Zix Acquires AppRiver for $275 Million -

Zix is acquiring AppRiver for $275 million in cash. The deal combines an email security specialist with an MSP-friendly cybersecurity and Microsoft Office 365 cloud solutions provider (CSP) specialist.

The big question: Can Zix -- which generates nearly 60 percent of new sales from direct customer engagements -- engage and retain AppRiver's pure channel sales model and a highly respected ecosystem of 4,500 MSPs?

Updated January 15, 2019, 6:00 p.m. ET: Zix CEO David Wagner describes MSP partner strategy.

Financials and Investors: Let's start with the dollars and cents behind the deal. Zix, led by CEO David Wagner, ended Q4 2018 with $27.1 million in cash and no debt. The company has lined up financial backers to help finance the AppRiver deal and fund further growth. Among the financial moves to note:

True Wind Capital will make a $100 million equity investment with closing of the AppRiver acquisition; James H. Greene, Jr. (Founding Partner) and Brandon Van Buren (Principal) will join Zix’s board of directors at the closing
SunTrust Bank and KeyBanc Capital Markets are committed to a new five-year $175 million term loan and a $25 million revolving credit facility.

So what does Zix gain? Plenty. AppRiver's ecosystem of 4,500 MSPs supports more than 60,000 companies worldwide. AppRiver CEO Michael Murdoch and lieutenants like North American Channel Director Justin Gilbert have been hyper-focused on MSP-centric recurring revenue opportunities for partners.

Murdoch was not quoted in the Zix-AppRiver M&A press release, so we suspect he's exiting the business. We're checking to see if Gilbert and other AppRiver channel leaders will remain with the business, post acquisition.

Zix Blends Direct, Indirect Sales: While AppRiver essentially is a pure channel business, Zix has had a blended sales model. For instance, 58 percent of first-year orders involved direct sales during Q3 2018, while 41 percent involved VARs and MSPs; and 1 percent came from web sales and other areas, Zix CEO Wagner said during the company's Q3 2018 earnings call.

We're checking to see if or how Zix plans to grow its partner-led sales beyond the AppRiver deal.

Zix and AppRiver: Combined Company Financial Picture

The combined company, known as Zix, expects to hit the following financial targets:

Annual Recurring Revenue (ARR): More than $180 million in ARR.
ARR At Year-End 2019: Roughly $200 million to $207 million at fiscal 2019 year end, up 11 percent to 15 percent year over year.
Q4 2019 Revenue: Roughly $47 million to $50 million with a 24% adjusted EBITDA margin in the fourth quarter of 2019.

Zix Business Performance Before the Deal

Amid the deal, Zix said it expects Q4 2018 revenue of $18.3 million to $18.4 million, up roughly 9 percent to 10 percent compared to $16.8 million in the fourth quarter of 2017. Those figures, just to reinforce, do not include the AppRiver deal.

Also, Zix expects revenue for fiscal 2018 to be $70.3 million to $70.4 million, up roughly 7 percent compared to $65.7 million in fiscal year 2017. Again, those 2018 figures do not include the AppRiver deal.

Read between the lines, and it's safe to conclude that AppRiver is growing faster than Zix. And the combined companies also expect to generate about $8 million of cost savings within the first 12 to 18 months following the acquisition close. Zix did not disclose how much of the $8 million in savings involves potential job consolidation post-AppRiver acquisition.

AppRiver Accelerates Zix Growth

AppRiver is well-known in the Microsoft Office 365 cloud solutions provider (CSP) market. The company helps VARs and MSPs to monetize Office 365 through customer migration and support services.

Among AppRiver's latest moves: Introducing Office 365 security audit opportunities for MSPs.

AppRiver itself has been active on the M&A front ahead of its sale to Zix deal. The deal timeline included: