Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Zix Corp  (NASDAQ:ZIXI)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, and welcome to Zix Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Mario, and I will be your operator this afternoon.

Joining us for today's presentation are the company's President and CEO, David Wagner; CFO, David Rockvam; and Vice President of Marketing, Geoff Bibby. Following their remarks, we will open the call for your questions.

I would now 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. Sir, please proceed.

Geoff Bibby -- Vice President of Marketing

Thank you, Mario. Good afternoon, everyone, and thank you for joining our fourth quarter and full year 2018 earnings call. With me today are as Maiyo our CEO, Dave Wagner; and our CFO, Dave Rockvam.

After the market closed, we issued a press release announcing our results for the fourth quarter and full year ended December 31, 2018, a copy of which is available in the Investor Relations of our site 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 filing 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, 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 found in the investor relations section of the site.

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

David J. Wagner -- President and Chief Executive Officer

Thanks Geoff, and good afternoon and thank you everyone for joining us today. With revenue up 10% to a record $18.4 million and adjusted EBITDA up 14% to a record of $5.6 million or 30.2%. The fourth quarter of 2018 topped up another strong year for the company. Not only did we returned to double-digit revenue growth for the quarter, but we also delivered new first-year orders growth of more than 20% for the third quarter in a row. With roughly 55% of our new first-year orders in the quarter coming from existing customers, we continue to successfully cross sell into our installed base and increased our attach rate driven by the continued success of ZixProtect and ZixArchive, which made up more than 25% of our total new first-year orders for the fifth consecutive quarter.

In short, Q4 results exemplify the strategic focus and execution over the last couple of years. From the beginning, we knew that our customers are looking for a complete security bundle as they migrate to the cloud. They are looking to improve their security posture and consolidate with a vendor, who provides easy to use, highly effective solutions, backed by phenomenal customer care. As we assemble the right product offer and made enhancements to our platform, we've been able to drive stronger new first-year orders growth, increase our attach rates and accelerate the adoption of our cloud-based solutions.

Along the way, we remained true to our commitment to profitable growth, which continues to inform our growth strategy and continues to shape our journey to become one of the leading cloud-based email security providers. 2018 was an inflection point of that journey. The point at which we could see the formation of something special. Our growing success with ZixProtect and ZixArchive were the beginning. We leverage that success to further strengthen our archiving capabilities with the addition of Erado in April 2018. This f rther expanded our addressable market and began to transition from a company with a solid focus on email to one that is more broadly protecting all business communications.

We also made significant enhancements to our cloud platform putting our product in a better position to address the market trends and meet our customer's current and future needs. But it's not just a great product the May 2018 a really successful year for Zix. It was also the strong performance from both our sales teams and our channel partners that helped us reach record revenue, orders and annual recurring revenue.

During the year, we grew our sales team and empowered them with additional business development representatives, targeted account-based marketing and enhanced tools to support their growth. We expanded our MSP program added dozens of G suite resellers and we reduced our reliance on OEM partnerships in favor of partners more aligned with our cloud-based offerings.

As a result, our sales teams have been performing in a positive and consistent fashion. We could not be more pleased with their efforts across all customer sizes. In summary, 2018 with a major league forward for the company on all fronts. This start of 2019 is continuing that momentum, we came out of the gates strong with the acquisition of AppRiver last month. We significantly expanded our archiving capabilities beyond email to include nearly 50 additional channels, including social media business collaboration tools, text and video and we also enhanced the supervisory capabilities compliance-oriented buyers, further strengthening our value proposition and cross-selling opportunities.

Last week, we launched ZixSuite which is the cloud based business communication, security and compliance solution that combines advanced threat protection, business email continuity, email encryption, email DLP and unified archiving, all managed from a centralized interface. This launch is the combination of years of work across multiple locations and represents a major step forward for email security platform. It brings together three of the Company's industry leading solutions ZixProtect, ZixEncrypt and ZixArchive into a highly effective solution that integrates easily with our client, cloud, email environments.

All of these major steps have culminated into the successful alignment of our business to the cloud and a really strong foundation from which to build further. Along with AppRiver today we are a much stronger business that is in -- is even better positioned to help our customers. We're also business with more scale, with better cost synergies with more cross-selling opportunities and market tailwinds working steadily in our favor.

Now I'll turn the call over to our CFO, Dave Rockvam to provide more details on the financials for the quarter, Dave?

