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On Tuesday, November 12, 2013, Institutional Investor and SumZero, the worlds largest online
membership community of buy-side investment professionals, hosted an idea competition at
Columbia University Business Schools Uris Hall Auditorium.
Nineteen emerging managers were selected from within the SumZero community on the basis of
strong performance and high-quality peer reviews. Each manager gave a three minute pitch on their
best idea to an audience of analysts and investors who rated their pitch for validity of the thesis,
strength of the argument, feasibility of the trade and originality.
We invite you to view these ideas and register to download each presenters bio and full pitch paper.
If youre a professional investment ofcer or analyst, we invite you to register to vote for the winning
idea.
Favorite Investment Book:
You too can be a Stock Market Genius by Joel Greenblatt
Favorite Quote/Author:
Why do you think the same ve guys make it to the nal
table of the World Series of Poker EVERY YEAR? What, are
they the luckiest guys in Las Vegas? Mike McDermott
from the movie Rounders, explaining to his girlfriend that
poker is not all luck. I feel the same way about investing.
Most Attractive Area of the Market Right Now:
Small cap technology companies with strong balance
sheets, reasonable valuations, and limited to no analyst
coverage.
Least Attractive Area of the Market Right Now:
U.S. 30-year treasuries I am not lending our current gov-
ernment money for 30 years at sub 4%.
Languages Spoken: English and Spanish
Best Past Investment Made:
I bought Apple in 2000 at $8 split adjusted and held. It has
been a 60 + bagger.
Worst Past Investment Made:
I owned Pinnacle Airlines all the way into bankruptcy. I
mistakenly believed that the board and management would
be fair to common shareholders and Delta would honor
their contract. Both assumptions proved false. Common
shares are no longer worth the paper they are printed on.
Personal Investing Style:
Concentrated with low turnover, willing to accept volatility
for long-term returns
Areas of Personal Expertise:
I invest almost exclusively in equities with a preference for
technology and business services that are U.S. or Europe-
an listed. I am very comfortable with small cap companies
that have limited to no analyst coverage.
Scott Miller Greenhaven Road Capital
Age: 42 Title: Portfolio Manager Location: Rye, N.Y.
Education (Undergrad/Grad/Certications): University of Pennsylvania (Political Science), Stan-
ford University Graduate School of Business MBA, Stanford University Graduate School of Educa-
tion - MA
Previous Employers/Positions: I have held a variety of operating positions from managing a paper
bag factory to cofounding a service business that employs 1,000 people across ve states. I have
also worked for an education-focused private equity fund as an associate and a long/short hedge fund as an analyst.
Bio: Unlike most fund managers, I have extensive operating experience growing a business as a cofounder, expanding
from three employees to more than 1,000 people and generating annual revenues in excess of $50M. I have served as
Chief Financial Ofcer, Chief Technology Ofcer, and software developer. To quote Warren Buffet, I am a better investor
because I am a businessman, and a better businessman because I am an investor. I have also worked in private equity
and a long/short hedge fund which provided foundational skills for due diligence, industry analysis, and nancial model-
ing.
AUM: $5 million
Past Ideas Submitted on SumZero: Fortress Investment Group (FIG), AIG Tarp Warrants (AIG WS), ChipMOS (IMOS)
Firm Focus: Greenhaven Road was created as a vehicle for friends and family to invest alongside me. I invest the fund
like it is my own money because it is. The structure is based off of the early Warren Buffet partnerships where I only
make money when my investors make money.
Firm Strategy: The fund is engaged in primary research and operates under the premise that fundamentals matter and
the market is inefcient. The general partner of the fund has a very substantial portion of his liquid net worth in the fund
and manages the fund as if it is his own money because it is.
Fund Disclaimer: Please see section 16 of appendix.
Fund Description: Greenhaven Road Capital Fund 1 is a concentrated, value-focused long/short fund. The portfolio
consists of high-quality businesses with high free cash ow yields and special situations such as spinoffs. The fund can
invest in all geographies and market capitalizations, but primarily invests in small and mid-cap U.S. listed companies and
has historically been 80%+ net long with minimal use of leverage.



70 Greenhaven Road, Rye NY 10580 (917) 880-2051


Ticker ZIXI
Asset Class Common Equity
Recommendation Long
Expected Timeframe 1 year to 2 years
Country United States
Situation Growth at a Reasonable Price
Price At Recommendation $4.12
Price Target $6.00
Diluted Shares (MM) 62.5
Market Cap $257
Cash & Equivalents (MM) $33
Debt (MM) 0
Non-controlling interest (MM) 0
Enterprise Value $224
Catalyst Type Growth & Spinoff of subsidiary


ELEVATOR PITCH
Zix is a high quality business with 95% + customer retention rates, regulatory tailwinds, in a four
player industry with one of the players exiting. There is optionality on two new products that
are transitioning from only expense to profit contributors over the next two years as Zix cross
sells to their 9,000+ existing customers.

