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Zix Corp (ZIXI)
Q1Â 2020 Earnings Call
May 6, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, and welcome to Zix First Quarter 2020 Earnings Conference Call. My name is Sarah and I will be your operator today. 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. [Operator Instructions]
Now I would like to turn the call over to Geoff Bibby. Sir, please proceed.
Geoff Bibby -- Vice President, Marketing
Thank you, operator. Good afternoon, everyone, and thank you for joining our first quarter 2020 earnings conference call. On the call today we have our CEO, Dave Wagner and our CFO, Dave Rockvam. After the market closed today, we issued a press release announcing our results for the first quarter ended March 31, 2020, a copy of which is available in the Investor Relations section of our website at www.zix.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 factor section of our most recent Form 10-K and 10-Q filings with the SEC, including the 10-Q we expect to file on May 11, 2020, provide examples of those risks.
As more fully described in our quarterly report on Form 10-Q for the quarter ended March 31, 2020, the company has been actively monitoring the COVID-19 situation as impact on both the company and the world in which we operate. The impact of COVID-19 and unprecedented measures to prevent its spread are affecting our business in various ways such as causing volatility in demand for our products, changes in customer behavior, including their spending and payment patterns, disruptions in the operations of our third-party suppliers and business partners and limitations on our employees' ability to work and travel.
We expect the ultimate significance of the impact on our financial and operational results will be dictated by the length of time that these circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and the governmental and public actions taken in response. These factors will also make it more challenging for management to estimate the future performance of our business, particularly over the near-term.
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 be found in the Investor Relations section of our website.
Now with that, I'd like to turn the call over to Dave Wagner for his opening remarks. Dave?
David Wagner -- President & Chief Executive Officer
Thanks, Geoff. Good afternoon, and thank you everyone for joining us today. What an extraordinary time we are living through. The COVID crisis requires remarkable efforts from people, communities, organizations and governments to safeguard our health and safety, and it is impacting people all over the world. Our thoughts go out to all those affected and our sincere appreciation to all frontline workers from all sectors of the economy and especially our healthcare workers, many of whom are also our customers.
As many more workers are now working remotely, Zix and AppRiver operate way for companies to establish a secure modern workplace online. The demands of remote work require businesses to digitally transfer even more sensitive information both through email as well as a plethora of new channels. It's an even more challenging world for information technology teams, and malicious actors are seizing on the opportunity. We provide tools to make our customers more productive by making them more secure and by safeguarding their sensitive information.
We've spent a lot of time over the last several weeks executing plans that allowed our business to continue, while also ensuring employees' safety. Fortunately, our business continuity plans and IT infrastructure were effective and flexible and allowed us to continue helping our customers and partners meet the challenges of today's remote work environment.
Zix was founded on the ideal of enabling people to communicate securely. For years, our customers and partners have trusted us to manage the most sensitive information and communications. We are honored to have earned this trust and are working to pay it forward. In addition to supporting our customers with our industry-leading solutions and phenomenal care, we made several complimentary educational resources and security tools available to new and existing customers.
As one of North America's leading providers of productivity and security solutions, we have a unique ability to share best practices and help organizations weather this storm. For instance, our solutions are supporting remote telemedicine and remote mental health visits. And our secure network transmitted some of the earliest COVID test data from labs, hospitals in the New York Metro area.
The journey toward digital transformation and cloud migration requires time, energy, resources and expertise. The pandemic has exacerbated IT issues around security, compliance and productivity as the world shifts to a primarily remote workforce. Gartner recently noted that the viruses' appearance sped up the cycle and workplace modernization by at least seven years, leading many businesses unsure of where to begin when it comes to balancing security with productivity. This is where we come in.
The resources businesses need to be effective in this environment are precisely the ones that Zix, AppRiver, together with our partners provide. The Zix and AppRiver teams have worked tirelessly over the last year to integrate the two companies and our respective solutions to help businesses achieve their vision of a secure modern workplace. On April 15, we successfully launched Secure Cloud, which is the culmination of our integration efforts, delivering a new Secure Modern Workplace platform to empower our customers and partners to deliver business value in the digital workplace.