David E. Rockvam -- Vice President and Chief Financial Officer

Thank you, Dave, and good afternoon everyone. The Q4, was a success in many ways, including the fact that we achieved record revenue, record ACV or ARR a return to double-digit top line growth and new first-year orders growth of more than 20% for the third consecutive quarter. We also achieved total orders growth of 21% and as Dave alluded to earlier, our strong growth for the quarter combined with our disciplined cost management enabled us to achieve the highest level of adjusted EBITDA and adjusted EBITDA margin, since we, he and I joined Zix in 2016 which we are really proud of. Our record results coupled with driving a transformational acquisition in the first quarter of this year really speaks to the dedication of the ZIX team.

Turning now to our financial numbers in more detail. Our new first-year orders for the quarter increased 23% to $3.1 million compared to $2.5 million in the same quarter last year. The increase was due to the continued market adoption of our advanced threat protection, archiving and hosted email encryption offerings along with higher cross-selling activity. New first-year orders for ZixProtect and ZixArchive continued to make up more than 25% total new first-year orders demonstrating the growing demand from both our new and existing customers for the solutions.

You can see this balanced mix of sales to new versus existing customers more clearly from our new first order breakdown for 2018 were 45% came from new customers while 55% came from our installed base. Revenue for the fourth quarter increased 10% or record $18.4 million from $16.8 million in the same quarter last year. For the full-year revenue increased over 7% to a record $70.5 million from $65.7 million in 2017. Our 2018 revenue did include three quarters of Erado revenue. With $18.4 million and $17.5 million, we exceeded our revenue guidance for the quarter and year respectively.

Our adjusted gross profit for the quarter was $14.6 million or 79.3% of total revenue, which was an improvement on a dollar basis from $13.7 million or 81.4% of total revenue in the fourth quarter of 2017. Our adjusted gross profit margin percent for Q4 was down year-over-year. As a reminder, this is primarily due to Erado and the deferred haircut associated with the acquired subscription revenue as well as a slightly higher cost associated with archiving. Our adjusted R&D expenses for the fourth quarter of 2018 were $2.4 million or 13.1% of total revenue compared to $2.7 million or 16.2% of total revenue in the fourth quarter of last year.

The year-over-year decrease was primarily due to the capitalization of software associated with new features and functions added to our hosted platforms. In total, the software capitalization was about $1.5 million in 2018 and we'd expect a slightly higher number in 2019. Our adjusted selling and marketing expenses for the quarter were $4.9 million or 26.7% of total revenue compared to $4.5 million or 26.9% of total revenue in Q4 of last year.

The increase in selling and marketing expense was due to the expansion of our (ph) or lead qualification teams to support the company's growth, particularly with our advanced threat protection and archiving solutions. As I mentioned on previous calls, some of the increase in selling and marketing expenses has been offset by lower commission expenses as a result of our implementation of ASC 606 in 2018.

For the fourth quarter of 2018, our adjusted general and administrative expenses were $2.6 million or 14% of total revenue, compared to $2.3 million or 13.6% of total revenue reported in Q4 of last year.

On a GAAP basis, we reported net income of $9.2 million or $0.17 per fully diluted share, compared to a loss of $12.9 million or $0.24 per fully diluted share in Q4 of last year. The large increase was due to our expanding profitability, which allowed us to capture the value of an additional $7.8 million of our NOLs or net loss carry forward.

For the full year, net income improved to $15.4 million or $0.29 and per fully diluted share, compared to a loss of $8.1 million or $0.15 per fully diluted share in 2017. As a reminder, the loss of $12.9 million in Q4, 2017 was largely a result of a one-time non-cash charge of $12.5 million due to the U.S. tax change. Our fourth quarter non-GAAP adjusted net income, excluding deferred tax was $4.6 million or $0.09 per fully diluted share, $0.09 per share matched our guidance for the quarter and represents a slight improvement over the amount we reported in Q4 last year.

For the full year, non-GAAP adjusted net income excluding deferred tax, was a record $17.5 million or $0.33 per fully diluted share. $0.33 per share matched our guidance for 2018 and represents an improvement in $0.035 over the amount we reported in 2017. And finally, our adjusted EBITDA for Q4, 2018 totaled a record $5.6 million, an increase of 14% compared to the $4.9 million we reported in Q4 of last year.

As a percentage of total revenue, adjusted EBITDA for Q4, 2018 increased to 30.2% from 29% we reported in Q4 of last year. We are pleased to achieve 30% adjusted EBITDA, which was the guidance we gave following the Erado acquisition. Cash flow from operations for the fourth quarter of 2018 was up 16% to $4.9 million. At the end of Q4, we had $27.1 million in cash. CapEx and other intangibles for the quarter were $1.8 million, which consisted primarily of normal business capital purchases, internal software development projects and capitalized R&D.

