax benefits expense to be <unk> for the third quarter of 2021.
We are currently forecasting adjusted EBITDA to be approximately 22% of forecast revenue for Q3.2021 day.
<unk> per share guidance figures are based on an approximate basic share count of $56.9 million for Q3.2021.
Based on our current visibility we are increasing our revenue guidance for 2021 to be between $253.1 million and $253.9 million.
Representing the increase of between 16% and 16, 2% compared to 2020.
We also expect fully diluted GAAP loss per share attributable to common stockholders to range between a loss of 38 and a loss of 36 for the year.
On a non-GAAP basis adjusted earnings per share attributable to common stockholders is expected to range between 58% and 60.
Adjusted EBITDA is forecasted to be approximately $56 million or approximately 22% of total revenue for 2021, and a year over year increase of approximately 10% compared to fiscal year 2020.
The per share figures are based on an approximate basic share count of $55.5 million for 2021.
Based on our current outlook, we expect to generate continued strong operating cash flow in 2021, we are forecasting approximately $9 million in interest expense on our bank credit facility and other interest bearing items for 2021.
In summary, as we execute this strategy, we believe our 100% subscription model.
Favorable profitability profile and strong cash flow generation positions us well to meet our manageable debt obligations and achieve our adjusted EBITDA guidance of approximately $56 million.
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 plan to file by August 9.
Also visit our Investor Relations website to view, our most recent investor presentation.
David.
Thanks, David as our financial performance reflects we experienced reacceleration in our business in Q2, and we are seeing a steady growth market ahead as businesses globally continue their journey to the cloud with an increased focus on E mail security compliance and resilient.
As you've heard me talk about our growth strategy is built on 3 key pillars, new partner and customer acquisition partner and customer add ons and retention.
I'll take a few minutes to provide an update in each of these areas.
Starting first with new partner customer acquisition. During Q2, we added 5232 new customers.
Our global partner expansion continues to gain traction, especially in the UK and Germany. In fact, all 5 of our top new partner wins for international with 3 in the U K and 2 in Germany.
Our UK MSP wins in the quarter included a highly accredited UK based MSP, who initially moved over the Microsoft users and more recently moved over more than 1000 feet from E Mail security to our advanced <unk>.
Email threat protection.
We are working with this partner to add additional seats and services, including cloud backup.
Another nice UK win was an MSP from consolidated with <unk>.
1 strategic partner, providing a range of offerings, including replacing their current backup solution with cloud alloy.
These wins contributed to our record new partner recruit quarter in EMEA with 39, 16 of which were in Germany.
We remain enthusiastic about our opportunity in Germany, because secure cloud is so well positioned to help providers in that market.
Transition the businesses from traditional brake day focused businesses to becoming higher value add subscription billing MSP.
Our UK and German expansion reflects the success of those strategic investments and our commitment to strengthening our partners security compliance and resilience tools.
Equally exciting are the examples we're seeing a cloud backup helping us capture new partners and new customers.
Our UK team secured a new partner that were dissatisfied with the level of service and support they were receiving from a competitive cloud backup and cyber security provider.
When the partner Herb does X story, they not only chose our cloud backup solution for 3000 feet, but also brought over the Microsoft licensing with 5000 pizza as well.
This partner plans to add more than 1000 feet of archive later this quarter.
In North America, 1 of our partners learned of a situation where an end customer was dissatisfied with the competing backup offering.
When they learned the VIX is salesforce backup capability. They selected us for both our 650 sales force backup seats as well as the 5500, Microsoft backup seats as well.
This new win gives us the opportunity to demonstrate our value and expand even further with more solutions over time.
It's these type of success story that reflect the value of secure cloud are phenomenal service and the effectiveness of our account management capabilities.
In terms of our top 5 new wins, where our bar and direct sales team. We had 2 in healthcare 2 in consumer and 1 in the government vertical.
4 of the top 5 wins included E Mail encryption.
Our largest bar direct win in the quarter with a 6 figure encryption win with a large government defense contractor.
Displace an incumbent vendor and were selected in a competitive process for our superior end user experience and support.
Turning to our second growth pillar, which is sales to existing partners and customers.
In his portion Dave mentioned, our updated partnering customer numbers. When we include cloud Allies partners, we are up to more than 5600, transacting partners and more than 100000 and customers.
Space.
And the white space in it is the key source of growth for us going forward.