As I mentioned a moment ago, we are focused on employee safety and our team is delivering on our value proposition to partners and customers like never before. I am incredibly impressed by our team's resilience and productivity in these uncertain times. Our stable financial performance and uninterrupted operational execution in the first quarter is a testament to their commitment.
However, we do recognize that we are not immune from the ongoing uncertainty caused by COVID-19 and its effect on business and the economy. In April, we implemented a cost savings plan to reduce our non-GAAP operating expense forecast by approximately $6 million in 2020 compared to our pre-COVID forecast and $9 million on an annualized basis. The goal of our cost reduction program is to maintain our market momentum, while also increasing our margin to deal with the potential economic impact of COVID on some of our partners and customers.
These actions are largely complete and strike a balance between temporary expense reductions on travel, marketing, executive pay and deferred salary increases with structural changes like early retirement, terminations and data center cost savings. To be clear, we are confident in our business and remain committed to our long-term strategy. However, we believe that these actions are prudent in the face of the uncertainty in the current economic outlook. The leadership team and I have navigated through turbulent markets and recessionary times before. We believe Zix will emerge even stronger.
Now I turn the call over to our CFO, Dave Rockvam to provide details on the financials for the quarter before I will return to discuss Q1 and our growth drivers in more detail. Dave?
Dave Rockvam -- Vice President & Chief Financial Officer
Thank you, Dave, and good afternoon, everyone. At a high level, we delivered on our revenue and EPS guidance for the quarter, demonstrating the resiliency of our business model and our commitment to reliably delivering profitable adjusted EBITDA growth on an absolute basis.
Now let's talk about the numbers in more detail. At the end of the first quarter, our ARR totaled $214.3 million, up 15% organically from Q1 of last year. On a combined company basis, cloud-based ARR now comprises 83% of total ARR, an increase of 24% from Q1 of last year. New customers totaled over 5,200 and were up 21% from last year, representing the highest level we achieved as a combined company.
For the first quarter, we had just over 100% 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. Our strong gross dollar retention of over 90%, growth in new customers and continued success in cross-selling drove yet another quarter of record ARR.
Revenue for the first quarter increased 79% to $52.4 million from $29.3 million in the same quarter last year. The $52.4 million of revenue was at the midpoint of our guidance range and reflects 15% organic growth across Zix and AppRiver. Our adjusted gross profit for the quarter was $29.2 million or 55.7% of total revenue, which was an improvement on a dollar basis from $18.2 million or 64.8% of total revenue in the first quarter of last year. As expected, our adjusted gross profit margin percent for Q1 was down from the prior and year ago period.
Those of you that have been following our story know that this compression is largely due to our increased sales associated with Microsoft productivity suite, which carried lower margins and sales of our proprietary solutions. We believe the migration of mailboxes to the cloud provides us with a highly effective, low cost, lead generation source for our higher margin security portfolio. As such, we are focused on growing gross margin dollars from both our high margin security solutions as well as our Office 365 distribution. We believe this mix will provide ample flow through to the bottom line to meet our EBITDA dollar growth goals.
Our adjusted R&D expenses for the first quarter of 2020 were $4.9 million or 9.3% of total revenue compared to $3.5 million or 11.8% of total revenue in Q1 of last year. The year-over-year dollar increase for the quarter was primarily due to the inclusion of AppRiver in our results. Our adjusted selling and marketing expenses for the quarter were $10.6 million or 20.3% of total revenue compared to $7.5 million or 25.5% of total revenue in Q1 of last year.
This lower percent of revenue in selling and marketing shows our lower cost of customer acquisition from our high velocity sales model and the success we are having in winning new customers and wallet share gains from our nearly 4,400 MSP partners. Proof of this was our record low CAC, cost to acquire customers in the quarter of just $2,000 per customer. That combined with strong new customer wins and solid retention, positions us well to deliver on our high velocity, lower cost sales model.
For the first quarter of 2020, our adjusted general and administrative expenses were $4.6 million or 8.7% of total revenue compared to $3.2 million or 10.8% of total revenue reported in Q1 of last year. On a GAAP basis, we recorded a net loss attributable to common shareholders of $3.1 million or a loss of $0.06 per fully diluted share. This compares to net loss attributable to common shareholders of $8.7 million or a loss of $0.17 per fully diluted share in Q1 of last year.