For the full year 2019, we forecast our CapEx and other intangibles will be between $5 million and $6 million. This range takes into account the investments to modernize our business systems, integrate our acquisitions and enhance our multi-tenant cloud platform. We also expect approximately $4 million of depreciation and amortization in 2019. Our backlog, which represents the dollar value of committed contracts was $73 million as of December 31st, 2018, which was up slightly from $72.6 million as of the same date last year. At the end of the fourth quarter our ACV, or Annual Contract Value totaled a record $75.8 million, up 13% from Q4 last year.

If you remember from our AppRiver acquisition call in January, we referred ACV, that there are our annual recurring revenue, because it is more consistent with how the rest of our industry uses this metric. We will be using ARR instead of ACV going forward. Now, for our first quarter and full year 2019 financial guidance. We currently anticipate revenue for the first quarter to range between $26.5 million and $27.5 million. We are also forecasting fully diluted GAAP earnings per share to be between a loss of $0.04 and a loss of $0.01 and fully diluted non-GAAP adjusted earnings per share excluding deferred tax expenses between $0.03 and $0.04.

The financial outlook includes approximately one month of AppRiver financial results consolidated into Zix's and also includes a required GAAP adjustment on the deferred revenue acquired from AppRiver for purchased revenue accounting. These results will be slightly dilutive to quarterly non-GAAP adjusted net income on a year-over-year basis for the first quarter. And we forecast the acquisition to be accretive on a non-GAAP adjusted basis starting in Q2, 2019.

For the full year 2019, we expect revenue to range between $164 million and $167 million, which represents an increase of between 132% and 137% compared to revenue in fiscal 2018. On a pro forma organic basis, this would be 10% growth for Zix Corp product offering. We are also forecasting our fully diluted GAAP earnings per share to be between a loss of $0.12 and a loss of $0.01 and our fully diluted non-GAAP adjusted earnings per share excluding deferred tax expense to be between $0.30 and $0.33 for fiscal 2019.

Due to the increased share account, EPS is down to flat for the full year. However, we would expect EPS to be accretive to shareholders in the second half of 2019 compared to the second half of 2018. On a pure dollar basis, we are forecasting growth of over 20% on non-GAAP adjusted net income, excluding deferred tax benefit. This financial outlook includes approximately 10 months of AppRiver financial results consolidated into Zix and also includes or a required GAAP adjustment on the deferred revenue acquired from AppRiver for purchased revenue accounting.

Our earnings per share, both on a GAAP and non-GAAP adjusted basis included the addition of approximately 16.6 million shares associated with the $100 million investment by True Wind Capital. Also, reiterating our comments from our conference call in January 15, we are targeting annual recurring revenue of approximately $200 million to $270 million at fiscal 2019 year end, representing a growth rate of approximately 11% to 15% year-over-year.

We are also expecting revenue of approximately $47 million to $50 million with a 24% adjusted EBITDA margin in the fourth quarter of 2019. Also, we have identified and executed all $8 million of our cost savings initiatives, well ahead of the previously stated 12 to 18 months we stated earlier, these initiatives are now all complete and as a result we should see the full impact of those savings in the third quarter of 2019.

Before I wrap up my prepared remarks, I wanted to note that we now have a new slide in our investor presentation that outlines our long-term financial model. We are providing this long-term model to give investors a better sense of our significant growth opportunity after this transformational acquisition. In this model, which can be found on the Investor presentation page on our IR site,. We are targeting the following financial objectives over the course of the next three to five years. ARR of $275 million to $350 million gross margins of 60% to 65% and adjusted EBITDA margins of 27% to 30%.

The full model can be found on that slide in the presentation, i just mentioned. But I wanted to quickly provide some commentary around these targets. As we've communicated before, with the acquisition of AppRiver, we have not only significantly scale the business, but are now in a much stronger position to drive higher growth through our expanded product suite, go to market channels and cross-selling opportunities. We believe this wall enable us to achieve the $275 million to $350 million of ARR, i just mentioned. With respect to gross margins, you'll notice that they are at the lower level than Zix's pre-operator stand-alone business. This is largely a result of the third party reseller products which despite their lower margin, provide us with significant lead generation capabilities.

It is these lead generation capability that we will be leveraging to scale our growth ARR and margins, while at the same time, reaping the cost synergies of the acquisition and making further enhancements to our platform to drive strong adjusted EBITDA margins. So in essence, our model reflects the strategy we have in front of us to significantly increase our ARR within five years, while bringing back up, our adjusted EBITDA margins near the range they were in 2018, only at that time it will be up a much higher volume and scale and Zix's could realistically ever achieved the loan. As Dave will elaborate on further, that is the opportunity we have to we have significantly drive higher returns for shareholders. And one last financial comment is regarding the debt that we have taken on to acquire AppRiver,. As we have disclosed earlier, we have taken out $175 million term loan. Our Q4 guidance on adjusted EBITDA would give us roughly $46.5 million annualized value, which would put our adjusted EBITDA to debt leverage at 3.75 times. This is the level we and our banks are very comfortable with and with our ability to pay down the loan coupled with growth in our long-term model, we can deliver further deleveraging in the future.

