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Zix (NASDAQ:ZIXI)
Q4 2020 Earnings Call
Feb 25, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon. Welcome to Zix fourth-quarter and full-year 2020 earnings conference call. My name is Olivia, 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 Chief Marketing Officer Geoff Bibby.

Following their remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via link in 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 -- President and Chief Executive Officer

Thank you, operator. Good afternoon, everyone, and thank you for joining our fourth-quarter and full-year 2020 earnings conference call. On the call today, we have 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, 2020, a copy of which is available on 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 Factors section in our most recent Form 10-K and 10-Q filings with the SEC provides examples of those risks. As more fully described in our quarterly report on Form 10-Q for the quarter ended September 30, 2020, and as will be further discussed in our upcoming annual report on Form 10-K for the year ended December 31, 2020, the company has been actively monitoring the COVID-19 situation and its impact on both the company and the world in which we operate. The impact of COVID-19, the unprecedented measures to prevent its spread are affecting our business in various ways, 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 employee's 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 government and public actions taken in response.

These factors 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 site. Now with that, I'd like to turn the call over to Dave Wagner for his opening remarks. Dave?

Dave Wagner -- Chief Executive Officer

Thanks, Geoff. Good afternoon, and thank you, everyone, for joining us today. The fourth quarter marked a strong finish to a successful and transformative year for Zix. We delivered profitable growth again in 2020, highlighted by 14% ARR growth, 26% revenue growth and 29% adjusted EBITDA growth.

Revenue of $218.5 million; annual recurring revenue of $237.7 million; adjusted EBITDA of $50.9 million; and cash flow from operations of $31.3 million, all marked record levels for our company. Achieving these results in the face of unprecedented challenges is a testament to our team, our partners, our customers and the resilience of our operating model. As I reflect back on 2020, in many ways, we were able to use the year's challenges to build and grow even stronger. The investment we made in culture and in establishing strong core values was perhaps the most important thing we did in 2019, as our culture was essential in helping us manage the challenges of 2020.

Our emphasis on learning kept the team adaptable and able to respond to many changes and pressures. Our goal setting and objective and key results are OKR-focused, kept us executing on track and on plan, which enabled us to meet our financial and operational commitments in 2020. I'm very proud of the team and our ability to execute. Our enhanced focus on the channel and our investment in our secure cloud platform was already well timed, but the rapid shift to remote work caused by the pandemic provided further support to the transition.

Last March, we learned that many organizations were not fully prepared to transition to remote work. According to Forrester, 41% of the companies they surveyed between April and May 2020 reported that their organization was not prepared to effectively transition to full-time remote work. That same Forrester survey found that organizations are increasingly leveraging cloud technology to support remote and hybrid work environments and that decision-makers see productivity, security, compliance and resilience as key tenets of a secure modern workplace. These are areas where Zix excels.

The shift to remote work is not transient. Some industry analysts estimate that 70% of all workers will work from home regularly, even as the impact of the COVID-19 pandemic recedes. Remote work creates new, sometimes larger attack factors, enabling more attacks, bigger breaches and an even greater need for data restoration following a breach. The recent SolarWinds and Mimecast breaches remind us that email remains the No.

1 threat vector. Zix' Secure Cloud provides security tools and a second layer of threat protection that are increasingly critical for small and medium-sized enterprises. Now I will turn our call over to our CFO Dave Rockvam to provide details on our financial results for the quarter and year. Dave?

Dave Rockvam -- Chief Financial Officer

Thank you, Dave, and good afternoon, everyone. As Dave mentioned, we again delivered on our commitment to drive profitable revenue growth, increased adjusted EBITDA and generated more than $31 million of operating cash flow for the year. Looking at the numbers in more detail, at the end of Q4, our ARR totaled $237.7 million, up 14% from Q4 of last year. Our continued and sustained ARR growth is being driven by our customers' move to a secure modern workplace, which emphasizes cloud adoption.

We are pleased that our cloud-based ARR grew 21% over Q4 last year and comprises 87% of our total ARR, or $206.6 million. New customers added in the quarter totaled over 4,200. 99% of new customers in the fourth quarter were onboarded on the Secure Cloud. In Q4, those classically Zix customers onboarded to Secure Cloud averaged 1.6 services per mailbox, which is above the 1.1 average per services per mailbox historically across the company.

