Zix CEO Dave Wagner On How Buying AppRiver Unlocks SMB, Microsoft Opportunities

Dave Wagner dishes on how the AppRiver deal will streamline service delivery around Office 365, why Zix and AppRiver partners will continue being served by separate programs, and how he plans to double sales within the next half-decade.

Mastering Microsoft Email Security

Zix's $276.4 million acquisition of AppRiver earlier this year will allow the company to spread its wings beyond helping healthcare and financial services organizations achieve email compliance to providing SMBs with a bundle of security services around Office 365, according to Zix President and CEO David Wagner.

Wagner told CRN that the purchase of AppRiver will make it easier for Zix partners to bill and provision Office 365 for their clients while attaching complementary email security services. The Dallas-based cybersecurity vendor hopes to grow from $188 million of annual recurring revenue today to $375 million of sales within the next three-to-five years, Wagner said.

AppRiver partners, meanwhile, will benefit from additional compliance and security features provided by the legacy Zix technology to protect against threats like ransomware, malware, and phishing, according to Wagner.

From maintaining separate programs for Zix and AppRiver partners to competing against the likes of Proofpoint and Mimecast, here's what Wagner said solution providers can expect from Zix in the months and years ahead.

What new technology are you most excited about getting into?

Zix's suite broadly we launched in February, and that's where we brought together our cloud-based multi-tenant bundle for encryption, archiving, and threat protection. We had all three products for two years, but the launch in February was when we brought that all into one integrated offer. So that's where our partners and customers are attracted to now. It's not a point solution, but a bundle of services around the Office 365 mailbox. So that's what's driving things. With the AppRiver acquisition in February, that should show the partner community and the market that we're really focused on being complementary to Microsoft and helping our customers have a tightly integrated product with their core productivity application, giving fantastic support for partners and end customers around Office 365. So that's going to drive a lot of our growth in the next 18 months. It's going to be around adoption of that tighter integration with the mailbox and transition services we can do to help customers migrate to the cloud.

What did Zix and AppRiver each bring to the table?

AppRiver has built a platform over 12 years for doing entitlement, provisioning, and billing for partners so that it's very easy for them to administer Office 365 for their clients and attach the complementary email security services. That platform will, over the next 18 months, become the core Zix-AppRiver platform for partners to get easy integration of the suite of services and the ability to a la carte pick which services work with which customers in a very agile way. If you think about the small MSP managing 30 clients, each of those clients have employees leaving on Friday and coming in on Monday. The AppRiver platform allows those MSPs to add the new users easily, delete the old users, and updates the bill automatically, and takes care of the provisioning, entitling and billing for them.

What has surprised you as the two companies formally join forces?

The integration is going really well. We exceeded our expectations in terms of how quickly we were able to integrate Zix Encrypt into the Nautical platform. We completed that within 45 days of the acquisition. So that was a first big accomplishment. The second big accomplishment came in late June with the integration of Zix Archive into the Nautical platform. The technical integration has been a really pleasant surprise. Office 365 is growing very, very rapidly. Our core tenant was helping our partners and customers get through that migration, and get the right services attached to the mailbox. But that movement to the cloud has accelerated even since the beginning of the year, so we're really excited about that. And we're really pleased with the strength of the Microsoft partnership that we have with AppRiver. AppRiver is one of the very top Microsoft cloud service providers, one of the top two productivity providers in the CSP program for Microsoft. So the really tight relationship we have with our account team there building programs and services, particularly for the mid-market buyers, is something I've really been pleased with.

Why is it so relevant in the mid-market?

It's relevant for Microsoft because they spend a lot of resources servicing their largest clients, and they're not as well-equipped to handle the smaller clients. Microsoft looks to partners like AppRiver and others to provide outstanding support. They want their smaller customers to get same level of service that their larger customers get. They're just not well-equipped to service those 17 million small businesses around the world. So they value a partner like AppRiver who can consolidate services and support for a lot of smaller MSPs so smaller businesses who get their services from MSPs can be serviced by AppRiver, which reduces phone calls and support onto Microsoft. So it's really good from a Microsoft perspective. It's really good from a Zix/AppRiver perspective because we're really well-positioned to complete the email service with the right compliance and security products around the mailbox. So by working with Microsoft really well in the corporate and mid-market space, we're also then able to really address the customers' security and compliance requirements at the same time from the same platform.

Was Microsoft the primary email vendor Zix worked with prior to the AppRiver acquisition?