And our second quarter sales to existing customers through MSP accounted for 51% of our increase in the quarter, which compares to 44% in Q1.
We see this largely as the reversal of the Covid trend of reducing users to reflect the increase in F&B hiring we saw in North America, especially in March and April.
In terms of our top 5 add ons were a bar and direct sales team former in healthcare and 1 was in construction.
The largest add on was with a health care organization, who wanted to consolidate encryption data loss prevention and Microsoft licenses with 1 vendor who provides phenomenal support.
Our top 5 add on customers in Q2 had an average of more than 3 solutions per account as we continued to successfully attached more solutions.
Eric.
We're also doing a great job of introducing VIX is cloud backup capability to our existing partners and customers.
<unk> already had more than 100 partners and 60 direct customers signed on with our cloud backup offering <unk>.
This adoption has us well on track to meet or exceed our attach goals the cloud backup from 2021.
Moving to our third growth pillar, increasing retention total company net dollar retention increased from 98% in Q1 to over 101%. This quarter gross retention at a company level remained over 90%, which is in line with historical trends.
We anticipate our retention rates to remain strong as we attach more services to our base.
Over the past 5 years, we've successfully transitioned zix from an email encryption provider to a cloud first provider with a broad range of solutions based on our secure cloud platform.
As much as we've accomplished and as proud as we are of VIX today, we're still in transition.
Our growth strategy in 2021 remained centered around transformation.
In addition to driving predictable and profitable growth our focus is on improving partner and customer experiences by consolidating more of our services onto our secure cloud platform the <unk>.
<unk> of our encryption customers to secure tier cloud is going phenomenally well in fact, nearly all new customers have them onboard to secure cloud this year and we've migrated more than 2000 existing encryption customers to secure cloud year to date.
The integration of cloud Allied cloud backup into our secure cloud platform will be completed this quarter, which will further unify the platform and allow our partners and customers to protect business critical data within today's modern SaaS applications like Microsoft 365.
Sales force, Google workplace, Dropbox and box.
Looking ahead, <unk> remains well positioned to capitalize on secular market trends in cloud adoption.
Ensuring that hybrid work environments adaptive secure compliant and resilient.
Our building cloud momentum has the sidetrack to realize our financial goals for 2021, while also setting us up even greater success down. The road. This includes long term growth with a goal of achieving $500 million in annual recurring revenue by 2025.
That concludes our prepared remarks, operator, we're ready to open the call for questions operator.
Thank you and as a reminder to ask a question simply press star 1 on your telephone to win.
Draw your question Preston.
<unk> our hash key.
Again that is star 1 to get in the queue.
Our first question comes from Chad Bennett with Craig Hallum.
Great. Thanks for taking my questions Congrats.
Congrats guys Reacceleration was was really impressive, especially on the secondary metric. So I'm just curious.
On the on the mailbox numbers I mean day.
You saw like huge step function growth there from last quarter.
And then in and then from a new customer standpoint, just I guess.
No based.
Based on Microsoft results, we saw some acceleration in mailboxes in their numbers or office 365, I should say in their growth rate numbers and I know NFIB has ticked up nicely.
Just.
Just other than those kind of macro but highly correlated.
Metrics, what really happened I mean, it's a pretty dramatic uptick in those 2 figures.
Yeah. So thank you for the question Chad, we do feel much better about there is macro.
Items that you mentioned and those are absolutely key drivers.
David I the whole leadership team, we're really proud of the execution, which I think is.
Is improving with our always execute well, but the team really came together.
Yes.
This quarter end.
Feel good about the way they are that are driving and executing right now.
And then just in terms of.
The attach rate or services for secure cloud.
Again, do we have I mean I love. The examples you gave David up of all the displacements and add ons with various partners and customers in the quarter.
If we look at <unk>.
A year from now or exiting this year can 1.3 to go to 1.36 or how do we think about that attach rate and should we expect some acceleration from what it's been the last couple of quarters.
Yes, I think thank you Ryan we've seen really good attach, especially since secure cloud launched general April of last year and.
132 services per customer now.
That's been coming up.
Going to 2 points of every quarter, we think with.
As long as things continue on the recovery that we've seen.
We can continue to see that grow.
Secure cloud, we know when we get customers over onto secured cloud makes it easier for them to to trial the products makes them easier to buy and implement the products. So we do expect that we can continue to drive that number and thats what drives our long term model going forward.