Our first quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $6.7 million or $0.12 per fully diluted share, which was inline with our guidance. This compares to $3.8 million or $0.07 per fully diluted share that we reported in Q1 of last year. And finally, our adjusted EBITDA for Q1 2020 totaled $11.1 million, an increase from $5.8 million reported in Q1 of last year. As a percentage of total revenue, adjusted EBITDA for Q1 2020 was 21.1% compared to 19.8% in Q1 of last year.
As we mentioned on our Q4 2019 earnings call in February, we would be investing in sales and other areas in Q1, which would push certain expenses up in the first quarter. As January and February were off to a solid start of the year, we were strategically investing early in the quarter to drive organic growth opportunities to capture more mailboxes, but curtailed that investment with the onset of COVID-19 impacts in early March. These strategic investments coupled with some unexpected COVID-19-related expenses resulted in our adjusted EBITDA margin coming in slightly lower than our plan for the quarter. Cash flow from operations for the first quarter of 2020 was $4.4 million, an increase of $4.8 million over Q1 2019. We ended the quarter in a sound liquidity position was $16.3 million in cash and $17 million available through our revolving credit facility.
In terms of capital structure and debt metrics, we had $169.7 million of net debt on our balance sheet at the end of the quarter. The $9 million of annualized costs we recently took out of our business along with our strong free cash flow generation and our unchanged adjusted EBITDA outlook of $51 million to $53 million for the year provide us with ample cushion on our leverage ratio to meet our debt obligations. To better illustrate this, using the midpoint of our adjusted EBITDA guidance of $52 million, we are projecting our leverage ratio at the end of Q4 2020 to be about 2.9%, which is well below our maximum permitted leverage ratio of 4.75% for year end 2020.
Capex and other intangibles for the first quarter of 2020 were $5 million, which consisted primarily of normal business capital purchases and capitalized internal use software development. We expect capex and other intangibles to be approximately $13 million to $15 million for the full year 2020. We also expect adjusted depreciation and amortization to be approximately $10 million for the full year 2020. Our backlog at March 31, 2020 was $88.5 million, which was up 2% from $87.1 million at the end of Q1 last year. For the first quarter of 2020, total gross billings were up 96% to $55.8 million from $28.5 million in Q1 of last year and up 22% on an organic basis when you include all of AppRiver's Q1 2019 billings.
Now turning to our financial guidance for the second quarter of 2020, which is based on current market conditions and expectations. In Q2, we currently expect revenue to range between $52 million and $53 million, which imply the 10% to 12% organic growth rate compared to the same year ago quarter. Fully diluted GAAP loss per share attributable to common shareholders is expected to be in a range of a loss of $0.07 and a loss of $0.06.
We are forecasting fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax expense to be in the range of $0.12 and $0.14. We expect adjusted EBITDA to be approximately 23% to 25% of total revenue. The per share guidance figures are based on an approximate basic share count of 53.7 million for Q2 2020.
Based on our current visibility, we have updated our revenue range for the full fiscal year 2020 to reflect the anticipated impact of the COVID-19 pandemic on our operations. For the full year, we are currently forecasting revenue to range between $210 million and $217 million, representing an increase of between 21% and 25% compared to 2019 and between 9% and 13% on an organic basis. We expect fully diluted GAAP loss per share attributable to common stockholders to range between a loss of $0.13 and a loss of $0.09 for the year.
On a non-GAAP basis, adjusted earnings per share attributable to common stockholders is expected to be $0.56 to $0.58. Adjusted EBITDA is forecasted to be in a range of $51 million to $53 million or approximately 23% to 25% of total revenue for 2020 and a year-over-year increase of between 29% and 34% compared to fiscal year 2019. The per share figures are based on our approximate basic share count of 54 million for 2020.
We are withdrawing our ARR guidance for the full year of 2020 due to the current market conditions and uncertainties related to COVID-19. Based on our current outlook, we expect to generate continued strong free cash flow in 2020. We are forecasting approximately $11.5 million in interest expense on our loan. We are pleased that even in these uncertain times surrounding COVID-19, we are still positioned to deliver our initial 2020 adjusted EBITDA guidance of $51 million to $53 million, even at a potentially lower revenue number that we had initially planned for in 2020.