THESIS
ZIX Corporation is a small, growing, mission critical, high-quality business with very high
customer retention rates (95+%), contracted revenue, high gross margins, regulatory tailwinds,
and the ability to cross-sell new products to their 9,000-plus customers. The current GAAP
financials mask the true profitability of the business as new product development temporarily
depresses earnings. ZIX has a solid balance sheet with no debt and 12% of the market
capitalization in cash.




70 Greenhaven Road, Rye NY 10580 (917) 880-2051

PRIMARY PRODUCT
Established in 1998, Zix was originally in the healthcare business, providing an e-prescription
platform to healthcare organizations. Gradually, the business migrated away from
prescriptions towards encrypted e-mail and fully exited the prescription business in 2010. The
Zix Corporation e-mail encryption system emphasizes ease of use. The person sending the e-
mail does not have to actively encrypt the e-mail by remembering to press a certain button.
Instead, the e-mail encryption product has a series of filters that are set by the client and
determine if an e-mail needs to be encrypted. A very basic example is that words such as
confidential will trigger encryption. The company has spent several million dollars a year on
R&D and has built more complex algorithms than encrypting confidential. Once an e-mail is
sent, it is routed through Zixs $50M data center. If the intended recipient is registered in the
Zix directory, then they will receive the e-mail and be able to read the content without any
action on their end. There is never any additional action required by the user. Sending an
encrypted e-mail is the same as sending a regular e-mail. All of the work is done by the filtering
technology. Only recipients not registered in the Zix directory have to do anything to receive
the e-mail. With more than 38 million registrants in the Zix directory, more than half of
received e-mail requires no action by the recipient. As the Zix directory grows, this percentage
will continue to increase.
BROAD BASE OF CUSTOMERS
Zix currently provides e-mail encryption solutions to 9,000 organizations, including the U.S.
Treasury, all U.S .banking regulators, the SEC, 32 of the Blue Shield healthcare organizations,
20% of U.S. banks and 20% of U.S. hospitals. Customers typically sign multi-year contracts (the
average length is 2.5 years) with a per user fee (average fee is $21 per user). No customer
accounts for more than 2% of revenue.
SAFE CHOICE FOR PURCHASERS
Zix has a 90+% retention rate of customers and a 75% win rate on new contracts because of the
ease of use for senders and recipients, low cost, and installed base of customers. For the IT
manager that selects the e-mail encryption platform, Zix is a safe choice. It is the same e-mail
encryption that government regulators use. You will not be fired for selecting or renewing Zix.
E-mail encryption is not the first place managers go to save money or be heroes/innovators.



70 Greenhaven Road, Rye NY 10580 (917) 880-2051

Given that Zix passes the cost, uptime, ease of use, and industry standard criteria most
managers use, the one area where Zix is vulnerable is on the breadth of offering. Zixs e-mail
encryption is effectively a stand-alone offering.
CORE BUSINESS IS GROWING AND A PRIMARY COMPETITOR IS EXITING THE BUSINESS
Zix has had 19 consecutive quarters of increasing revenues. YTD 2013 revenues are up 13%
versus the previous year. Historically, Zix has cited Cisco as one of its three primary
competitors along with Proofpoint and McAfee. Cisco, as part of its corporate realignment, has
been re-emphasizing routers and deemphasizing e-mail encryption and other ancillary
businesses. E-mail encryption, which was never a significant business for Cisco, has become
even less so. To quote Zix CEO, Rick Spurr, on the second quarter 2012 conference call, Cisco
announced they are no longer selling their high end encryption solution and they put a notice in
the marketplace that, like I said, they quit selling and they are going to drop support for their
product in the 2014-2015 timeframe. So customers will have a little runway but it's obviously a
signal that they are going to quit investing and most customers see that as a red flag to do
something different. We don't know the rate at which that will play out but that high-end
encryption appliance is being used by a number of large corporations. So that's good.
NEW PRODUCTS CREATE SHORT TERM HEADWINDS BUT LONG TERM OPPORTUNITIES
Zix has a very scalable model with gross margins in excess of 85%. Their largest variable
expenses are sales commissions. As a result of their cost structure, the economics of any
incremental revenue is highly profitable. To increase long-term profitability, Zix has been
steadily increasing its R&D budget to fund the development of two new add-on products which
have just been launched. The Zix 2013 R&D spend will be approximately $10M, which is twice
the 2011 spend and three times the 2010 spend. The company is spending somewhere on the
order of $3M to $5M or five to eight cents per share in what could really be considered growth
capex. Eventually the new products should be strong financial contributors, but given the
combination of their young life and subscription accounting, they are virtually all cost and no
revenue to date.
The first investment is in a product for Data Loss Prevention (DLP), which was released in March
2013. The DLP product uses the same filters as the e-mail encryption to determine if e-mail
content and attachments should be sent. In the event that an e-mail has content that should