And Chad the other thing I think you heard in my commentary there is that now.
How pleased we are with cloud backup.
The product we have is really good.
Market for cloud backup is really strong and thats 1 of the things that's.
Thats, helping the acceleration is.
That new product.
In our area of high market demand right now.
Just 1 last 1 from me.
<unk> cloud cloud ally cloud backup.
The the <unk>.
Higher success rate from attach standpoint, right now what would be kind of 2 and 3 from us from a service product standpoint in your mind.
Well our number 1 attach product by features that advanced threat product gets the natural second layer of defense.
We believe every 1 of our customers have and then the cloud backup. We also believe every cloud dataset key datasets should be backed up so irrespective.
<unk> posture.
Regulatory demands on the organization. We believe those are the 2 additional layers that every business mailbox should have so those are the 2 highest attach opportunity products we have.
Got it thanks nice job again.
Thanks, John.
Our next question comes from Andrew King with color Securities.
Hey, guys. Thanks for taking my question sorry, if you already addressed they got pulled off the call a couple of times, but you obviously saw some nice.
New partner.
EMEA you get into the world color.
The U S new partner.
And specifically, how you see that ramping to pre pandemic levels given the return of in person MSP events.
Yes, that's a great question Andrew.
New partner ads that they have been steady.
In North America.
During COVID-19 and this quarter I think we let folks know may was our first.
Person partner event.
That's an area that we're leaning into as North America, new partner recruit.
Obviously, we're all watching the delta variant close laid back.
Do have team out doing in person events that are getting a lot more focused on.
<unk> partner accrued here in North America.
Rick This edwards kind of steadier Barry.
During COVID-19, we're looking for that to pick up here in the second half and you saw in our in my comments I mentioned, your selling and marketing continued to invest see investment in the second half of the year.
We really want to lean into the opportunity.
We're seeing the seat license counts come up that we saw in Q2, we think that there's opportunity there in.
In Q3, and Q4 and the leaning on the selling and marketing side is going to be to support.
That effort for North America and international.
Partner adds along with our direct as well, but mainly focusing on as David said is that recruit function.
Great and then just double clicking on international investment can you give us a little bit more color as to where youre at in those initiatives specifically regarding.
Hiring and where you're at with the German markets Theyre, having completed the hiring there you're still building that out and what functions.
Yes, that's right Andrew.
We're really pleased with that.
First hires where the salespeople in region Theyre doing a great job as you could see from those numbers, we had a nice small team already in Germany, we're adding support and implementation.
People in the German market if not.
Dozens of people, but by a handful of folks to make sure we have the resources in the region John.
And first call doing the implementations that obviously the partner relationship work.
Largely staffed and all functions.
In geography at this time and we expect to continue to invest there as we bring on new partners and customers.
Great. Thank you for taking my questions and congrats on the quarter.
Thanks, Andrew.
Thanks, and our next question is from now Chuck <unk> with Northland capital.
Alright, great. Thanks, Great results.
So you had $9 million or <unk> <unk> growth this quarter.
Can you break that out between <unk> and <unk>.
That's a higher margin services.
Yes.
Yes, I would say we're running probably.
$65, 70% would probably coming from the productivity and Microsoft and 35% coming from the IP that.
That balances, you're probably right in on that.
50% gross margin, what we're seeing today.
Great, Okay and loved that you pointed out that you had the highest gross profit dollars.
The increase since the closing of the <unk> acquisition, and that's really great to see.
There are lots of elements going on in terms of the gross profit trajectory.
To.
Gross margin I talked about the execution.
The team generally when.
John <unk> question.
That's really what they're focused on is the attach.
<unk> services. The addition of the cloud backup.
Capability that we pointed out.
That.
A really strong success, we're seeing there are at least relative to the to the plans, but we added acquisition, which now seem quite modest.
But those are the things that help them.
Helping drive that attach and then of course, the biggest tailwind than we are.
It was a premise from the beginning of App wherever the biggest tailwind is that rotation.
To the cloud.
The office, 365% and Thats, what we really saw in the quarter as we pointed out in 1 of my line.
As we.
Suffered.
Contraction of mailboxes remember when Covid hit we didn't lose customers, we launched mailboxes on existing customers and we saw that move back again as we said in that call. It Q2 March and April really strong months for existing customers to add back.