For the fourth quarter, we are pleased that our net dollar retention once again was above 100% at 100.3%. Net dollar retention represents our renewals plus new sales into the installed base divided by the renewals that were available at the beginning of the quarter. Revenue for the fourth quarter increased 15% to $57.9 million from $50.4 million in the same quarter last year. The $57.9 million of revenue exceeded our guidance range for the fourth quarter, which was $56.4 million to $57.4 million.

Revenue for the full year increased 26% to $218.5 million from $173.4 million in 2019. The $218.5 million of revenue exceeded our guidance range for the full-year 2020, which was between $217 million and $218 million. Our adjusted gross profit for the quarter was $30.2 million, or 52.2% of total revenue. This was an improvement on a dollar basis from $29.2 million, but down from 58% of total revenue on a percentage basis in the fourth quarter of last year.

The gross margin change during the year was mainly due to the continued strength of our productivity products and the lowering of rebates from Microsoft on some SKUs in the fourth quarter of 2020. The gross profit on a GAAP basis was up slightly from $26.3 million in Q4 last year to $27.4 million in Q4 2020. Our adjusted R&D expenses for the fourth quarter of 2020 were $5.4 million, or 9.2% of total revenue, compared to $4.3 million, or 8.6% of total revenue, in Q4 of last year. The quarter's dollar increase was primarily due to certain development projects we completed during the year and their expenses have begun to amortize into our R&D costs.

Our adjusted selling and marketing expenses for the quarter were $10.1 million, or 17.5% of total revenue, compared to $11.5 million, or 22.7% of total revenue, in Q4 of last year. The decrease in selling and marketing expense for the quarter was primarily due to lower travel and actions we took in April of 2020 to contain expenses due to COVID-19. The lower selling and marketing expenses as a percentage of total revenue for the quarter reflects the benefits of our lower cost of customer acquisition from our high velocity sales model. It also reflects the success we are having, winning new customers and wallet share gains from our nearly 5,000 active MSP partners.

Our model and go-to-market strategy enables Zix to maintain industry-leading efficiency ratios, including overall CAC, as well as CAC relative to customer lifetime value. For the fourth quarter of 2020, our adjusted general and administrative expenses were $4 million, or 6.9% of total revenue, which was down from $4 million, or 7.9% of total revenue, reported in Q4 of last year. The decrease in percentage of revenue in the quarter was primarily due to lower travel expenses, other expense actions we took in April and variable compensation expenses due to COVID-19. On a GAAP basis, we recorded a net loss attributable to common shareholders of a loss of $5.3 million, or a loss of $0.10 per fully diluted share, for Q4 2020.

The $0.10 loss per share includes approximately $0.04 per share for an impairment to our deferred tax asset. We still plan to utilize our NOLs, but at this time, we have a number of acquisition and stock-based compensation-related expenses that will lower profitability on a GAAP basis prior to our ability to use them all in our current profitability model. Our fourth-quarter non-GAAP adjusted net income before deemed dividends and excluding deferred tax was $8.6 million, or $0.16 per fully diluted share which was within our guidance. This was an increase of nearly 30%, compared to $6.7 million, or $0.13 per fully diluted share, we reported in Q4 of last year.

Our full-year non-GAAP adjusted net income before deemed dividends and excluding deferred tax, increased 41% to $32.5 million, or $0.60 per fully diluted share. And finally, our adjusted EBITDA for Q4 2020 totaled $13.4 million, an increase from $11.5 million we reported in Q4 of last year. As a percentage of total revenue, adjusted EBITDA for Q4 2020 was 23.1%, compared to 22.8% in Q4 of last year. Our adjusted EBITDA for the full-year 2020 totaled $50.9 million, an increase from $39.5 million we reported for the full-year 2019.

As a percentage of total revenue, adjusted EBITDA for 2020 was 23.3%, compared to 22.8% in 2019. Adjusted EBITDA came in slightly below our guidance due to higher vacation accruals related to COVID-19, as well as higher bonus accrual in the quarter because we achieved the higher end of our revenue forecast. That being said, we are planning to attain about a 61% payout on our 2020 bonus program due to the impact from COVID-19 on our first half of 2020 results, which caused our numbers to be lower than our internal plan. We are pleased that in a year like 2020, that presented so many challenges to the economy and our country, we were able to come in right at the bottom end of our original adjusted EBITDA guidance that we gave in February of last year.