70 Greenhaven Road, Rye NY 10580 (917) 880-2051

not be sent, the system will quarantine the information and send the proper alerts. The
company has provided no guidance on the number of expected users. To date, the market
acceptance of DLP appears tepid. There have been fewer than 8,000 seat licenses sold in six
months. The company is releasing a version 2.0 in 2014 which they claim will address several
feature requests from the marketplace. If Zix can achieve a 10% attachment rate at $7 per user
and 85% margins, the company is looking at two cents per share in contribution and two cents
per share in decreased development spending. For a company with YTD run rate GAAP
earnings of twelve cents per share, this is material.
The second product Zix is developing and introducing is also a derivative of the core product,
and relates to BYOD Bring Your Own Device, a growing problem for IT departments where
employees want to use their own iPhone/Blackberry/laptop for work. Bringing your own device
is a very practical request, but can be challenging for the preservation of e-mail encryption and
other security measures such as DLP. The BYOD product allows IT departments to encrypt mail,
control devices, and delete mail in the event a device is lost. BYOD was released in September
2013, just 27 days before the quarter ended. The ASP for BYOD is expected to be in the $30-
$35 per user range. Similar to DLP, the financial impact of BYOD to date has been all expense.
If Zix can convert 10% of users to also purchase BYOD at a $35 ASP and 70% gross margins, it
can contribute eight cents per share in earnings and another five cents per share in decreased
development spending once the product is mature. For a company with YTD run rate GAAP
earnings of twelve cents per share, the combination of BYOD gaining traction and decreased
future expenses is material.
GAAP FINANCIALS UNDERSTATE EARNING POWER
Zix Corporations accounting is all legal and conservative, however, it can be misleading during
times of growth and investment. The company has three practices which depress short-term
earnings that are not clear from looking at the income statement. The first practice is that even
though contracts have a typical duration of two to three years, all commissions are paid in the
first year, even though the revenue is recognized over full timeframe. The net result of this
policy is that the first year, with all of the commissions loaded into it, is less profitable than the
subsequent years. The impact of this can be seen in orders, which are on a run rate of almost
$9M. All commissions will be expensed this year even though the revenue will be recognized
over the next 2.5 years.



70 Greenhaven Road, Rye NY 10580 (917) 880-2051

The second accounting practice that can obfuscate true profitability relates to the companys
accounting for product development. All software development expenses are incurred during
the period that they are expensed. As previously discussed In the case of the development of
the DLP and BYOD products, the company is incurring significant R&D expenses for which there
is almost no revenue coming in yet. These expenses are an investment in future growth that
depresses current earnings. R&D has increased by $5M from two years ago, or eight cents per
share in depressed earnings.
Lastly, the company recognizes revenue on contracts only as services are provided. If the
company were to sell a $300K contract with a duration of 30 months ($10K/month) with each
year paid up front, it would receive $120K in cash to start services for the first year. The
company would pay commissions of approximately $20K and would recognize only $10K per
month in revenue. Over the 30-month lifetime of the contract, it will be profitable; from a cash
perspective, because they are paid up front, the contract will be cash flow positive over the
course of the contract, but from a GAAP earnings perspective, the contract will not be
profitable in the initial quarters where the commissions are paid and only a fraction of the
revenues are recognized. Again, over the life of the contract, this sorts itself out, but during
periods of growth, the revenue recognition and commission expense practices serve to depress
short-term earnings.
GAAP FINANCIAL STATEMENTS UNDERSTATE BALANCE SHEET
General Accepted Accounting Principles (GAAP) understate the balance sheet of Zix Corporation
as well as the earnings power. This understatement can be seen in two primary areas. The first
is that Property Plant and Equipment is valued at $2.5M on the balance sheet. In the late 90s/
early 2000s, the company spent in excess of $50M building a data center, which it is still
operating today. The data center is still fully functional, processing more than 100 million e-
mails a month and would cost tens of millions of dollars to replace, yet effectively does not
appear on the balance sheet because of its age; it is fully depreciated according to GAAP. This
situation exists because the useful life of the data center is longer than the period that GAAP
allows for depreciation. The second area of understatement is that the balance sheet does not
reflect the companys backlog. The backlog represents signed contracts for which payment
has not yet been received (but commissions have typically been paid). The value of the backlog
is currently $64M. This appears nowhere on the financial statements, but would clearly be of