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 May 11. Also visit our Investor Relations website to view our most recent investor presentation. Dave?
David Wagner -- President & Chief Executive Officer
Thanks, Dave. I'd now like to review our first quarter execution in the context of our three primary growth drivers, during which I will provide some April color before I transition to my closing remarks as it relates to our first growth driver, which is new orders to new customers.
We recorded some notable wins in the first quarter. On the Zix side, one of our top five wins was in Fintech, two were in finance and two were in healthcare. Our largest new customer win in the quarter was a six figure deal with a healthcare provider who purchased productivity, encryption and advanced threat protection. We displaced the competitive solution because the customer was dissatisfied with the functionality of our competitors' encryption and threat solution and was also looking for better support.
Another noteworthy new logo in Q1 was a six figure win for productivity and three Zix solutions; encryption, advanced threat protection and information archive. They were also attracted to Zix by our phenomenal customer support. Phenomenal care isn't just a nice add-on for Zix. It's a real driver to which we can attach our organic higher margin products. Our top five new customer transactions in the quarter averaged three solutions per customer, again demonstrating our success selling bundled solutions.
On the MSP partner side, we added 55 net new transacting partners during Q1, bringing our total to 4,393 at quarter end. In Q1, we continued to add approximately 200 net new customers per week and the new customer acquisition rate in April remained on that trend. Companies migrating to the cloud are looking for partners to facilitate that transition. Our ability to attract new partners and new customers supports this thesis and our growth opportunity.
Europe continues to lead the way on new partner acquisition where our value proposition, although new to the market, continues to resonate well. We are also seeing good success displacing existing ATP solutions in many of these European partners. At the end user level, again on the MSP side, sales to existing customers accounted for 59% of the MRR increases in the quarter.
With respect to new business trial trends, we began the year with increasing sales momentum on both the direct and indirect side of our business. Our AppRiver trial activity was tracking at record levels in January and February. However, in March, trial momentum tapered off as the economic impacts of COVID-19 set in and many of our partners pivoted to fundamental work from home enablement tasks. Then, beginning in April, we've seen trial activity pick back up. And in April, we began to see an increase in the rate of new orders to new customers of about 20% as partners finished up work from home preparation and reaccelerated cloud migrations.
Shifting to our second growth driver, which is sales to existing customers. Four of the top five add-ons in the quarter were in healthcare and one was in finance. Three of the five were encryption-only add-ons, one was for archiving as a third solution to a customer who already purchased encryption and threat protection and the fifth was a five solution cross-sell, adding Office 365, advanced threat, secure file transfer and archiving to our existing encryption solution. Interestingly, the average contract term of the top five add-ons was 29 months, representative of some of the success we are having moving larger customers to longer term agreements, partially offsetting our declining overall contract duration as many customers move to monthly billing.
On the MSP side, sales to existing customers accounted for 41% of the MRR increases in the quarter and offset all of the terms, resulting in a net renewal rate of just over 100%. In March, we saw a deceleration of orders from existing customers as existing customers began decreasing users and downgrading Office 365 SKUs. While we believe that flexible, consumption-based, month-to-month billing is the future of cloud services and is a competitive differentiator in attracting new customers in the type of economy, it does offer customers the flexibility to elastically decrease users and license entitlements as they furlough workers.
In April, an existing customer MRR decreases offset nearly all of the MRR increases in existing customers for the month. We are also seeing an acceleration of the migration from hosted exchange to Office 365 driven by work from home demands that are better served in the cloud and by Microsoft customer incentive for team's adoption.
Looking at our results for the first quarter by solution area, and please be reminded that we do not manage our business by solution category and increasingly, our sales are made as bundled solutions. That means that we must use judgment to estimate the value allocated to each solution area. With that context, productivity ARR increased 7% sequentially and 32% year-over-year to $102.5 million. Average revenue per user or ARPU of $101 and $0.01 was down $0.57 from last quarter. The primary reason for the ARPU decrease is the rotation to lower costs SKUs caused by COVID that I mentioned earlier in the call.