Cash flow from operations for fourth quarter of 2020 was $7 million, an increase of 17% to Q4 2019. Cash flow from operations for the full-year 2020 was $31.3 million, an increase of 124%, or $17.3 million, over 2019. We feel our strong 2020 cash flow from operations really demonstrates the real cash generation capabilities of the company. Capex and other intangibles for the fourth quarter of 2020 were $4 million, which consisted primarily of normal business capital purchases and capitalized internal use software development.

We expect capex and other intangibles to be approximately $18 million for the full-year 2021, consistent with our 2020 spend. We also expect adjusted depreciation and amortization to be approximately $12.5 million for the full-year 2021. Billings for the fourth-quarter 2020 totaled $56.6 million, up 14.7% from $49.3 million in Q4 last year. Billings for the full-year 2020 totaled $219.1 million, up 28.7% from $170.2 million for the full-year 2019.

Turning to our balance sheet, we ended the quarter with $21.4 million in cash. In addition to our strong cash position, we also have $25 million available for borrowing under our revolving credit facility. In terms of our capital structure and debt metrics, we had $211.9 million of debt on our balance sheet at the end of the quarter. Our adjusted EBITDA of nearly $51 million in fiscal-year 2020, reflects a leverage ratio of approximately 3.7 times EBITDA at the end of Q4, putting us below the maximum permitted leverage ratio of 4.7 times for year-end 2020.

Shifting gears to our financial guidance for the first quarter of 2021, which is based on current market conditions and expectations. In Q1, we currently expect revenue to range between $58.7 million and $59.8 million. Our revenue forecast for the first quarter of 2021 implies a 12% to 14% growth rate compared to Q1 of last year. We are forecasting fully diluted GAAP loss per share attributable to common stockholders to be in a range of a loss of $0.07 and a loss of $0.06.

And fully diluted non-GAAP adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax benefit expense to be in the range of $0.15 and $0.16 for the first quarter of 2021, which is based on a share count of 55.1 million shares. We are currently forecasting adjusted EBITDA to be between 22% and 23% of total forecast revenue for Q1 2021. Based on our current visibility, we are forecasting full-year 2021 revenue to range between $244 million and $248.5 million, representing an increase of between 12% and 14% compared to 2020. We also expect fully diluted GAAP loss per share attributable to common stockholders to be in a range of a loss of $0.27 and a loss of $0.25 for the year.

On a non-GAAP basis, adjusted earnings per share attributable to common stockholders before deemed dividends and excluding deferred tax benefits expense, is expected to be in a range of $0.58 to $0.60. Adjusted EBITDA is forecast to be approximately 23% of total revenue for 2021 and a year-over-year increase of over 10% compared to fiscal-year 2020. This would equate to full-year 2021 adjusted EBITDA of approximately $56 million. We are forecasting approximately $9.5 million in interest expense on our bank credit facility.

The per share figures are based on an approximate basic share count of 55.5 million shares for 2021. It is important to note that fiscal 2021 guidance includes approximately $3 million of expenses related to travel, employee raises, variable compensation and marketing, which were lower in 2020 due to COVID-19, but we anticipate a return to more normalized levels in 2021. Those added expenses and the additional R&D expense from the amortization of R&D projects that concluded in 2020 and are scheduled to conclude in 2021, have us relatively flat on adjusted EPS on a year-over-year basis. But does allow us to continue to target over 10% EBITDA dollar growth that we have stated as our current goal.

We expect to maintain a healthy adjusted EBITDA dollars to cash flow conversion ratio and generate approximately $35 million of cash flow in 2021. Our adjusted EBITDA guidance of approximately $56 million in fiscal 2021 reflects a leverage ratio of just three times adjusted EBITDA at the end of Q4 2021, putting us below the maximum permitted leverage ratio of 4.5 times for year-end 2021. In summary, as we enter 2021, we have a solid financial foundation with consistent cash flow generation, providing us with the resources and predictability to comfortably meet our debt obligations while executing our growth strategy. 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-K, which we plan to file by March 16. Also, visit our Investor Relations website to view our most recent investor presentation. Dave?