It's G Suite and Microsoft. In the over 200 mailbox space, Microsoft has more than 80 percent share. So we work very well with both G Suite and Microsoft. It's just Microsoft has a larger share of the market.

How has the AppRiver acquisition impacted partners?

We're not bringing the partner communities together just yet. On the AppRiver side, which would be traditional MSPs, they've been really pleased with the Zix acquisition, and particularly pleased with the superior product performance, pricing and margin structure we've been able to give them with the Zix IP bundled into the solution. So we're getting really positive feedback. If you think about the MSP's job, number one is providing outstanding service to their clients. The second thing on their clients' mind is security, and making sure they're protected from everything they're reading about in the news, the ransomware, the malware, the phishing attacks. The Zix suite is really well-positioned to provide great email productivity solutions that work, and layer on the compliance and security piece they need. So they're very excited about it. On the Zix side, we're continuing to work with all of our VAR partners, and many of them already have providers of Office 365. That's great, and they'll continue to provide Office 365 directly from Microsoft or through a different CSP if that's the way they're procuring it, and it'll continue to deliver the suite of protection services that's highly aligned and complementary to Office 365. And then, over time, we'll look at which of those partners might be better serviced by AppRiver than the current CSP. But for the most part, we're just continuing to support our VAR partner community with Zix suite services attaching to their Office 365 motion.

What percentage of Zix partners have shifted over to AppRiver for procuring O365?

We didn't have a lot of overlap, so we're not shifting anybody. It's less than 10 percent partner overlap. They're pretty separate go-to-market motions where Zix is working with the more traditional VARs and the DMRs, and App River is focused exclusively on the MSP community.

What's additive for the Zix partners if they're already getting Office 365 from another CSP?

Today, not much. Today, they get the assurance that Zix is very Office 365-centric in our product strategy, and they can know that we'll have a real tight integration and it'll work really well for them. As we do the product roadmap integration, the platform for partner delivery will see a lot of enhancements for our VAR partners going forward for the provisioning and entitlement of the Zix services through the Zix platform. So that'll be coming in the next 18 months to two years.

Can they take advantage of those even if they use a different CSP for procurement?

Yes, exactly.

Is there a plan to bring the Zix and App River partners together into a single unified partner program?

We want to sell the way customers want to buy. It's pretty basic solution selling. And we're seeing the motions largely separate. So we plan to retain two separate selling motions. The MSP motion, those partners are making the technology choices on behalf of their customers, and their customers 90 percent of the time are just going to accept the technology selection of the MSP. On the VAR channel, those are typically slightly later customers that haven't chosen to outsource to an MSP yet, and they're much more actively involved in their procurement decision. The VAR partner and the DMR is helping the end customer navigate that procurement decisions, and the sales team in Burlington [Mass.] is working with those partners where the end customers will actively engage in the procurement process. They're pretty separate go-to-market motions. Some of the larger partners will be both a VAR reseller for their larger clients, and they'll be an MSP in other instances. They understand when we can compete to be the technology provider in the MSP. So if they're currently using another vendor, we'd like to compete and win that opportunity to be the technology provider in their MSP stack. But if the customers are getting more involved in procurement decisions, they know to reach out to the Zix team to help them help their customer make the right decision versus the various competitors we have. We're navigating, and the overlap seems to be pretty well understood on both sides.

What's the difference between the typical Zix and AppRiver end customer?

The AppRiver end customer average size is 28 users, and the Zix end customer is 750 users. So they're pretty different go-to-market motions, and pretty different customer types. And as I talk to MSPs, that 28 happens to be latest the U.S. Small Business Administration survey number of employees. And so it would make sense that the MSP channel is really tightly aligned with small businesses, and the VAR channel is working typically 100 customers and up, driving that much larger deal size through the VAR channel.

How does the differing customer size inform the construction of the platform and product roadmap?

That's what the cloud is doing. The cloud takes the away that discrimination. I think about Salesforce as the number one cloud company, and they started by servicing the mid-market buyer, and they moved up. Whether I'm serving a million mailboxes 20 at a time, or I'm servicing a million mailboxes at once, it's the same. The cloud takes away the discrimination on scale, and that's what we're building for is a cloud platform to help businesses deliver their cloud applications, whether it's SMBs delivering to their partners or VARs delivering to their customers. The platform access to purveying and titling and strong support is a key value proposition.

Who would you consider your core competitors to be, and what is your biggest differentiator?