Net of churn, we added more than 66,000 mailboxes in the quarter, down from 83,000 last quarter. April was positive by approximately 9,000 mailboxes, reflecting the trends noted earlier of higher net new, slightly higher churn and a flattening of additional licenses to existing customers. Encryption ARR was $71.7 million, down 1% sequentially, but up 2% year-over-year. The decline was largely due to an accounting change for ARR of our acquired EMS product. ARPU was down $0.09 to $17.96. Our encryption seats declined by less than 1% or about 36,000 seats from Q4, largely due to the continued erosion of the OEMs.
Advanced threat protection ARR was $24.1 million, which was up 3% sequentially and 10% year-over-year. Our ARPU was $13.38, which was down 2% from $13.65 in Q4, but up 8% from $13.14 in Q1 of last year. And finally, ARR in our emerging category was down 11% quarter-over-quarter to $16.1 million. Again, accounting changes for ARR of our acquired total defense product drove the majority of the ARR decline. However, with the end-of-life of ZixOne scheduled for October 2020, we expect emerging to remain flat or slightly declined through the rest of 2020. Our ARPU was $30.31, which compares the $33.58 last quarter.
Moving to our third growth driver, increasing retention. Our total company net dollar retention remains at a solid level just north of 100%, representing a slight decline sequentially. This minor regression was primarily due to lower sales into the installed base beginning in March, as I mentioned earlier. Core Zix had a very strong retention quarter. And as noted above, we continue to have a success extending our larger customers to longer term agreements.
In April, Zix core retention remained strong on a small sample size. And AppRiver retention dipped about 400 basis points due to the economic impact of COVID. I've provided a lot of April business trend commentary in my remarks. This is obviously preliminary, contemporaneous data that's being provided without the benefit of a more robust reviews, controls, associated with our normally reported quarterly results. In summary, we anticipate the total company ARR increased modestly in April from March.
Moving on to my closing remarks. In the midst of the COVID-induced market disruption, our team successfully launched Secure Cloud right on schedule on April 15. Secure Cloud is our consolidated platform with a suite of productivity, security and compliance applications to deliver a secure modern workplace. The reaction from our partners, customers, press and analysts has been universally positive.
Our customers and partners let us know that the reimagined, rearchitected enhanced platform and solutions are exactly what they were looking for. The ability to easily add and manage a suite of services from the newly modernized single pane of glass coupled with flexible billing allows partners to meet the rapidly changing demands of their customers.
Reaction from the media has been equally rewarding with channel publications from CRN to ChannelPro demonstrating their understanding of and an appreciation for the power of secure modern workplace. This platform enables our partners to build powerfully differentiated offerings across the wide spectrum of customer needs.
They can offer the new customers an on-ramp to the cloud and they can enhance their customer security with advanced features, like attachment quarantining and sandboxing and superior encryption and file transfer solutions. Our part is existing customers are also better off. Now they can audit the health with our customer's Office 365 tenants with a security audit and then immediately remediate through our suite of solutions.
In addition, we've enabled partners and customers to archive the explosion of corporate information that's being created in newer channels like Slack, Teams, Facebook and LinkedIn. With secure modern workplace launched, we are even more enthusiastic about our long-term growth prospects and our ability to deliver on our vision of becoming the leading provider of cloud, email productivity, security and compliance for businesses of all sizes.
Despite all this good news, we know that we are not immune to the current market dynamic. Many of our customers, especially our smaller customers, are struggling with decreased demand and are decreasing users as they furlough workers. As a result, we are focused on balancing profitability as we capitalize on the positive market momentum for digital transformation.
We believe that we have a durable liquidity position with more than $16 million in cash and $17 million available for our revolving credit facility. We believe that the $9 million of annualized costs that we recently took out of our business, coupled with our strong free cash flow generation, give us the ability to grow the business and meet our debt obligations. And we believe we have the right strategic plan in place and that our industry-leading solutions and world class team will enable us to capitalize on the digital transformation opportunity that is accelerating.
In closing, I have never been more proud of our team and their commitment to deliver phenomenal outcomes for our partners and customers. We don't like recessions, but we know that our success today will better position Zix in a post-COVID-19 environment and enable the realization of our vision to be the leading provider of cloud email security, compliance and productivity solutions for companies of all sizes.
That concludes our prepared remarks. Operator, we are ready to open the call for questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Chad Bennett with Craig-Hallum. Your line is now open.
