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CTCH: This Evolving Business Model Suits Commtouch

By Ken Nagy, CFA

On November 14, 2013, Commtouch Software Ltd. (CTCH), the 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 third quarter and nine months, ended September 30, 2013.

Commtouch reported third quarter 2013 GAAP revenues grew by over 44 percent or $2.461 million year over year to $8.019 million compared to $5.558 million for the comparable quarter of 2012. Sequentially, revenues were flat from the $8.055 million from the first quarter ended June 30, 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.
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.

Likewise, the integration of the Q4 2012 acquisitions continues to proceed well with the company completing the core portions of the integration of its fourth quarter 2012 acquisitions during the third quarter 2013. Furthermore, the recent streamlining efforts have resulted in margin improvements in the third quarter.

Still, gross margin during the quarter fell year over year to 78.5 percent from 83.5 percent for the three months ended September 30, 2012.  However, gross margin improved slightly from the first quarter’s 78.2 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 third quarter were $6.750 million compared to $4.576 million in the third quarter of 2012 and $6.982 million in the second 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 rest of this year. Nonetheless, Commtouch’s recent streamlining efforts have improved the company's cost structure and yielded measurable results with a significant sequential increase in both gross and operating margins.

The company reported a GAAP net loss of $914,000 for the third quarter. This was down from net income of $19,000 during the three months ended September 30, 2012 but an improvement from a net loss of $745,000 during the second quarter 2013.

Third quarter 2013 results include an acquisition related earn out adjustment of $0.3 million and reorganization expenses of $0.1 million. Second quarter 2013 results included an acquisition related earn out adjustment of $0.3 million and a $0.1 million net litigation settlement in favor of the company related to contractual issues.

Based on a weighted average number of diluted common shares of 26.384 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 $0.00 on a weighted average number of diluted shares of 24.845 million during the three months ended September 30, 2012. GAAP diluted net loss per share was $0.03 for the second quarter fiscal 2013 based on a weighted average number of diluted common shares of 26.128 million.

Non-GAAP net income for the third quarter ended September 30, 2013 fell year over year by $422,000 to net income of $322,000 while non-GAAP earnings per diluted share for the third quarter of 2013 fell to $0.01 compared to $0.03 for the three months ended September 30, 2012. Non-GAAP net income was $126,000 during the second quarter of 2013, resulting non-GAAP earnings per diluted share of $0.00 for the quarter.

Cash and equivalents decreased slightly to $3.972 million compared to $4.951 million for the period ended June 30, 2013. After quarter end, the company signed a new credit facility with a U.S. based bank for up to $7.5 million dollars. Net cash usage from operating activities was $1 million for the quarter compared to cash usage of $1.4 million in the third quarter of 2012.

The company has made significant 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.  The  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.

Likewise, during the third quarter, the company made excellent progress in expanding its global sales and marketing organizations to support the rollout of the new cloud-based offerings.

The company has also 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.

Management continues to anticipate revenues for the full year 2013 to be in the range of $32.0 million and $33.0 million. The current outlook would be a year over year increase of approximately 34 percent to 38 percent over fiscal 2012. Furthermore, 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.

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 Commtouch Software Report

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