Commtouch Software ( Nasdaq - CTCH ) -- Expansion Strategy in Place

Commtouch Software (CTCH $3.10) reported good Q4 results.  Earnings (fully taxed) rose 20% to $.06 a share, excluding non-recurring items.  Revenues climbed 11% to $5.95 million.  Commtouch is a leading provider of Internet security technology.  The non-recurring costs were associated with an acquisition the company made last year.  That operation outperformed its targets, generating an extra performance bonus.  Its previous owner recently was acquired, moreover, eliminating the residual value of the non-compete agreement it originally issued.  Commtouch also hired a new CEO in the quarter, triggering a small golden parachute.  Operating margins remained at high levels.  Sales growth appeared to moderate, but much of that stemmed from Commtouch's subscription based pricing model.  New business was solid but a significant portion was deferred into future periods.

Organic growth of 15% is likely to be sustained.  Expenses may rise slightly faster due to a more aggressive acquisition strategy.  Commtouch currently is investigating two potential targets.  Marketing and R&D costs are likely to remain elevated in the near term, as well.  New products probably will be launched this year, but the impact on financial performance will take time to materialize due to the delayed revenue recognition policy.  Acquired products could bolster results more directly.  They also could make the entire product line more attractive.  A more comprehensive line also might be sold on a private label basis, enhancing revenue potential substantially.

Our estimates exclude any contribution from new products or acquisitions.  We estimate sales will advance 15% to $26.5 million to provide earnings (fully taxed ) of $.25 a share (+9%).  Effective product line extensions could yield substantial leverage.

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