Chad Bennettt -- Craig-Hallum Capital -- Analyst
Great. Thanks for taking my questions. So just in terms of the guide that you guys just gave for the year, how should we think about the trends that you saw, in particular in the AppRiver business in late March into the month of April? How are those in the guide in terms of how should we think about the retention rate there and the net new business rate there and how you're thinking about that for the year? Thanks.
David Wagner -- President & Chief Executive Officer
Yeah. Chad, so that is obviously on top of mind with all the great things going on at the company, the release of Secure Cloud and positioning there, all that's fantastic. But the reality of the economic environment is affecting particularly our smaller customers. And we started to see those trends early mid-March and it's been pretty consistent coming into April, especially seeing the new customer flow being strong or perhaps actually 20% up from prior quarters in terms of new business in flows. We're really pleased by that. That makes I think sense, as you think about the work from home environment.
The churn hasn't gone up much. It's up a little bit. But the big change is in existing customers who previously were accounting for quite a big amount of increase, just 41% in Q1, and that increase has really dropped. It's still an increase, but it dropped dramatically in the last seven weeks as existing customers, both furlough workers and do some adjustments especially with the Microsoft SKUs to save some money. And so those are the trends that we've looked at most carefully when we put together the guide for the quarter and for the year and we're looking at -- just taking those best acts that we can and incorporate them into the guide.
Chad Bennettt -- Craig-Hallum Capital -- Analyst
Got it. That's great color. I appreciate it. And then shifting to the Zix business, have your -- it sounds like retention there has been fine and obviously you're in all the regulated industries that are very sticky and you're dependent -- they're dependent upon you for mission-critical data and applications. I guess have you changed anything either from a retention or existing base or net new on the Zix business for the year?
David Wagner -- President & Chief Executive Officer
Yeah. On the Zix business, the larger customers across both brands -- the larger customers, they aren't immune, but it's not as acute there. What we've seen in prior recessions is retention holds quite well and those compliance-oriented buyers. And so we're not expecting increase in churn. It becomes a little harder to do -- we're not large projects, but a little harder to make changes. So it would be incorporating a modest decrease in our new business on the Zix side, again all packaged up into that -- the full guide for the year.
Chad Bennettt -- Craig-Hallum Capital -- Analyst
Got it. Okay, thanks. That's it for me. Nice job on the quarter and managing the business going forward. Thanks.
David Wagner -- President & Chief Executive Officer
Thank you, Chad.
Operator
Thank you. Our next question comes from the line of Nick Yako with Cowen and Company. Your line is now open.
Nick Yako -- Cowen and Company -- Analyst
Hey, guys. Thanks for taking my questions.
David Wagner -- President & Chief Executive Officer
Hi, Nick.
Nick Yako -- Cowen and Company -- Analyst
I want to start maybe with the launch of Secure Cloud. And I know it's early, but just curious, is the plan is to lead with the Zix Secure Suite with new customers going forward? And then just any color on how Secure Suite is priced maybe relative to the a la carte pricing?
David Wagner -- President & Chief Executive Officer
So that's a great question. Thank you. We've been leaning toward Secure Cloud with the packaging of Office 365 beginning really in Q4 in a bigger way. And as you saw on the top five deals this quarter, we're getting really good success with that suite approach. When we put the full suite together to get three solutions or more, that's roughly a 20% discount built into the bundled SKUs, which encourages both the partners to position that way and end customers, when we talk to the end customers to go for the suite approach. And so that's working well for us.
The Secure Cloud launch, of course, just happened here in April. And that's the flow that the sellers will be able to get into and later in the quarter and increasingly be using the same try and buy methodology. And we're really excited about what that's going to bring to the sales motion back half of this quarter and into the rest of the year.
Nick Yako -- Cowen and Company -- Analyst
Okay, great. That's helpful. And then maybe one on -- on the restructuring program, is the bulk of that behind you? And then just any additional color in terms of where some of those costs were would be helpful? Thank you.
David Wagner -- President & Chief Executive Officer
Okay, good. So the restructuring program, and I'll let Dave let chime in a bit too, but we tried to balance it in terms of things that we would call temporary marketing program reductions, travel reductions, of course, executive compensation decrease, deferred salary. Those are things that we would intend to put back into the business as the economy recovers, which of course we hope would be as soon as later this year.
