Commtouch Software ( Nasdaq - CTCH ) -- Follow-up Report

Commtouch Software (CTCH $3.85) reported excellent on target Q4 results.  Reinforced by a recent acquisition, sales climbed 34% to $5.38 million.  Organic growth was 12%.  Non-GAAP earnings improved 25% to $.05 a share.  For the entire year sales rose 20% to $18.2 million.  Organic growth was 12%.  Income advanced 27% to $.19 a share.  Figures reported by the company were somewhat higher, since earnings were shielded by the use of tax loss carryforwards.  We applied a 10% tax rate, which is the full corporate rate Commtouch would have paid in Israel without the benefits.  The company continues to hold $100 million in future carryforwards, which will enhance cash flow in upcoming periods.

The anti-virus acquisition is boosting performance.  The existing revenue base was maintained without any customer defections.  Cross marketing is beginning to bear fruit.  And new customers are being attracted by Commtouch's broader product line.  All of the company's software is provided on a subscription basis to Internet providers, cloud computing service bureaus, and a range of corporate customers.  Revenues are recognized on a monthly basis, so new contracts build up over time.  The recurring revenue base provides reliable visibility, and margins tend to widen as volume builds.  Our 2011 estimates are little above Commtouch's official guidance, which reflects a conservative build-up.  Sales of $24 million and earnings of $.25 a share still appear to be realistic targets.

More acquisitions are possible.  Cash flow remains positive.  Commtouch still has money in the bank ($13 million) following last year's deal.  And debt probably could be obtained on favorable terms if a large transaction were identified.  In 2010 Commtouch repurchased 1.03 million shares at $3.71 a share.  That program has been placed on hiatus but it could resume if an acquisition is not completed.

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