Dave Wagner -- Chief Executive Officer

Thanks, Dave. Heading into New Year, our theme at Zix is Transform 2021. Transform is just a fancy word for change, but we're focusing on the idea that change is something that happens to us. While transformation is intentional.

A transformation modifies our underlying beliefs and enables more natural and power change. And while we continue to transform the core recipe for success remains execution of our growth drivers: new partner and customer acquisition, partner and customer add-ons and retention. Our first growth pillar is new partner and customer acquisition. As we transform, new customer acquisition increasingly comes from our partners.

In Q4, about 85% of our new customers were added by partners, primarily our MSP partners. Some key MSP partner wins in the quarter included: a new MSP partner who is previously buying Office 365 from a global distributor and wanted to consolidate their O365 and security to a single provider for better support and a superior platform. We had a similar new MSP win in the U.K. from that same global distributor.

The U.K. MSP consolidated their Microsoft and IP purchases, including cloud backup, from three different vendors to Zix Secure Cloud. Another large U.K. MSP moved to Zix with a bundle of our advanced threat and security audit tool with Office 365.

These wins are a really clear example of the power of Secure Cloud for our partners. Our partners need to keep their customers, usually SMBs, secure. And Secure Cloud provides the three most important security layers that every MSP needs. First, a second layer of email filtering protection to prevent malware and phishing attacks; second, a security audit tool to monitor the configuration of their Office 365 tenants for indications of compromise; and third, a backup and recovery solution to restore their clients should it breach our manual error occur.

When I talk to partners, this is what they refer to as security built in, and it's what Zix delivers. On the value-added reseller and direct side of the business, our top five wins in the quarter included two in healthcare, two in finance and one in construction. Most impressively, the top five new customer wins averaged four solutions per transaction, well in excess of our previous high and another great indication that we're on the right track with our attach rates. All of the top five new customer wins included email encryption and Office 365 and all five new logo wins were deployed on Secure Cloud.

New partner and customer additions will be a key focus for us in 2021, and we are laser-focused on attracting new larger MSP partners who are better positioned to sell our IP. Which brings us to our second growth pillar, which is sales to existing partners and customers. Existing partners are a key source of growth for us. In Q4, sales to existing customers through MSPs accounted for 46% of the MRR increases in the quarter, which compares to 47% in the prior quarter and 44% in Q4 last year.

The MSP partners we added between 2012 and 2020 are growing at a compound annual growth rate of over 50%. Moving on to our top five add-ons through our bar and direct sales team, two were in banking, two in healthcare and one in legal. The two largest were encryption only add-ons and all five included encryption. Moving on to our third growth pillar, increasing retention.

Total company net dollar retention was 100.3% in Q4, which was up from 99% in Q3. Gross retention at the company level was greater than 90%, which is in line with historical trends. We did, however, experience higher-than-historical churn in both packs and on-premise email encryption. Churn rates on both products began to increase in Q2 and continue to slightly elevated levels through year-end.

Earlier this year, we initiated programs to more actively migrate text and on-premise encryption customers to Secure Cloud. These programs could accelerate churn in the short term while optimizing longer-term value retention. Before I turn the call over for Q&A, I'd like to expand on three of our 2021 growth initiatives: cloud backup, expansion into Germany, and migration of legacy Zix customers to Secure Cloud. At a high level, the acquisition of CloudAlly expanded our product suite into the cloud backup market, which is a $1.3 billion market growing at 25% according to markets to markets.

Microsoft Office 365 backup and recovery represents nearly half of that market and was the No. 1 product extension requested by our channel partners. CloudAlly has performed exceedingly well since joining Zix. The last three months have been the three strongest ARR growth months in their history.

No one factor accounts for this increasing momentum. Surely, some is due to their acquisition by a larger company, but there's also a growing buzz in the market as cloud data sets become increasingly valuable and the large cloud players step away from the backup market. Both Salesforce and Microsoft recommend third-party backups and Google only retains backups for 25 days. We're incredibly proud with how the CloudAlly team is helping us transform partner and customer relationships with technology.

To date, we're winning 85% of the resolved partner trials. As a reminder, the North American bar direct sales team just began selling cloud back up in February and the integration of cloud backup into Secure Cloud is planned for Q3 2021. Another highlight of 2020 was our progress in international markets. We more than doubled our international ARR in 2020 with a focus on the U.K.

