Commtouch Software Sees New Bookings

Zacks Small Cap Research

By Ken Nagy, CFA

On November 6, 2012, Commtouch Software Ltd. (CTCH), a cloud-based Internet security provider, reported financial results for its third quarter and nine months ended September 30, 2012.

Commtouch reported solid progress with new booking sales more than doubling year over year and accelerated execution on its next generation mobile and SaaS security solutions.

While the increased new booking sales  are expected to provide an enhanced foundation for growth in 2013, the enhanced performance of next generation mobile and SaaS security solutions highlight the Company’s strategic advances. 

Still, third quarter 2012 revenues amounted to $5.558 million compared to $5.855 million for the comparable quarter of 2011.

The decline in revenue was primarily a result of the low level of new bookings in the previous fiscal year and a modest decline in the level of activity among select customers who experienced a slowdown in their own underlying businesses.

Second quarter 2012 GAAP net income fell $868,000 to $19,000 from $887,000 during the three months ended September 30, 2011.

The drop was primarily due to the impact of acquisition related costs as well as the planned higher level of investment in sales, marketing and engineering expenses associated with the ongoing support of Commtouch's "Software-as-a-Service" strategy rollout and upcoming launch.

It should be noted that during the third quarter, Commtouch announced the acquisition of FRISK Software International's Antivirus business.

The acquisition is expected to help accelerate the Company's strategy to deploy an expanded range of antivirus solutions for the OEM and service provider market, including private label solutions. 

Still, while gross margin improved year over year to 83.5 percent from 82.6 percent for the three months ended September 30, 2011, total operating expenses increased year over year by $887,000.

Sequentially, gross margin improved from 82.1 percent for the three months ended June 30, 2012.

The improvement to gross margin on a year over year and sequential basis was primarily  a result of management’s continued steps to optimize cost.

Based on a weighted average number of diluted common shares of 24.845 million, GAAP diluted net income per share resulted in $0.00 per share for the third quarter fiscal 2012.  This compares to diluted net income per share of $0.04 on a weighted average number of diluted shares of 24.726 million during the three months ended September 30, 2011.

Non-GAAP net income for the third quarter of 2012 fell year over year by $1.029 million to $744,000 and non-GAAP earnings per diluted share for the third quarter of 2011 fell to $0.03 compared to $0.07 for the three months ended September 30, 2011.

For the nine months ended September 30, 2012, year over year revenues improved by $59,000 to $17.125 million from $17.066 million for the first nine months of fiscal 2011.

Still, GAAP net income for the nine months fell by $1.291 million year over year to $2.032 million for the nine months ended September 30, 2012. This compares to $3.323 million for the comparable nine months ended September 30, 2011.

Gross margin for the nine months held steady at 82.6 percent while total operating expenses increased year over year by $1.436 million.

Based on a weighted average number of diluted shares of 24.984 million shares, diluted net income per share resulted in net income of $0.08 per diluted share during the first nine months of fiscal 2012.  This compared to a diluted net income per share of $0.13 on a weighted average number of diluted shares of 24.678 million shares during the nine months ended September 30, 2011.

On a non-GAAP basis, net income for the first nine months of 2012 dropped year over year by $1.091 million to $3.639 million and non-GAAP earnings per diluted share for the first nine months of 2012 was $0.15 compared to $0.19 for the nine months ended September 30, 2011.

Although cash and equivalents dropped sequentially by $2.489 million to $17.334 million, cash usage during the quarter included a $1.0 million pre-paid supplier agreement, $828,000 related to the company's share repurchase program activity during the quarter, as well as increased capital expenditures related to the execution of the company's new SaaS strategy and higher acquisition related expenses.

Additionally, operating cash flow for the third quarter was steady on a sequential basis at $1.4 million. 

Still, cash used for operating cash activities during the quarter included $1.0 million as part of a pre-payment plan to secure a long-term technological supplier agreement.

It should further be noted that this technological supplier agreement is projected to yield cost effective results in terms of reducing the company's cost of revenue and increasing gross margin.

Moreover, Commtouch’s global sales and marketing infrastructure sustained impressive results and continues to set the stage for renewed revenue growth.

The Company’s focused sales and marketing efforts generated major successes including a significant $2.2 million contract win in Latin America as well as increased sales traction across international and U.S. based customers.

Matter of fact, Commtouch has successfully secured more new business wins over the last two quarters than the preceding 12 months combined and also has more than doubled its new bookings year-to-date.

Along the same lines, management expects these multi-year contract wins to begin to significantly contribute more to the Company’s revenue growth and profitability in the coming quarters.

Likewise, it should be noted that customer renewal activity during the quarter was solid with more than 95 percent of eligible customers renewing.

Similarly, management remains centered on winning new customers and driving its backlog and believes it is making excellent progress with regards to setting the stage for growth and improved profitability in 2013.

It should further be noted that Commtouch made significant progress towards its strategic evolution into a cloud-driven 'security as a service' solutions provider. 

This cloud based platform provides the Company’s clients an extended range of offerings and addresses new markets which will allow Commtouch to sell more.

The Company remains on track with the planned rollout of its new Mobile Security SDK product for Android devices in the current quarter as well as its next generation cloud-based 'security as a service' offerings for web and email which are targeted for release in the first half of 2013.

However, based on the Company's year to date revenues and the projected influence of the acquisition of FRISK Software International's Antivirus business, which closed on October 1, 2012, as well as current expectations for the remainder of 2012, Commtouch updated its current outlook for 2012.

The company lowered its full year guidance to approximately $23 million, which is in line with its 2011 levels.

This compares to previous guidance of between 2% and 6% revenue growth for its full year 2012 over 2011 heights.

Still, management expects to return to sequential revenue growth beginning in the current fourth quarter of 2012. 

Additionally, Commtouch now expects non-GAAP net income for the full year 2012 to be greater than $4.0 million as the company accounts for the initial ramp of the FRISK business as well as higher costs associated with the company's investment and integration around FRISK within Commtouch.

Finally, In May 2012, Commtouch announced the authorized initiation of a stock repurchase program of the Company's ordinary shares in the open market, in an amount in cash of up to $2.5 million.

The action reflects the confidence of the management team and the board of directors in the long term growth prospects of the Company.

During the quarter ended September 30, 2012, the Company had repurchased approximately 297,000 shares at an aggregate cost of approximately $828,000.

Furthermore, as of September 30, 2012, approximately 495,000 shares have been repurchased through the program at an aggregate cost of approximately $1.4 million.

 
To access a free copy of the full CTCH research report, CLICK HERE.

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