And then others were more deeply structural of early retirement, which were voluntary, which caused changes in some unexpected places in the organization. We did end up doing some voluntary terminations, which of course you have more control over and then data center cost, and those are structural and would be persistent.
In total, we were focusing on keeping the company positioned really strong. We do see very strong trends for us in digital transformation. The new customers are still onboarding at a great rate. We want to make sure that we're prepared to continue to provide phenomenal care and continue that -- finished up the end 31 works. So we tried to protect the product organization as much as possible in terms of the P&L line changes.
Dave Rockvam -- Vice President & Chief Financial Officer
Yeah. And I would just add that about 95% of those changes are made as of now and will carry seven and a half to almost eight months worth of savings. Some of the data center stuff finishes up by the end of the quarter, but we expect almost all of that to be done by the end of the quarter. And most of the people changes, the marketing program changes, all those things have been implemented to save seven months to eight months worth on the year.
And as Dave said, we went across kind of the different parts of the organization. I would say where we tried to make sure we held up was on the sales front and made sure that we're -- they have the sales team aligned to take advantage of the opportunity that's there. So we continue to see the strong opportunity out there for us and what the sales team out there being able to push the Secure Cloud.
David Wagner -- President & Chief Executive Officer
Yeah. And then just to reiterate, any employees who are affected have been notified. We do have a few that are especially early retirement who are working for several months to transition their work.
Nick Yako -- Cowen and Company -- Analyst
Okay. Helpful color. Thanks guys.
David Wagner -- President & Chief Executive Officer
Thank you, Nick.
Operator
Thank you. Our next question comes from the line of Nehal Chokshi with Northland Capital Markets. Your line is now open.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Thank you. And congratulations on hitting your guidance, the top-line guidance within what was the incredibly tough environment. That's really amazing.
David Wagner -- President & Chief Executive Officer
Thank you, Nehal.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Yeah, absolutely. I would ask kind of the same question as first I did but in my way. So for the new revenue guidance at the low-end of the range that implies that you're going to be flat Q-over-Q for Q3 and Q4. And then if we look at the midpoint, it's implying a rise of about $1 million each quarter into Q3 and Q4. So let's take the midpoint and why should we expect an improvement in the quarterly trajectory, whereas your Q2 guidance implies this going to be flat Q-over-Q? And kind of the answer I'm looking for is maybe composite into two parts. One is, your macro assumptions for Q2 versus the back half. And then the fundamental parts of the business that you've been talking about.
David Wagner -- President & Chief Executive Officer
Okay, good. Those are great questions. And of course, we gave a lot of detail on the trend for April so that we can share as well as we can with analysts and investors. Yeah, what we're seeing in the business. I am not the economic expert. The SMB impact, when we're looking at it, we think we'll be more acute in this quarter that we're in. So we were up modestly in ARR for the month of April, which we take as a good sign to deliver in the ARR growth that we really want to see this year. But we were looking as we were thinking about it as May and June could be the toughest part of the outlook.
On the second side, generally, the Secure Cloud, we're super proud of it. We think the positioning is really good particularly in tough economic times where we offer organizations relatively large and small. The ability to have a very elastic user count opportunity, where if they're uncertain about their year and what it looks like, they can adjust their users monthly and go up and down, which we think is a really big competitive advantage in a tough market.
And so our new business pipeline and new business across the business, the pipeline is actually quite strong. And so we are not giving up on the opportunity to have a really good year. And in 2021, we just felt that with the level of uncertainty that's in the macro environment that we were more prudent to make adjustments early than wait -- getting a level of uncertainly we see in the market.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Okay. That's great. And then you mentioned that essentially you think that May and June maybe the worst for the SMB. So what percent of your ARR is actually exposed to these SMB customers today? And I just need to find how you define SMB as well, what size customer do you consider SMB?
David Wagner -- President & Chief Executive Officer
Sure. The 50 users and down would be what I would consider SMB and that's approximately -- we use the breakout of the MSP side of the business, those channel partners, they do have some larger customers, but primarily the legacy AppRiver business that we think about when we think about the SMB exposure.