We are launching into the German market during the second quarter of 2021 with the localization of Secure Cloud. Our survey suggests that the German market is three years behind the U.K. market and five years behind the North American market in the rate of cloud adoption. And we know the German market opportunity is larger than the U.K.

market, both in terms of population and in the number of knowledge workers. Traditional IT providers in Germany need to transform their business models from on-premise hardware to modern cloud subscription businesses and secure cloud is a perfect solution for that use case. Our third 2021 opportunity is migrating legacy Zix cloud customers to Secure Cloud. Programmatic migrations will begin in March and once migrated, these customers will begin logging into Secure Cloud and will more easily be able to attach other solutions.

We will begin moving meaningful cohorts of customers throughout 2021, with the goal of having 85% of all of our cloud customers on Secure Cloud by the end of 2021, up from about 70% today. I highlighted our work culture earlier. But before I close, I would like to take another minute to highlight our focus on ESG more broadly. Our core company mission is to protect our partners and customers by empowering them with productivity solutions that are secure, compliant and resilient.

Our human capital objectives are to attract, retain and develop the highest quality talent and put them in a position to do their best work. Diversity, equity and inclusion are a top priority in further developing our culture. We also continue to focus on energy conservation and minimizing our impact on the environment. And we remain committed to best practices in corporate governance.

We are proud to be recognized as an ESG prime company by the NASDAQ, a recognition bestowed on less than 20% to public companies. In conclusion, with our Secure Cloud platform and growing array of applications, we are positioned to benefit from strong secular growth drivers, including the increasingly dynamic threat landscape and the move of business communications to the cloud. Together with our partners, we provide the solutions, customers need to be secure, compliant and resilient. Over time, we believe Zix will extend its position as the leading provider of cloud email security, compliance and productivity solutions.

That concludes our prepared remarks. Operator, we're ready to open the call for questions. Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] And our first question coming from the line of Nehal Chokshi with Northland Capital. Your line is open.

Nehal Chokshi -- Northland Capital -- Analyst

Yes. Thank you, and congratulations on the solid results and nice guidance, by the way. Let's talk about the guidance, though. So your guidance, 14% Q-o-Q revenue guidance, given that you did have these solid results for Q4, can you characterize what you have seen in the March quarter so far to provide this guidance, which I would characterize as in line to slightly better than expectations?

Dave Wagner -- Chief Executive Officer

Yeah. I think in line is what we're seeing. Things have been progressing nicely, in line for us since Q2, as you've been watching things grow. I think from the commentary, you're seeing that this security built-in message with our partners is working really well.

And the CloudAlly success, not a really big business, but that cloud backup and the buzz around that and these three strongest months, those are the kinds of things that have us confidence in the continuation of the relatively strong trends we've been seeing.

Nehal Chokshi -- Northland Capital -- Analyst

OK. Great. And then just to be clear, your ARR numbers, you say it is organic. Does that include or exclude the CloudAlly contribution?

Dave Rockvam -- Chief Financial Officer

That does include the CloudAlly contribution. So it would be one point or two less without the CloudAlly in there.

Nehal Chokshi -- Northland Capital -- Analyst

OK. Good. I think it was going to be bringing about $8 million of ARR in calendar '20?

Dave Rockvam -- Chief Financial Officer

That's right.

Nehal Chokshi -- Northland Capital -- Analyst

OK. All right. So if I subtract that out, I'd come up with ARR up about 3% Q-over-Q, cloud ARR up about 4% Q-over-Q, which is about the same rate as the prior quarter. But it does reflect an ongoing year-over-year detail of both the ARR and cloud ARR.

That's because the year-ago Q-on-Q increases were larger. So the question is, is that -- one, is that analysis correct? And then two, let me first make sure that analysis is correct before I follow-up on that.

Dave Rockvam -- Chief Financial Officer

Yeah, that's correct.

Nehal Chokshi -- Northland Capital -- Analyst

OK. All right. And so does the slower Q-o-Q growth relative to a year ago, continue to be driven by pandemic-induced job cuts? Or is it something else going on?