In fact, the adjusted EBITDA generated from the long-term model, coupled with our net loss carry forwards and the step up in valuation, that we're getting with AppRiver with the AppRiver asset. We could be in a position to pay down all the $175 million of debt prior to the five year loan payback horizons.

Now, we're not saying that is exactly what we would do with the strong cash flow generation. But our new capital structure gives us a lot of options that we will as we go and will do that with an eye to creating further shareholder value. Overall, our results for the quarter and the full year, demonstrate that the strategy we laid out three years ago to drive strong results strong returns for shareholders is really starting to bear fruit. Both our hosted and bundled offerings have performed exceptionally well and are demonstrating that we can be successful in a regular competitive basis, whether it's winning new customers or cross-selling to an existing one.

With the recent transformational acquisition of AppRiver, we look to extend this success in a more impactful way by capitalizing on our new balance scale, cost synergies, expanded customer base and complementary solutions. Altogether, this should help us achieved the significant operating leverage illustrated by our long-term financial model, which calls for a much stronger growth and profitability within the next three to five years.

This completes my financial summary, for a more detailed analysis of our financial results, please refer to our Form 10-K, which we plan to file by March 12. Dave?

David J. Wagner -- President and Chief Executive Officer

Thanks for the financial overview, Dave. I'll now review our progress, as it relates to our three main growth drivers and update you on some of our new product capabilities as well as where we are with the AppRiver integration, before we open the call up for questions. As a reminder, our three growth drivers are, one new customer acquisition, two sales to existing customers and three, increasing retention. Our first growth driver is new orders to new customers. As I mentioned earlier in the call, we're seeing a strong uptake of our new solutions by new customers. Three of our top five new customer wins in Q4 included ZixProtect. Two of the top five were for the bundle then includes advanced threat protection and email encryption, while the other one was for our advanced threat protection alone.

We won new customers by displacing key competitors like Barracuda, McAfee and Microsoft. In fact in all five of our top five new customer wins, we displace competitors. Customers are recognizing the strength and versatility of our offerings as well as our superior customer service. The results we achieved over the past several quarters demonstrates that we have successfully positioned Zix to better respond to our customers' growing needs. And we have situated ourselves right at the heart of one of the most powerful secular trends in our industry, no migration of email to the cloud.

Our largest new customer win for the quarter within the financial services vertical. This title insurance customer was looking for superior email encryption service that could easily and effectively protect their business communications through completely hosted environment with responsive customer service. This customer like many of our new customers were using Microsoft Office encryption opportunistically. As our growth accelerated they wanted to use encryption to meaningfully improve their security posture. They selected -- as the best-in-class encryption vendor. They recognize the importance of ease of use, as the primary driver in an enterprise rollout and they valued the high quality of our email DLP filtering.

They will be using our cloud service and will have rolled out Zix encrypt to 31 different domains in under 60 days. They will eventually roll out more than 25,000 mailboxes across more than 200 domaind, this was a meaningful new win for us. Looking at our total new first-year orders, during the quarter by distribution channel, 55% came from our direct sales efforts.39% VARs and MSPs and 6% from web sales and other. Our progress in 2018 to develop our channel program is encouraging, although still in the early days, monthly recurring revenue from our new MSP Program more than doubled from September to December.

And we're up 30 transacting cloud-based MSP partners. Equally exciting our new MSP partners in aggregate have sold as many seats of ZixProtect and ZixArchive as they have of that's encrypted. With an aggregate attach rate of approximately 75% and 25% respectively. With the acquisition of AppRiver, we have the opportunity to expand on that progress in an even more meaningful way. With respect to our success, internationally, Q4 was our best international quarter ever. Going forward we will be shifting our international strategy to an MSP first approach built on AppRiver's nautical platform.

Now let's take a closer look at our second growth driver which is sales to existing customers. Looking at our add-on sales for the fourth quarter similar tape to the third quarter, four of our top five add-ons were in the healthcare vertical with the fifth being in Government. All five increased the email encryption ARR, well to also added ZixProtect. So in addition to the success we're having selling ZixProtect we're also continuing to see existing account increased their ZixEncrypt fees.

Competitively as with our new customer wins for the quarter, we displaced or complemented vendors like Microsoft with ZixProtect demonstrating our view and Gartner's view that a significant majority of customers believe that having just Microsoft alone is not enough to fully protect a company's business communications. As I mentioned, 55% of our new first-year orders during the quarter came from our installed base, demonstrating the growing propensity of our customers to attach additional solutions. Our aggregate attach rate for advanced threat protection is now over 15%, which was our 2022 target when we first rolled out ZixProtect in Q2, 2017.

Clearly, we're ahead of plan with our with our green data acquisition, which bodes well for the future. For Zix Archive, the attach rate is about 2%, but it's still in the very early days for that solution, with the recent enhancement of Zix Archive to include unified archiving, as well as advanced eDiscovery capabilities, we expect attach rates for this solution to grow nicely in 2019. As we continue to increase our attach rates and migrate more of our customers to our hosted offerings, we'll be able to drive stronger retention as well, which brings me to our third growth driver retention. Retention for the full year was just under our target of 90%. As expected, the final $1 million of excess churn we talked about in 2017 finally, rolled off in Q4, 2018, which is what drew the rate slightly below our 90% target. With the excess churn behind us, we now have greater visibility and confidence that we will increase our retention rate from here.

We're continuing to experience great success of our customers cloud migration efforts, growing 44% in 2018. It's important to note that 53% of our ACV in Q4 coming from customers with 100% of their solution in our cloud. This compares to less than 25%, when Dave and I joined the organization in 2016. So, it's evident that we've made tremendous strides in growing our cloud platform. We started 2018 with roughly 800 on-prem hardware customers and reduce that number to 580 at the end of the year. Approximately 62% of the 220 customer decrease were transitioned to another Zix platform, in 2016 we migrated 14 customers, in 2018 we made 137 such migrations, driving home the back that our cloud platform is where we're seeing the most success, growth and best retention.

As we work closely with our customers, we still have a significant number of customers we plan to remain on-prem for the foreseeable future. In those instances, we've been very successful securing longer term renewals. As I mentioned on our last call, 25 -- of our top 25 on-pre hardware customers, 24 has already renewed agreements for an extended time of more than 12 months. This will help us drive higher retention rates in 2019. It's worth noting that our on-prem hardware customers now account for only 15% of our total pre AppRiver ARR. Based on our conversations with the on-prem customers and the propensity to renew for three year terms, we think we're close to the bottom of this transition for the intermediate future, and in fact our on-prem ARR could rise a bit in 2019 as we migrate some ZZT (ph) customers to ZixEncrypt EMS and as we execute on the pipeline for that product.

Now that talked about our progress as it relates to our three growth areas. I'll spend some time talking about where we are with the integration of AppRiver, before we open the call up for questions. As we outlined on our January 15th call, we are really excited about the value creation opportunities ahead, as we execute on the integration of the two companies. The combined company has significant scale with approximately $181 million of ARR year end, accelerated growth opportunities led by email box, migration to the cloud, meaningfully expanded channel opportunity with more than 4,500 MSP partners and Rich cross-selling opportunities across our installed base of more than 80,000 customers.

The founders of AppRiver Mike Murdoch, Joel smith and Scott Cutler will be transitioning out of the business over the next 30 days. And I would like to thank them for what they have built over the past 18 years. They began with our cloud-based email security product and a deep commitment to providing a nominal customer care of your partners. Through the years that business develop to include hosted exchange to which they have a 100% attach rate of advanced email security and more recently they have developed a large Office 365 practice as one of the first two tier distributors, and now the second largest provider of Microsoft modern workplace solutions.

The transaction closed just six business days ago on February 20th, and our combined team was able to collaborate to identify and implement all $8 million of cost reductions. The cost reductions came through one approximately $2 million per year of executive compensation and expenses; two, approximately $2 million of third party cost synergies redundant expenses like PR firms, advertising firms, legal fees, accounting and other. Third and finally approximately $4 million of headcount reductions as a result of approximately 40 employee separations. The employee separation are balanced across Zix and AppRiver and the redundancies were pretty evenly spread across P&L lines.

As difficult as headcount reductions are I am pleased that all on the staff reductions and position, eliminations necessary to deliver the $8 million of cost savings have been completed. Executing these changes by day one will allow the teams began collaborating right away. In addition to delivering the cost synergies, we have four priorities for 2019. First and foremost, we will be bringing the companies together to form one integrated cloud-based email security company. This means that we will work together to unify our vision purpose and core values and we work closely with our partners, customers and employees to update our brand frameworks and identities.

We will work intentionally to integrate marketing, G&A, product management and development during 2019. The customer facing sales and support organizations will remain largely unchanged, as we want to minimize any potential disruption to partners and customers. Because the go-to-market motions are so complementary, we expect these organizations to continue to identify with our existing brands for the foreseeable future.

Second, we will aggressively pursue cross-selling opportunities. We expect to be in a position to sell secure Office 365 and secure hosted exchange to the Zix customer base by early Q2. We further expect to begin selling ZixEncrypt and ZixArchive to the AppRiver MSP partners by early Q3.

Third, we will be continuing our focus on channel development and channel acceleration by actively engaging our partners in the meaningful cross-selling opportunity. We believe that our channel partners will be the biggest beneficiaries of the combination of Zix and AppRiver. Forward, as I mentioned, we have already integrated the product management, software development and operations organizations. They are collaborating extensively already this week. So that we can aggressively focused on and deliver the light integration of ZixEncrypt and ZixArchive to enable seamless provisioning from the Nautica (ph) platform. They will then move on to more meaningful integration, as we build an integrated product roadmap together. They will focus on integrating the best aspects of our respective platforms and threat protection services to drive accelerated customer value and further cost savings that can be reinvested on our growth are delivered to the bottom line.

I had the opportunity last week, post closing to me with a couple dozen of AppRivers top MSP partners at our regional partner conference. Our third party survey conducting during diligence indicated that 39% of AppRiver's customers had a high likelihood the purchase and enhanced compliance bundle within the next two years. My one-on-one time with these key partner leaders to reinforce this study data that our MSP partners represent a strong cross-sell opportunity. They love their relationship with AppRiver, and they want to purchase more solutions from them. They are particularly enthusiastic about email DLP and encryption.

As I listen to them their customer acquisition process begins with their core competency, along with a strong local presence that add meaningful value to our customer relationships. They nearly always provide email services for their customers making AppRiver, an important component of most of their relationships. All of the partners, I spoke with and looking for opportunities to better protect their clients to differentiate their service from (inaudible) Office 365 and to increase their margins. So there is a very tight strategic alignment with how they want to grow their businesses and how we are evolving Zix and AppRiver.

Moving to the legacy Zix customer base, a similar third party survey of Zix customers indicated that about 30% of the Zix customers have a high likelihood the purchase either secure Office 365 or secure hosted exchange from Zix in the next two years. We already have Zix partners contacting us about Office 365 further evidencing the cross-sell opportunity had for us. So in conclusion, 2018 was a milestone year for the company. We returned to double-digit revenue growth. We increased our attach rates. And we achieved record adjusted EBITDA. We also reaccelerated our new first-year orders growth of 20% underpinned by strong cross-selling of ZixProtect and ZixArchive, which represented over 25% of our new orders.

Meaningfully, we accomplished these to be not only by broadening our product portfolio, but also by enhancing our go-to-market capabilities, which provides us a solid foundation to build upon for our future. As we look ahead to 2019, we'll continued cross-sell products and add additional capabilities that our customers need. Our sales team prepared intensely to get ready for 2019, and we are after a strong start. We expect the positive company and market dynamics that have driven our business to continue.

We will build on this progress by fully integrating AppRiver and investing further in our cloud-based platform, leveraging our expanded customer base through significant cross-selling opportunities and accelerating the momentum of our full suite of solutions to become the leading provider for protecting all business communications. We're excited to execute the opportunities ahead of us in order to accelerate our growth, enhance our profitability, achieve our three to five year vision, and drive value for our shareholders.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Mike Malouf from Craig-Hallum Capital. Your line is now open.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Great. Thanks and congratulations on the AppRiver closing you guys are certainly got a lot of bright stuff ahead of you I think one of the things that I wanted to explore though, is if you could just tell then a little bit into the model of that forever. It looks like obviously gross margins are coming down because of the channel, but maybe you can just give us a little bit of color with regards to the gross margins. And then particular on the R&D side looks pretty low relative to where you're at. And just some commentary on the model would be helpful? Thanks.

David J. Wagner -- President and Chief Executive Officer

Yes. Got it, thanks. Thanks, Mike, and thanks for the kind words. As we look at the model going forward for AppRiver. So, yes, there gross margins are, as we talked about lower then Zix as we start to build out the model going forward. We, as Dave said there's opportunity as we start to put any of really proprietary technology and the encryption and the email archiving side. So there's opportunity there for us, which is good. Going forward, this move to Office 365 continues to move quickly. So I think our guidance really reflects that we expect to have continued success there and then adding on kind of each dollar we were selling of an Office 365 or hosted exchange offering, we want to be able to add on a dollar of proprietary technology at the higher margin to get that blend on the gross margin side. When you look across the R&D side, it is. Yes, a little bit lower than ours, they really invest strongly in the nautical platform and in there, advanced threat protection is where they've been investing strongly.

