Portrait of a patsy:
Shorts ahead in battle over Zix
By Herb Greenberg, CBS MarketWatch.com
Last Update: 3:09 PM ET Aug. 6, 2004
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This has been updated to reflect that Zix's first-quarter restatement was voluntary.
SAN DIEGO (CBS.MW) - Fried-Day:
Zixit a zaxit: When I first mentioned it positively in October one of my short sources said, "You've heard something good about that piece of garbage?"
Indeed I had -- and it wasn't something I stumbled on as an afterthought in another conversation with another source.
Zix, with a history of over-promising and under-delivering encrypted e-mail, had plunged head-strong into the e-prescription business, which allows doctors and pharmacists to communicate electronically. It was an idea whose time had come, and Zix had a head start.
Never mind that it's often a red flag when somebody who is better known for pointing out the pitfalls of a company writes positively about it. (Hey, I'm half kidding.) The economics portrayed by Zix (ZIXI: news, chart, profile) seemed compelling enough that sooner rather than later the company would book surprisingly big profits from transaction-related fees on each prescription.
Zix made it sound as if it were a no-brainer that would result in a speedy turnaround in its business -- and that skeptics simply didn't understand the operating leverage in its model. By year-end Zix said that 10,000 doctors would be using its e-prescription service. There was even talk about being cash-flow positive by the beginning of this year.
Those hopes were dashed in the first quarter, when Zix acknowledged it had signed up a pathetically few 230 doctors during the period. By the end of the second quarter, the company says, another 400 were added. Trying to show how fast physician ramp can occur, the company said that an additional 231 were signed in the last five business days. "So, last week's sign up is almost equal to the complete month of June," Chief Operating Officer Rick Spurr said on the company's conference call.
For the entire quarter the company is expecting signups of 1,500, which is impressive, except at the current pace there's no way Zix will come anywhere near to the 10,000 it had hoped by year-end. That shows in the company's latest forecast of becoming cash flow positive in mid-2005, a half a year later than even some bulls had expected. Even that forecast, however, is suspect considering it's coming from a management whose forecasting abilities have little to no credibility. (I have no idea why any company offers up that kind of guidance, especially an emerging company, but that's another story for another day.)
Zix is and always has been about management execution, and on that score the second quarter was not a confidence booster. The company guided below analyst revenue expectations for the third quarter, but also said it restated first-quarter results related to an acquisition. (If it's not one thing with this company, it's another!) Management's spin on its conference call was that it still believes that once doctors are "deployed" the results will start showing up in billings, deferred revenue and then the collection of cash.
Maybe -- and maybe investors will be richly rewarded. Or maybe not -- and maybe they won't. Eprescribing is real. It's just unclear whether Zix can do what it says it can do, or whether the economics amount to what it claims.
It's always hard when equally smart sources are on both sides of the story in a business that is real. But even real businesses aren't always good investments. In this case, if the company somehow pulls it off, it may turn out that both sides will have won. Right now, with Zix's stock hovering at around $4.50, the shorts are ahead by more than just a few lengths. They're rounding the turn. |