Dave Wagner -- Chief Executive Officer

It's been exactly that. As we've seen, getting back to the 100% ARR growth is a great thing, and we're pleased with that momentum. If we think it talks to the power of the rotation, the cloud and our position, helping our partners take advantage of that. But the overall environment is not as strong as it was a year ago.

Nehal Chokshi -- Northland Capital -- Analyst

Got it. OK. And then finally, you did talk about your net revenue retention rate. It did improve.

It improved about 100 basis points Q-o-Q, correct?

Dave Rockvam -- Chief Financial Officer

That's right.

Nehal Chokshi -- Northland Capital -- Analyst

OK. And can you just discuss what were the drivers of the improvement, the components of that between churn versus upsell, relative to the quarter ago?

Dave Rockvam -- Chief Financial Officer

Yeah. It was a combination of both, actually. So we're very pleased that churn, specifically around productivity, advanced threat protection, archiving and CloudAlly, the -- it continues to stay strong. As Dave mentioned on the call, a little bit higher churn on the encryption and on hosted exchange or specifically the on-premise encryption.

So -- but we continue to see good strength from our core retention of well over 90%. And then on the upsell, we did continue to see good strength in the upsell. What we have seen out there in Q3, Q4, and you can see it from our new customer wins, still strong new customer wins, but that's a place where we've seen with COVID, it's a little bit harder to get out there with the new customers and with the new partners, but the strength has continued to be in that base while we come out of this.

Nehal Chokshi -- Northland Capital -- Analyst

OK. Great. Thank you for answering my questions.

Dave Rockvam -- Chief Financial Officer

Thanks, Nehal. Appreciate it.

Operator

And our next question coming from the line of Chad Bennett with Craig-Hallum. Your line is open.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for taking my questions. So just kind of questions on Secure Cloud and now that we've seen a significant amount of the cloud ARR base kind of converted or in that product or suite, and it sounds like a lot of the new -- net new logos are directly flowing in there. Are we at a point where you can talk -- either one of the Davids, on Secure Cloud net retention or net expansion there? And then kind of in conjunction with that, it's good to see that, obviously, the services or products per mailbox ticking up, which is what you're trying to accomplish, I believe, with Secure Cloud.

But when do we see kind of the needle move on overall gross margins also and that starts to lift those a little bit? Any commentary there?

Dave Wagner -- Chief Executive Officer

Yeah. First of all, on the Secure Cloud rotation, what we were really successful with in 2020 was getting the new customers, 99%, coming on to Secure Cloud. 2021, to be clear, is the year where we'd be bringing over large cohorts of customers from the Zix Cloud and the Secure Cloud. That movement, as I discussed, starts actually next month during this quarter.

And that's a nice opportunity for us to bring those customers in, to start to see the opportunity to drive even higher attach with some of our existing customers. So excited about that part coming up. The retention inside Secure Cloud is really strong. It's driven largely by the shift, the fundamental shift toward channel and MSP.

And so as you break it down, our channel retention is even stronger than our direct retention. So really leaning in to those MSP cohorts, seeing the growth in those 2012 to 2020 cohorts that I talked about have grown greater than 50%. Those are really positive trends that underpin our confidence in the guide in the year. The gross margin piece, we're really focused on the gross margin dollars.

The Office 365 is a really powerful tool, and you go from Microsoft's results, they're performing in a powerful way. And so as that mix shifts up, it dilutes our margin percentages. but really confident in the attach and to continue to grow the gross margin dollars that we deliver to the bottom line.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

OK. And then maybe just -- sorry, a follow-up on CloudAlly. I think you mentioned, David Wagner, that they had their best three months of ARR growth year over year. I think you commented once you announced that deal that you expect that business to, I believe, was it double over the next couple of years from an ARR perspective?

Dave Wagner -- Chief Executive Officer

Yeah. Exactly. Exactly.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

OK. Are we on track with that and kind of how do you think about that?

Dave Wagner -- Chief Executive Officer

Yeah, that business is out of the gates, really, really strong. The team is integrating and executing. One of the things that's working better than we thought is the Salesforce back up market. That -- there's a lot of really important data sets in Salesforce and they're increasingly pointing their customers to the need for a backup of that data, and we have a really strong Salesforce back up.