So that's one place where we have some leverage in the model there, especially as we move down the road and bring together our advanced threat protection and bring together our platforms and as Dave said on the call we can we will we able to reinvest that for future growth or they'll be, could be some potential for opportunity to have further savings there. So we do you expect R&D to be to continue on their side to be a little bit lower and you can see that blends with our model to get us more coming out of the year more at this 9% to 10% overall company margin on R&D.

On selling and marketing with their 70 plus percent coming through channel much lower cost of sales on selling and marketing. So that's kind of when you see that blend coming in there and then of course just G&A synergies of the two companies bring that down in line. So with the gross margins forecasted Q4 projects in Q4 in the model of 61% to 62%, the operating expense synergies that we get across that enables us to get to that 24% at the end of the year.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Got it. That's really helpful. And then, if I could just keep going on that same slide, when you look out at the long-term model of 275 to 350 ARR? When you sort of sit back and say, OK, this is what we need to reach the upper end or conversely this is probably the headwind we would face if we were only reaching the lower. Can you talk a little bit about, just those two scenarios?

David J. Wagner -- President and Chief Executive Officer

Well, yes, the higher end reflects the opportunity we see to really meaningfully engage in the cross-sell opportunity and to further tie on Dave's response to your question. And my response to this one, what we're seeing in the market of these MSP providers being the first line for many, many medium and small businesses, their outsourcing their IT services and those providers are moving to cloud based email security providers and we see a very strong complement in the business model win-win for the end customer, the partners and us where they're able to provide where we are able to provide the Office 365 mailbox attached to that mailbox differentiated 100% margin, higher value IP that also provides the MSP reseller with higher overall margin. So that if we get that the high end, if we get that business model, working with our partners, we'll be in really strong shape and at the lower end, it would reflect continuing the businesses like the combined growth rates we were experiencing in the past.

Mike Malouf -- Craig-Hallum Capital -- Analyst

Okay. Great. Thanks a lot for the color and good luck.

David J. Wagner -- President and Chief Executive Officer

Thanks, Mike.

Operator

Our next question comes from Zack Turcotte from Dougherty. Your line is now open.

Zack Turcotte -- Dougherty -- Analyst

Thanks, Zack on for Catherine Trebnick. So you talked to quite a bit about the integrations with AppRiver through the end the call there and I just wanted to see if any more detail on sort of the impact. The acquisition is going to have on your go-to-market in general, specifically in relation to the partners. You had said at the time of the acquisition you expect the Zix suite to be integrated with an Oracle cloud platforms -- what's the timeline on that and in general on selling the bundles Zix suite plus the AppRiver hosted exchange in Office 365 offerings?

David J. Wagner -- President and Chief Executive Officer

Great. So as I turn the call, we really received the go-to-market motions to be highly complementary as proud as we are on the Zix side of the Zix HSP we launched last April on the 100% MRR growth from September to December. We have 30 transacting partners as compared to 4,500 transacting partners on the AppRiver side so integrating the MSP go-to-market into one program. There's a little work to do, but it's 30, so -- and so we would expect the existing Zix go-to-market motion to continue, unabated, working to engage our, VAR partners and MSP partners as appropriate based on end customer demand.

And similarly with that lack of overlap. We expect the I mean, 45,130 MSP partners that will be riding on the AppRiver platforming plan. We expect them to be able to continue our very effectively. What then will drive cross synergies and specific dates, as I said, we expect in early Q2 to be enabling the Zix go-to-market, sales force that have secure Office 365 and secure hosted exchange as skews and part numbers, that can be ordered and deployed through partners to be able to access that cross-selling opportunity. And then more specifically we will be integrating ZixEncrypt and ZixArchive into nautical where the existing advanced threat protection on an nautical

platform will remain intact. So that beginning in early Q3, MSP partners and AppRiver will be able to access the Zix encryption offer as well as the ZixArchiving offer.

Zack Turcotte -- Dougherty -- Analyst

Okay. Perfect. And then one more, actually starting with the acquisition for a second, with the enhancements to Zix archive that you announced in the quarter just what's the initial reaction been like from customers or additional demand from customers or new customers for the unified archiving solutions?

David J. Wagner -- President and Chief Executive Officer

Yes, it's really positive customer response to that new product it's 100% cloud-based solution with really broad channel support and really strong supervisory capabilities. So we're getting a good uptake. We already had a couple of sales since the launch that archiving attach takes longer because the customer migrate the data is a project and so customers don't updates their archive as often for example, as they relocate their advanced threat protection solution, but we are very pleased and excited about the additional tasks will get this year with the enhanced ZixArchive.