Dave Rockvam -- Vice President & Chief Financial Officer
Yeah. When we look at that, what we've talked about is, about less than 10% of the really hard hit verticals and small, medium business, our customers, the travel agencies, the travel industry, the restaurants, those kinds of things. So we look at that part as being the most impacted. And right now as Dave said, we're just looking at May and June. I think we thought that there would be kind of a quite a bit of seeing the small, medium business come forth and asking for extended terms and those kinds of things and not paying. We're seeing receivables just on par with where they were before.
So we haven't seen a drop off on that. We've seen just a couple hundred thousand dollars worth of requests for kind of extended payment terms, which I think is a pretty small number given the environment that we're in right now. So I think as we look at the guidance, April, as Dave said, was up in ARR, so that was good. The $214.3 million, so just up over that is what we're saying. And the guidance predicates just what we're looking for May and June as we just don't know at this point as no one does.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Okay, great. And then finally, can you put a rhyme and reason to why you saw more or less a drop off demand in March and then the resumption in April?
David Wagner -- President & Chief Executive Officer
Yeah. And I put that into the script. What we heard from the partners that we spoke with is, they were just busied out. Many of the smaller businesses around the country weren't well prepared for work at home, so they were busied out, putting in VPN and getting workstations ready to work remotely. And so they just couldn't work on the audit demand. Then as soon as that flipped around by the end of the month, they had their end customers able to work from home and then they went back to cloud migration, which we're actually seeing an acceleration of as a result of the benefits of Office 365, Teams and Secure Modern Workplace in a work from home environment.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Great. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Daniel Ives with Wedbush Securities. Your line is now open.
Daniel Ives -- Wedbush -- Analyst
Yeah, thanks. Hope everyone is well. So let me -- maybe you can just talk about as a management team in this environment where you guys are almost doing day-to-day, that's different and sort of navigating the channel customers. Maybe walk through how that's changed from an all hands on deck?
David Wagner -- President & Chief Executive Officer
Yeah. That's a great question, Ives. I feel I could be more proud of the team and the way that they're working in every part of the company that phenomenal care, the agents are working from home, they're standing up in the morning, standing up at the end, working just tremendously well remotely. The development team continued to deliver really meaningful products and they've done a great job. But I would point primarily to the sales team, stand up in the morning, stand up at night, really drive and rigor in their process positioning and repositioning with clients. The benefits of secure modern workplace and the benefits that we're bringing them into this market.
And so, we're spending a lot of time with partners, a lot of time also with new prospects. The pipeline is good and that's -- I don't want to take it with a grain of salt, but you have to be a little more careful with pipeline these days and qualify more carefully, make sure that the deals are progressing. And so I'd say the diligence in the sales front-end is really heightened, not that it wasn't always there, but heightened now more than ever.
Daniel Ives -- Wedbush -- Analyst
Okay. And then in terms of just guidance for 2Q or just going forward, do you sort of assume what you're seeing in April continues or it's putting more of a discount on that [Indecipherable] to the environment?
David Wagner -- President & Chief Executive Officer
When you look at the Q2 guide in particular, we were allowing for a little bit worse management and we just -- again, we just do not know. But allowing for a little bit worse assuming that maybe PPP allowed some funds to flow through and people paid before and they'll make some adjustments yet in May and June. But that's more just allowing for uncertainty than anything we're seeing, the trends that we're seeing as we disclosed, we're up in April, driven by more new churns, just a little bit higher churn. And then that -- again that decrease in existing customers not buying more or they're buying more is offset by customers who are furloughing workers.
Daniel Ives -- Wedbush -- Analyst
Great, thanks.
David Wagner -- President & Chief Executive Officer
Thanks a lot, Dan.
Operator
Thank you. At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Dave Wagner for closing remarks.
David Wagner -- President & Chief Executive Officer
Well, thank you all for joining us on our call this afternoon and for your support of Zix and we're looking forward to navigating this next quarter and speaking with you all again at the end of July. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 51 minutes
Call participants:
Geoff Bibby -- Vice President, Marketing
David Wagner -- President & Chief Executive Officer
Dave Rockvam -- Vice President & Chief Financial Officer
Chad Bennettt -- Craig-Hallum Capital -- Analyst
Nick Yako -- Cowen and Company -- Analyst
Nehal Chokshi -- Northland Capital Markets -- Analyst
Daniel Ives -- Wedbush -- Analyst