So that a couple of really nice wins and growing trends there in addition to the Office 365 piece, which was the core of our investment thesis. So we're just really pleased with the team, how they're performing, the product, the adoption rate by our existing partners. And again, full integration doesn't really come to Q3. So the early start is really nice.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

OK. And then maybe one last one. I think you commented on it a little bit on the previous question. But just what are your thoughts as we stand here today in 2021, just on the stability of net retention and churn relative to maybe kind of the end of the last year? Do you feel like things are improving? Or you have more visibility there than maybe two, three months ago?

Dave Wagner -- Chief Executive Officer

No, the good thing is that relatively strong we've experienced since June, July has stayed in a pretty relatively strong position since then. We're looking forward to a much stronger second half when the vaccines around, people are really moving again. It's -- as you know, the overall macro is -- from the way we see it, stayed pretty steady since July and it's a good thing in that, it's steady at the 100% net dollar retention. We're looking forward to being able to drive higher, which we think comes with the increasing economic activity, we can help -- we look for in a couple of months.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for taking my questions.

Operator

[Operator instructions] Our next question coming from the line of Brian Colley with Stephens. Your line is open.

Brian Colley -- Stephens Inc. -- Analyst

Hey, guys. Can you hear me all right?

Dave Wagner -- Chief Executive Officer

Nice and clear.

Brian Colley -- Stephens Inc. -- Analyst

All right. Congrats on the quarter. I just wanted to start off maybe digging in on the top-line beat and kind of what you guys -- what products drove the strength in excess of your guidance? And then also, maybe if you could just touch on what you guys are assuming from a macro perspective, just curious if you're baking in any sort of economic recovery or better cybersecurity spending environment in the back half of this year?

Dave Rockvam -- Chief Financial Officer

OK. I'll take the front part of the question around the beat on the revenue side. Of course, we continue to see strength in the Office 365. So that provided a part of the beat for us.

And then I would say end of Q3 and Q4, the attach of the Zix IP products onto the -- what was historic AppRiver platform, we saw that -- you heard we are on our -- or a number of trials, we had 30% -- almost 30% of trials were with IP and with that, we had our highest ARR growth from Zix IP onto the AppRiver base that we've had and seen. So that helped bring up the revenue. So it was a little bit higher than we expected into Q3 and then going into Q4. So that Zix IP into that AppRiver base and then the Office 365, I'd say.

And then I would say archiving continues to be performing nicely.

Dave Wagner -- Chief Executive Officer

Yeah. And at the macro level, I think, I'd point to our guide, 12% to 14% -- and 12% to 14% revenue growth in Q1, 12% to 14% revenue growth in Q4, means we're planning on a steady year. We do think the new customer acquisition trends will start to improve in the second half. But the beauty of the ratable model as those wins will contribute more in 2022 than 2021.

So this year is steady as you go, what we think are good trends, but they're, again, slightly less than we were experiencing a year ago at this time.

Brian Colley -- Stephens Inc. -- Analyst

Got it. All right. That's helpful. And then as a follow-up on that, I mean, just touching on one of the initiatives that you mentioned for this year, migrating your legacy Zix customers over to the Secured Cloud, you mentioned higher churn rates in that customer base.

I'm curious if there's any investments you think you can make in the business that can lower that churn rate?

Dave Wagner -- Chief Executive Officer

Well, a lot of it is execution. The hosted exchange is really the one that we're really focused on. We enjoy a higher gross margin on hosted exchange business than Office 365. But we know that the future of Microsoft and the future of productivity is in the cloud.

And so to sit and watch that base go down is we don't think it is the right thing. We're more aggressively marketing our customers. We're not moving customers who don't want to move, but we're making sure that our existing customers know that we've got a strong Office 365 presence, building bundles and packages that are higher-margin bundles and packages to accelerate that HECS churn to create -- continue the long-term relationship at a higher margin. And obviously, it's better than losing the customer.

And so it's that HECS piece that I was alluding to that we're going to get more proactive on that, given where we are in the cycle and make sure we're managing those partners and customers into us for the longer term and not losing them to another provider that's coming in with the cloud offer.

Dave Rockvam -- Chief Financial Officer

Yeah, I would just add on to that. The additional expense you're seeing a little bit, I talked about, the guidance is $56 million of EBITDA for the year. We've got $3 million coming in for expenses that we cut really in 2020, because you didn't have travel, not as much marketing, assuming a higher variable compensation attainment than the 61% we made last year. You bring those in, right, the $3 million-plus you get to more like a $59 million number.