Zack Turcotte -- Dougherty -- Analyst

All right. Thanks guys.

David J. Wagner -- President and Chief Executive Officer

Thanks.

Operator

(Operator Instructions) Our next question comes from Tim Klasell from Northland Securities. Your line is now open.

Tim Klasell -- Northland Securities -- Analyst

Hi guys, congrats on the quarter. And then I just have some of my questions are around sort of the model as well. First for Q4 you've laid out obviously ARR and your gross margins. Just wanted to get a feel for what sort of revenue synergies and gross margin synergies you see particularly on the AppRiver side. Will that include them doing some cross-selling and will there be any products or gross margin improvements on their side by embedding some of the AppRiver technologies excuse me the -- the Zix technologies into the AppRiver offerings. Thank you.

David J. Wagner -- President and Chief Executive Officer

Yeah, so -- at a high level, at the low end of the guidance would reflect continuing organic growth which is strong in both businesses that continuing and then the higher end of the range begins to represent additional cross-selling opportunities. So depending along we have paid to get us to meet these expected dates of early Q2 and early Q3 respectively to introduce the products. We will have, of course, subscription revenue, which takes a little time to wind into the model fully, but at the high end would represent pretty nice success in getting that cross selling going in beginning in that Q3, Q2 and then Q3 with the AppRiver side.

Tim Klasell -- Northland Securities -- Analyst

Okay. Great. And then...

David E. Rockvam -- Vice President and Chief Financial Officer

Well, I takes that (ph)-- subscription model once it gets going. Right. We've baked in a little bit more on the higher side of the model for orders with that kind of starting in late Q2 into Q3, but the subscription revenue taking time to come through Q4 before, maybe a little bit of meaningful uplift on the overall number. But taking that into Q1 of next year, as where we start to see the -- probably feel impact.

Tim Klasell -- Northland Securities -- Analyst

Okay. Great. And then on the MSP side -- as you begin to sort of maybe migrate particularly like you mentioned on the archiving side. Will the MSP be doing that themselves if they're migrating off to somebody else's archiving solution, generally speaking, how long will that takes -- I'm assuming there'd be a little bit of a lag effect before the bookings turn into revenues. Can you help us understand that process a little bit?

David J. Wagner -- President and Chief Executive Officer

Yes, so well, we're seeing so far is MSPs putting archiving on new mailboxes, we've been doing migrations in the the VAR and direct channel, but the MSPs are focusing on new mailboxes announced what we would expect going forward, across both platforms that the Zix archive beginning in as I said Q3 will be the preferred offer for new customers -- of nautical, but that existing customers -- well, you make there is migration decisions over a longer period of time.

Tim Klasell -- Northland Securities -- Analyst

Okay. Great. Great. And then one final one, you mentioned that the $8 million in cost synergies you pretty much got those nailed down. Do you think that $8 million may prove to be a little bit conservative or maybe give us a little bit of color around, how we were able to do it so quickly and maybe where there's other opportunity? Thank you.

David J. Wagner -- President and Chief Executive Officer

Yeah I would attribute densification, execution of those cost savings on a strong collaborative culture between the leadership teams. And it's always really hard work to do that, but to be able to do that. On day one or by day one of closing, I'm really proud of the team, the leadership teams on both sides to be able to do that. Never happens without any impact, but again I think the professional management, we're able to identify the redundancies and professionally do that so that portion itself had turned the script in a really strong position to begin collaborating and things that we do positively together forward. I think are going to drive customer value acceleration of all going to work to -- the focus on the revenue synergy side and additional growth and then we'll -- as we always do in our profitable growth model we will look at reinvestment in highest growth opportunities and,or bringing in some of those future opportunities line month-by-month, quarter-by-quarters we move ahead.

Tim Klasell -- Northland Securities -- Analyst

Thank you. Sounds good. Thank you very much.

Operator

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

David J. Wagner -- President and Chief Executive Officer

I just like to thank everybody again for your time and for joining us today we look forward to speaking with you again in April.

Operator

Thank you for joining us today for Zix fourth quarter and full year 2018 earnings call. You may now disconnect.

Duration: 60 minutes

Call participants:

Geoff Bibby -- Vice President of Marketing

David J. Wagner -- President and Chief Executive Officer

David E. Rockvam -- Vice President and Chief Financial Officer

Mike Malouf -- Craig-Hallum Capital -- Analyst

Zack Turcotte -- Dougherty -- Analyst

Tim Klasell -- Northland Securities -- Analyst

More ZIXI analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.