From a public markets perspective, it's Mimecast and Proofpoint and Zix and Sophos are the public companies that are in the email security space. Barracuda is now private in the email security space. Zix has always been the gold standard when it comes to compliance, making sure your organization is compliant with protecting outbound information, HIPAA and consumer privacy information. So that's where our strength is – ease of use, and compliance-oriented verticals. Healthcare is 50 percent of the Zix business, finance is 28 percent. So you can see a real high concentration in the compliance-oriented buyer.

Has that composition changed with the AppRiver acquisition?

In the SMB space, it's obviously much less concentrated in a vertical. But what we like about that position is that the need for compliance is going up. It's not going down. Twenty-person organizations aren't worried about GDPR every day, but GDPR is bringing a higher level of awareness across all verticals that consumer privacy and protection is important. We think the focus of our product roadmap on compliance services all verticals really well because all verticals are going to have higher requirements.

How rapidly is Zix growing from a revenue perspective?

We've more than doubled since I've joined 3.5 years ago. We've gone from $55 million to $188 million of annual recurring revenue. We're trying to double again in the next three to five years. $375 million is our stated long-term revenue target. Proofpoint is just under a billion now, Mimecast is in the $400 million to $500 million range. In the cloud email security space, we're all taking share from the on-premise folks. So there's still a lot of migration from on-prem to the cloud. McAfee, Symantec and Cisco would be the losers, and Zix and the other cloud-based providers would be the gainers.

Are you planning to make security awareness acquisitions to keep up with Proofpoint and Mimecast?

We follow a build, partner, buy strategy. We've done acquisitions as well, and we'll be looking at partnerships. We do a lot of partnerships today meeting the market in that area. But it's an area that we're paying a lot of attention to.

Is it important to have security awareness firms in-house to control the roadmap, or are there partnership opportunities?

There are both, and we'll continue to look at it both ways with partnering with other vendors in that space and/or building or buying something in that area.

Why did Zix move into new offices near Boston?

Our theme internally has been 'next level.' Ever since I joined Zix three years ago, we've been looking at moving Zix progressively up in the value that we provide to our partners and our customers. So it's been a really successful journey. We first focused on moving our core encryption product to the cloud. And then we did a couple of acquisitions to expand our suite of services, and include email security more broadly. And the sales team in this office has really been a big part of the growth of the company. All of our channel sales management for the country is based out of this office, and our inside sales team that supports those channel partners is all here in the Burlington [Mass.] office. So to me, this office represents the next level for Zix's sales team. The team has more than doubled over the past 18 months, so they've earned the right to get this space, and there's space to double here again if we continue to be successful.

How large was your sales team 18 months ago, and how large is it today?

When I started three years ago, I know it was 12, and now, we're up to 30. That's this sales team here. We have another 25 with the AppRiver team. But here in the Burlington offices, it's gone from 12 to 30.

What is the sales team growth allowing Zix to do as a company?

It's supporting an expanded product suite, complementing Office 365. The 800-pound gorilla in email is the migration to the cloud and Microsoft leading that. So we've built our product suite to be really complementary to that movement, both on the encryption side as well as the advanced threat protection and archiving side. This office expansion is really about the expansion of our addressable market, the breadth of products we have to support our customers, and the momentum we're see in the market by working with Microsoft.

What are the most interesting new and emerging threats you've seen focused on email security?

It's typically nothing new. It's typically small variants – Emotet's the one we've been seeing with minor variations trying to evade detection. Phishing, of course, has been up in the last several months as well. To us, Emotet is really about assuring customer's they're protecting. We're sensing our customers are getting tired of the fear selling, and are more focused on a vendor who gives them assurance that the protection is consistent and effective. Because our platform was built to be 100 percent cloud-centric from the very beginning, we've persistently done a really good of protecting our customers.

What are the biggest things partners should be expecting from Zix in the rest of 2019?

The continued success extending our product offering into the advanced threat protection space and archiving. We're in the early stages of that product launch, so we're excited about that. We're excited about increasing our attach rates. We had the largest win in company history last quarter, which was also really exciting. A top five bank in the United States with over 100,000 end users re-emphasizing this. At the same time, we're focused on the bundle that we are the gold standard in email encryption, delivering great value to some of the largest enterprises in the country around email encryption. So you can continue to see us with extensions of our email encryption platform to continue to keep at the very leading edge, and I think you'll see continued success in the mid-market and corporate space working with partners to complement Office 365.

Is there anything else you'd like the channel community to know about Zix?

The AppRiver side and those MSP partnerships are benefitted from the Zix organic IP getting integrated into that platform, and the Zix partners are benefitting from that close relationship and the ability to bundle Office 365 with the sale that fits their go-to-market motion.