Employee mailboxes, which was good for us.
Great Awesome.
And then Dave.
Last quarter, you gave us a little bit of a color as far as what we should expect for gross profit dollars trajectory in the June quarter, which was super helpful. Can you help us again without sort of September quarter.
Yes.
As I said in the script, we expect gross margin dollars to continue to increase.
There's $1.3 million increase this quarter really got a little bit of a rubber band, which was good from from March through June.
So that really helped drive the number significantly in Q2 coming off of a disappointing Q1 for us on that metric. So we do see it coming up $1.3 may be a high bar for next quarter as far as gross margin dollar increase but we do continue to see that from here.
Next couple of quarters nice increases, but the <unk> was a really strong number this quarter.
Great. Thank you very much.
Thanks, Tom.
And our next question is from Brian Colley with Stephens.
Hey, guys good morning.
So Brian.
So really impressive cash flow in the quarter I am curious.
I'm curious specifically what drove that strength and how sustainable you think that is because I mean 17, 5% free cash flow margin is pretty pretty impressive.
Yes no.
That cash flow is really important to us we've been focused on it in the last I'd say 4 quarters.
And we've been able to.
Our operating cash flow numbers have continued to come up I think we've got 3 of our 4 best quarters, probably in company history and.
You need to keep that focus.
I think that I don't know that we will like last quarter. We were $10 million. This was $14.7 I don't know that we'll be at $14.7 level again.
We stayed very.
We focused as we always do but on making sure that.
All of our working capital things are all in line and I think we'll continue to do that and build on that earnings continued to increase so as we do that we'll be able to continue.
To grow that and our guidance of the 65 to 70, 565% to 70% conversion of EBITDA to cash flow and so we'll keep focused in on that.
This quarter was nicely ahead of that and we'll keep.
Keep pushing through there.
Got it that's really encouraging.
Especially if there is nothing abnormal in there I mean that's.
Much higher.
Cash flow profile, then I kind of thought historically, so congrats yes I.
I think we pushed a little higher this quarter like I said I wouldn't call it for that number every quarter, but.
It's a strong focus in.
That's been our premise all along is that we can drive.
Good gross margin dollar growth, we can drive it to the bottom line through our EBITDA adjusted EBITDA and we can drive it to cash absolutely understood.
So just looking.
Looking at the guidance based on the 18% growth you posted this quarter I mean, the guidance for <unk> implies a bit of a.
Slowdown.
Is there anything specific happening in <unk>.
That would drive that or should we just kind of interpret that outlook, because you guys being prudent on the guidance.
I would say being prudent on the guidance.
There is a little bit of inorganic when you look at bringing in cloud alloy.
<unk> will head up against that in Q4.
In Q4, it'll be about a point delta.
So it will almost be back together on our organic versus inorganic and right now it runs a couple of points.
Youre still still good strong growth, but I think that just to be a little bit conservative. There is we don't know exactly what's going to happen as COVID-19.
Picture its head back up in the Delta variant and stuff so.
We'll be pushing hard for the second half of the year as always.
But I think we just wanted to be prudent as we continue to move the numbers up we started the year at 12% to 14% revenue growth. So we're pleased to be in a position to.
We had 18% this quarter and ended up full year guide just over 16% now that we got the <unk> got through the second quarter.
Absolutely agree with that approach so.
So I'm curious on the services per customer.
The metric.
Just as it relates to gross margins.
Driving higher attach rates.
Seeing a stabilization in margins completely understand the strategies to drive gross profit dollar growth, but I am curious.
Is there what's kind of the number as you run the math.
What level of services for secure cloud customer.
What level does that need to get to in order for margins to kind of stabilize.
From a gross margin perspective.
I don't know Brian.
Number that net stabilize that the Microsoft.
Pricing value that they add.
Perspective, consolidated net services, 1 vendor 1 tight integration simplicity flexibility and extensibility ease of use these are the value propositions that we're bringing to the market and.
It's not going to I don't think its going to be a number of attaches that drives gross profit back to 80% of those days are those days are gone.
Those days from most off where companies are gone as we continued to leverage the cloud and arent running on our own depreciated hardware.
So we really are focused on is gross profit dollar growth and I think the margin percentage is something that we really are trying to encourage investors and analysts.
Not paying closer attention to I don't think its a good metric for us.
Understood well.
If you keep putting out.
Cash flow like you are.
I don't think people will care so.
1 last question here.
Okay.
You've given the 2025 IRR target for 500 million.
I mean, how should we think about maybe an EBITDA margin range for that timeframe is 20% to 25% a decent range or.
Any type of ballpark there you can give.
So 2 things that when you're when you're processing through that so that the AAR. Our objective as of December 31st objective. So the revenue.
In 2025.
The math on a spreadsheet.
Back down.
The revenue, which would be in the mid mid high mid 4 hundreds and then.
EBITDA percentage on it.
There has been some compression at the EBITDA percentage line is that the gross margin line, but we will get baked in in terms of 20%.
EBITDA.
That kind of timeframe. There is the ways, we would think of it we're not putting out a strict guide as I said because of that.
How the next 5 years or 4 years.
For all themselves in terms of the mix is going to have a really big difference on that but we would be thinking in terms of some compression on the EBITDA percentage, but still a really strong really really strong.
Growth.
Net.
The EBITDA line as well.
Got it that's super helpful.
I appreciate you guys answering all the questions and congrats again.
Thanks, Thanks Ryan.
Thank you. Our next question follow up from Niihau, Chuck C with Northland capital.
Yep. Thank you.
Double click on the strong free cash flow here.
It looks like there were 2 main elements on the strong free cash flow 1 was that you had.
Good increase in accounts payable and then also a good increase in deferred revenue.
You discussed while you had nice sequential upticks in both of these.
Balance sheet items.
Yeah on the accounts payable side it was just being conservative on our payables down at the end.
There is a few things and of course, it'll that'll clean themselves up in the third quarter end.
And year end.
Like I said, we will put a little bit of pressure on those theres certain certain bills that.
Fit out there a little longer with different types of services people, you're working with and stuff. So.
That's why I said I wouldn't the $14.7 who has a really good number and we can continue to put up good cash flow numbers and operating cash flow numbers might not hit that number every quarter.
Yes, 1 thing given the holiday.
To remind you and you've been around long enough that the VIX annual billings that day.
Our good strong quarter.
In Q2, so that's the.
The deferred revenue does move a little more than the <unk>.
<unk>.
Remember, which but really consistent steady upward moving we do have some from timing of billings, obviously still with our annual contracts that contributed to the volatility and I'm really pleased with Dave and the whole team on the working capital management.
But payable we're at kind of a high watermark as Dave alluded to the other questions.
I think that longer term thinking about us is that 65% to 70% grower in terms of EBITDA to cash flow over time.
<unk> had quarters, where we've been off that in.
<unk> gotten pressure now we're way ahead of it but we do expect that to be more stable over time.
If I look at the days payables.
Relative to pre pandemic levels are still below that so do you think that you still have room for extending your days payables or.
Those are just different days.
Yes, those different days.
Okay Alright.
Alright.
And 2 other nitpicky things it looks like Youre guiding to a 2 million in Q2 increase in shares outstanding why is that.
It's how the balance works coming through it's all based on averages and so we.
We do our grants in the second.
Second quarter, mainly in the first quarter and last year. They are also came through in the second quarter. So it's just the timing of grants and how that works its way through so it just it was.
It was lower in Q1 and Q2 than we expected.
But they are it is pulling through on the average coming up in Q3 and Q4.
Got it Okay, and then your G&A did increase 4 million QQ and $1.1 million year over year, what's a narrative behind that.
Yes, a lot of it has to do with.
Expenses coming back up related to.
Q2 of last year, we really pulled back everything with COVID-19 hitting so.
Not a lot of travel that travel coming back in.
Variable compensation coming back in and Youll read or you can read our Q from R. K from last year proxy.
Variable compensation was.
And with the 60% range, we're accruing now towards.
A better number higher number so those are kinds of things that go into that number that pushed it up.
Great. Thank you very much and again, that's on a strong quarter.
Thanks Danielle.
And thank you and at this time. This concludes our Q&A session I would like to turn the call back to Mr. Wagner for his closing remarks.
Well I would just add thank you everybody for joining US early this morning and a pre.
<unk> market earnings release, we look forward to.
Meeting with you all again in about 90 days ago in November to talk through our Q3 results I. Thank you all and have a great day.
Thank you for joining us today for <unk> second quarter 2021 earnings Conference call you may now disconnect.
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John.
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