At Commtouch New Products are Poised to Grow the Top-Line

Zacks Small Cap Research
May 17, 2013

By Ken Nagy, CFA

On May 16, 2013, Commtouch Software Ltd. (CTCH) the Netanya, Israel based provider of internet security and cloud based services, supplying white label internet cloud-based (SaaS) ‘Security as a Service’ protection solutions to security OEM’s and service providers worldwide, reported financial results for its first quarter, ended March 31, 2013.

Commtouch reported first quarter 2013 revenues grew by over 34 percent or $2.029 million year over year to $7.925 million compared to $5.896 million for the comparable quarter of 2012.

The company reported a GAAP net loss of $1.295 million for the quarter, down from net income of $1.209 million during the three months ended March 31, 2012.

During the first quarter, the company recognized expenses related to its previously announced acquisitions, as well as related integration, severance and streamlining expenses, totaling approximately $0.3 million. 

During the fourth quarter, Commtouch closed the previously announced acquisitions of FRISK Software International's antivirus business as of October 1, 2012 and Eleven GmbH as of November 16, 2012.

The acquisition of Eleven accelerated the delivery of the Company’s “Security-as-a-Service’ quality and broadened it, enabling Commtouch to provide more OEM services and private labeled application as well as expanded its European footprint to head offices closer to many of their customers.

Gross margin during the quarter fell year over year to 77.6 percent from 82.2 percent for the three months ended March 31, 2012.

Still, as the company moves through the integration and streamlining process, management anticipates that it will begin to see a gradual improvement in the gross margin over time as business efficiencies are realized.

Based on a weighted average number of diluted common shares of 25.934 million, GAAP diluted net loss per share resulted in $0.05 loss per share for the first quarter fiscal 2013.  This compares to diluted net income per share of $0.05 on a weighted average number of diluted shares of 24.889 million during the three months ended March 31, 2012.

Non-GAAP net income for the first quarter ended March 31, 2013 fell year over year by $1.514 million to net income of $72,000 while non-GAAP earnings per diluted share for the first quarter of 2013 fell to $0.00 compared to $0.06 for the three months ended March 31, 2012.

Although cash and equivalents dropped slightly to $4.873 million compared to $5.137 million for the period ended December 31, 2012, cash usage during the quarter included integration and severance costs associated with the two acquisitions completed during the fourth quarter of 2012.

Similarly, cash used for operating cash activities during the quarter was $0.2 million.

Commtouch continues its progress on its recent transformation into a provider of comprehensive SecaaS offerings, which was accelerated by its strategic acquisitions and the formal launch of its new cloud-based email Security-as-a-Service offering in early 2013, highlighting the Company’s execution on its strategic roadmap and its foundation for future growth.

Commtouch's new Email Security-as-a-Service solution marks a major launch of the Company's latest cloud-based offerings and is complemented by new solutions focused on Email Security On-Premise for Service Providers and Mobile Security Services for Android.

Commtouch’s e-mail “security-as-a-service” combines permanent protection against e-mail based threats such as spam, phishing and malware with maximum post efficiency and minimum time to market while its new mobile security service for android is the first ever OEM solution that offers cloud assist antivirus and web security services delivered through a single easy to integrate client as the gate for the popular mobile operating system.

Similarly, the new On Premise e-mail security services for service providers delivers additional simplified messaging security and optimization functionality enabling Commtouch to better address the requirements of any service provider that offers e-mail services to end users. The new solution leverages e-mail security technology asset which Commtouch acquired as part of its purchase of Eleven GmbH.

Additionally, the Company’s focus remains on increasing its market share in the fast growing market for cloud based e-mails, web and anti-virus solutions.

The company remains on track to launch its new cloud-based Web security solutions and Advanced Persistent Threat (APT) Detection Service in the second half of 2013.

Likewise, management anticipates that organic new bookings growth, combined with the synergies of its recent strategic acquisitions, helps puts Commtouch on track to realize double digit year over year full year 2013 revenue growth. 

Along the same lines, management is reiterating its financial outlook for the full year 2013. The company continues to anticipate full year 2013 revenue between $34.0 million and $35.0 million, an increase of approximately 42% to 46% compared with full year 2012.

Similarly, full year 2013 GAAP net income is expected to be greater than $2.0 million while non-GAAP net income is anticipated to be greater than $3.5 million.

Still, both GAAP and non-GAAP net income guidance includes a higher level of sales and marketing expense versus 2012 to support a strengthened global sales platform.

Likewise, management plans to continue to strategically invest in the build-out of its global sales and marketing efforts.

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