CTCH: Long Term Growth Story Remains Intact at Commtouch

Zacks Small Cap Research

By Ken Nagy, CFA

On August 6, 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 second quarter and six months, ended June 30, 2013.

Commtouch reported second quarter 2013 GAAP revenues grew by over 42 percent or $2.384 million year over year to $8.055 million compared to $5.896 million for the comparable quarter of 2012. Sequentially, revenues improved by $130,000 over the $7.925 million from the first quarter ended March 31, 2013.

The fourth quarter 2012 acquisitions of the company’s German and Icelandic operations accounted for the majority of the year-over-year revenue increase.
During the fourth quarter, Commtouch closed on the 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. The integration of the Q4 2012 acquisitions continues to proceed well and management expects this process to be largely complete in the third quarter.

Gross margin during the quarter fell year over year to 78.2 percent from 82.1 percent for the three months ended June 30, 2012.  Still, gross margin improved slightly from the first quarter’s 77.6 percent. Gross margin declined primarily related to the acquisition of Eleven which has gross margins of roughly 75 percent and below the gross margin percentages generated by the Commtouch business historically.

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 overtime as business efficiencies are realized.

Operating expenses for the second quarter were $6.982 million compared to $4.036 million in the second quarter of 2012 and $7.244 million in the first quarter of 2013. Management expects operating expenses to gradually decrease as the company completes the integration process and begins to realize the benefits of its rationalization efforts in the second half of this year.

The company reported a GAAP net loss of $745,000 for the second quarter. This was down from net income of $804,000 during the three months ended June 30, 2012 but an improvement from a net loss of $1.295 million during the first quarter 2013.

Second quarter 2013 results include an acquisition related earn out adjustment of $0.3 million and a $0.1 million net litlement in favor of the company and relating to contractual issues.  First quarter 2013 results included an acquisition related earn out adjustment of $0.2 million and acquisition related expenses of $0.2 million.

Based on a weighted average number of diluted common shares of 26.128 million, GAAP diluted net loss per share resulted in $0.03 loss per share for the second quarter fiscal 2013.  This compares to diluted net income per share of $0.03 on a weighted average number of diluted shares of 25.219 million during the three months ended June 30, 2012. GAAP diluted net loss per share was $0.05 for the first quarter fiscal 2013 based on a weighted average number of diluted common shares of 25.934 million.

Non-GAAP net income for the second quarter ended June 30, 2013 fell year over year by $1.183 million to net income of $126,000 while non-GAAP earnings per diluted share for the second quarter of 2013 fell to $0.00 compared to $0.05 for the three months ended June 30, 2012. Non-GAAP net income was $72,000 during the first quarter of 2013, resulting non-GAAP earnings per diluted share of $0.00 for the quarter.

Cash and equivalents improved slightly to $4.951 million compared to $4.873 million for the period ended March 31, 2013. Net cash provided by operating activities was $1.5 million for the quarter compared to cash usage of $0.2 million in the first quarter of 2013.

Looking Forward

The company has made 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.

The three recently launched solutions have generated pronounced customer interest with 

Commtouch winning key customers and hosting clients for its new private label Email Security-as-a-Service product during the second quarter. These initial contracts have the potential to grow substantially as customers begin to roll out services.

Similarly, the company secured its first win for the recently launched Mobile Security for Android solution with a key European partner.

Demand for these new products from both new and existing customers remains robust and validate management’s strategy to transform Commtouch from a best-in-class embedded malware detection service provider to a supplier of the complete Cloud-based security-as-a-service solution.

Furthermore, the company has been gearing up to launch its second major Cloud-based product offering with the release of Commtouch’s new Cloud-based web security solution during the fourth quarter 2013. This offering will focus on web security in the Cloud services, which are easy to provision and use. Those services will be built on the market-leading security detection platforms and will be delivered by the company’s partners as private label services.

The company continues to invest in its sales and marketing capabilities to support its upcoming product launches. However, it has taken longer than anticipated to complete some key hires and as a result, management now anticipates revenues for the full year 2013 to be in the range of $32.0 million and $33.0 million. This compares to management’s previous guidance of $34.0 million and $35.0 million.  Still, the current outlook would be a year over year increase of approximately 34 percent to 38 percent over fiscal 2012.

Full year 2013 GAAP net loss is expected to be less than $2.0 million and non-GAAP net income is expected to be greater than $1.5 million.

Management previously guided full year 2013 GAAP net income to be greater than $2.0 million and non-GAAP net income to be greater than $3.5 million.

Despite the setbacks, management is very encouraged by the demand being seen for the company’s new products in the marketplace. This combined with Commtouch’s upcoming product launches give management confidence in its strategy to transform the company and position Commtouch for a long-term growth and improved profitability.

With the bulk of its integration and streamlining expenses behind it and cost efficiency efforts in place, management projects that profitability will improve in the second half of 2013 and to be much more reflective of the baseline profitability of the core business.

A copy of the full research report can be downloaded here >> 
 Commtouch Report

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