70 Greenhaven Road, Rye NY 10580 (917) 880-2051

value to an acquirer. The backlog has the added benefit of providing visibility into revenues
since more than 90% of the coming years revenue is typically already contracted and often
already prepaid.
VALUATION
Zix has a market capitalization of $257M; when the $32M in cash is backed out, there is an
enterprise value of just $225M. Given that the GAAP financial statements understate the value
of Zix, I believe a more true value of the company comes from looking at the cash flow
statement. In the last reported quarter, Zix reported YTD run rate free cash flow of just over
$11M. When you add back in inflated R&D of $4M, and the understated impact of $9M in new
contracts, there is normalized free cash flow of more than $16M + per year before any
contribution from new products or continued growth in the core business. If the company
continues to grow the core business at double-digit percentages per year, reduce share count
at single-digit percentages, and launch high margin new products, this will be a very successful
investment over the next three years.
The quickest path to realizing true value may come through being acquired. Most logical
acquirers are much larger organizations with existing sales forces and infrastructure. As a
result, they can increase the profitability just by stripping out another $2M in general and
administrative expenses they would no longer require (CFO, etc.). An acquirer should ascribe
value to the $64M in contracted revenue, the $50M data center, the potential of the future
high margin products, and the technology. Given that Google and Symantec have both chosen
to partner rather than build, there are data points to suggest that somebody may choose to buy
over build. Symantec, which is going through a strategic review under new CEO Steve Bennett,
would be a logical acquirer. A $6 per share valuation would imply less than $330M enterprise
value for a $50M data center, 9,000 customers, 3 product lines, and $60M in backlogged
contracted revenue and a 5%+ FCF yield before stripping out duplicative expenses. In other
words not a stretch.
BARRIERS TO ENTRY
The e-mail encryption business is not a great business, but is a pretty good business with
reasonable barriers to entry. Of course it is possible for a competitor to build a data warehouse
and hire engineers. It would be harder to replicate the Zix directory. This is a directory of 34



70 Greenhaven Road, Rye NY 10580 (917) 880-2051

million e-mail users and addresses such that if a user is in the Zix directory and receives an
encrypted e-mail, it will automatically be decrypted thus greatly improving the ease of use.
The last piece of the Zix puzzle that is hardest to recreate is the customer base and reputation.
Who would you buy encryption from the people who provide it for the Federal Reserve or
those who dont? Certainly, there are a number of potential entrants with credibility in the
security market that could win customers and are potential new entrants, and this will never be
a monopoly. I do however, take some comfort in the fact that two logical entrants into the e-
mail encryption business, Google and Symantec, have both decided to partner with Zix and
resell their products rather than developing their own.
CATALYSTS
Zix is an attractive business with recurring revenues, barriers to entry, high gross margins, a
market leading product, and a reasonable valuation. It has had these attributes for years while
the stock price has languished below $5. There are two potential catalysts. The first is that if
the BYOD product can demonstrate any traction in the marketplace, it would provide support
for multiple expansion. The second potential catalyst is a change in the composition of the
board of directors. The largest shareholder, Meldrum Asset Management, threatened a proxy
fight while seeking three board seats. The company agreed to forgo the fight and award
Meldrum two board seats as of January 1, 2013. Meldrum has not been explicit in its agenda,
but increasing the share buyback and pursuing the sale of the company would be two potential
paths to value realization. If Zix can continue to profitably grow sales, expand its customer
base, and expand product offerings, there is plenty of opportunity to compound growth for
years to come.
RISKS
Zix is a small cap company that is off the radar screen for most investors. They are covered by
no bulge bracket firms. The four analysts that cover Zix are Craig-Hallum Capital, Imperial
Capital, LOM, and Topeka Capital markets. Market indifference to Zix could persist for years.
With short term R&D for new product development masking growing profitability, the market
may remain inefficient. There is also the possibility of new entrants to the market. In
particular, instead of partnering, Google, Symantec, or others could enter the marketplace
competing in part on cost and driving down the overall profitability.



70 Greenhaven Road, Rye NY 10580 (917) 880-2051

***DISCLAIMERS
This is not an offer to buy or sell securities. I am not endorsing the buying or selling of this
security in any way, shape or form. I may or may not own this security at any time. Please make
your own decisions regarding investments.
This investment write-up in no way incorporates any non-public information and/or
unsubstantiated rumors or misrepresentations and does not involve any act, practice, or course of
business which operates or would operate as a fraud or deceit upon any person in connection
with an investment.
I have obtained all necessary approvals from my employer to submit this investment write-up to
the SumZero Idea Database and it complies with all applicable policies of my employer.
This submission does not violate any agreements to which I may be subject (including, without
limitation, any confidentiality agreements), insider trading regulations, SEC regulations, and/or
other applicable laws, rules and regulations.
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