So the $56 million numbers is in an alignment when you look at some of those things we had to bring back in. And then on the EPS side, kind of being relatively flat, that has to do with that R&D and why I bring it up here is we did spend and continue to spend on the tools that we need to make sure that we bring those customers across properly, that they come into a really strong secure cloud platform. And so that's a little bit of the additional expense we're taking to try and make sure that that goes smooth for our customers.

Brian Colley -- Stephens Inc. -- Analyst

Got it. That's really helpful. My last question was just on the international business. Obviously, seeing really strong growth there.

I'm curious if you could provide some disclosure on what your international ARR growth rate has been or what it was in 2020 and kind of what you see that being in 2021? And maybe what the potential is maybe over the next two to three years?

Dave Wagner -- Chief Executive Officer

Yeah. It's growing really well. We have a really strong team there. And as they've grown from nascent two years ago, this year was a doubling.

It's still sub -- meaningfully to sub-10% of ARR. But we could see them getting 10% of ARR in the next year, year and a half. Just the market there, the IT providers needing to move to a cloud, needing a platform to help them migrate their businesses, Secure Cloud fits that really well. We're making big investments now to launch later in April, which isn't that far way now into the German market, which we see being able to, in three to five years, match where the U.K.

is in a three-year investment period. So that just sits under 10% or another 10% of our ARR with that investment profile in that market.

Brian Colley -- Stephens Inc. -- Analyst

Got it. All right. That's really helpful. That's all I have.

Thanks, guys.

Dave Wagner -- Chief Executive Officer

Thank you, Brian.

Operator

Our next question coming from the line of Andrew King with Colliers Securities. Your line is open.

Andrew King -- Colliers Securities -- Analyst

Great. Thanks for taking my questions, guys. Congrats on a great quarter. So just over the course of the pandemic, we've seen a slowdown in your ability to add MSP partners as a result of the pandemic.

Can you talk a little bit that impact from this last quarter? And then also what your expectations are for that going forward into 2021?

Dave Wagner -- Chief Executive Officer

Yeah. So we should put the number out. This quarter was a little bit better than last quarter in terms of the number of MSPs added. So we're continuing to add MSP.

It's just a little bit slower than, again, than the pre-pandemic pace. But the focus for this year is a laser focus on larger MSPs. And so we're building out two careful OKRs, one is to attract MSPs who can do meaningful amounts of our IP. And so we're segmenting a little more carefully around the ability to really represent the secure, compliant, resilient part of the product suite in that targeting.

The other thing we're targeting is growing our existing MSPs. That's the real engine that we get built is bringing those MSPs on over time, getting all of their customers on to our platform and then supporting their growth as businesses. And that's a really powerful part of our model that we're continuing to lean into and really targeting the growth of our existing partners, as well as that attracting new larger partners.

Andrew King -- Colliers Securities -- Analyst

Great. And then just last quarter, you guys announced the hiring of a new product officer, Ryan Allphin. Can you talk a little bit about what he's done in his first three months there? And how he fits into the larger strategic view of the company?

Dave Wagner -- Chief Executive Officer

Well, yes, thank you for asking. He's a tremendous, really big add to leadership team. Ryan brings experience not only in building platforms, but looking carefully at the data sets and artificial intelligence, and how to think carefully about how we take the information that we have uniquely have for our partners and customers and helping to improve the experience with machine learning, artificial intelligence. So I think as we move forward, you'll start to see more effort to capitalize and ultimately monetize the data assets that we have and can build from.

But he's bringing it like we expected, a great architectural view and a longer-term product vision that I think is going to be really helpful.

Andrew King -- Colliers Securities -- Analyst

Great. Thank you.

Operator

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

Dave Wagner -- Chief Executive Officer

Well, I'd like to thank everybody for taking the time to spend with us this afternoon, this evening and look forward to speaking to you again in that 60 to 90 days on our Q1 earnings call.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Geoff Bibby -- President and Chief Executive Officer

Dave Wagner -- Chief Executive Officer

Dave Rockvam -- Chief Financial Officer

Nehal Chokshi -- Northland Capital -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Brian Colley -- Stephens Inc. -- Analyst

Andrew King -- Colliers Securities -- Analyst

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