Commtouch Software ( Nasdaq - CTCH ) -- Decent Q3 Results

Commtouch Software (CTCH $3.50) reported good Q3 results.  The company ended the nine month period below our forecast.  That might cast light on its decision to hire a new Chief Executive last month.  But the numbers weren't bad.  The foundation remains solid.  Profit margins are fantastic.  And the potential for superior growth is undiminished.  Revenues improved 27% to $5.86 million.  Organic growth probably was around 15%.  Commtouch made a significant acquisition last year, which was included for only one month in the Q3'10 quarter.  Earnings (fully taxed) were flat year to year at $.06 a share.  The acquired company generated lower margins than Commtouch's existing business, but improvements are being made. 

For the entire year we've reduced our earnings estimate to $.23 a share.  Commtouch generates most of its revenue from subscriptions that are recognized for accounting purposes as earned, month to month.  The company doesn't provide exact numbers but it did indicate that full year revenue would finish around $23 million.  That's $1.0 million below our earlier prediction.  We'd been hoping the company would capitalize on the growing need for Internet security, especially now that cloud computing and mobile applications were gaining momentum.  All the same, income looks 21% higher this year.  Sales are likely to finish up 26% at $23 million.

Organic growth could accelerate in 2012.  Internet crime is hard to prosecute.  And the payoff is can be tremendous.  Demand for security software is expanding as a result.  The former CEO put in place a strong book of business.  So we we think income will keep climbing in 2012.  The combination of 22% sales growth and expanding margins could deliver a 30% gain in income to $.30 a share. 

Long term growth could be be faster.  Acquisitions combined with internal product development and an expanded sales force could accelerate earnings growth in subsequent years.  In 2-3 years income could attain $.50 a share.  Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 185% from the current quote.

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Commtouch Software ( Nasdaq - CTCH ) -- Recruits a New CEO

Commtouch Software (CTCH $3.15) replaced its CEO today.  The company indicated that Q3 results remain on target and that upcoming periods also should exhibit organic growth of about 15% due to the subscription based nature of Commtouch's recurring revenue stream.  The new chief executive reportedly has superior technical knowledge of the security industry.  He also has a proven managerial record and experience with making acquisitions.  The number of prospective deals is increasing because of the downturn in the IPO market, and increasingly scarce late stage venture capital funding.  Commtouch offers a good platform but the right technical fit will be necessary to achieve the most mileage from a transaction.  Our estimates are unchanged.  Faster gains are possible in 2012 if the acquisition effort produces results.

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Commtouch Software ( Nasdaq - CTCH ) -- Building Momentum

Commtouch Software (CTCH $3.00) appears on track to report excellent on target Q3 results.  The company provides a range of security software to OEMs, which bundle it with other services for enterprise networks.  Commtouch also supplies Internet providers with its spam control and anti virus technologies.  Most revenue is subscription based, earned over multi year periods.  The company expanded last year via acquisition.  It also has been adding new customers at a fast pace in 2011.  Margins on the acquired products were lower than the corporate norm but Commtouch has been improving their profitability.  Overall margins continue to rise and could return to previous levels next year.  Competition exists in each of the company's product areas but no other company offers the full suite that Commtouch provides.  Customers are trending towards the one stop shopping approach.  New products are in the pipeline.  Additional acquisitions are being investigated. 

Our estimates are unchanged.  Like most Israel based companies that primarily generate revenues outside the country, Commtouch should benefit from the strenghtening U.S. Dollar.  Costs incurred in Israel will be translated at a lower rate for U.S. financial reporting purposes. 

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Commtouch (Nasdaq — CTCH) -- Strong Q2 Results

Commtouch (Nasdaq: CTCH $3.60) reported good second quarter results. Revenues increased 59% to $5.7m over the same period last year ($4.1m), and were up 4% from Q1 this year ($5.5m). The company should be close to reaching our projected year-end revenue of $24m.

Sales were driven by the company’s Command Antivirus and GlobalView URL Filter computer security solutions. Commtouch launched a mobile phone version of GlobalView this quarter, which provides antivirus protection and browsing security for Android smartphones. Commtouch also acquired several new customers, including Bullguard, a leading European desktop and mobile security antivirus company; and Neo Technology, an end-point security provider.

Shares earned $0.06 for the quarter, a 20% expansion from $0.05 from the same period last year. Earnings per share appear on track to reach $0.25 for all of 2011. Operating cash flow was $1.9m for the second quarter, a 58% increase from the year prior ($5.2m). The company now holds $16.1m in cash, up from $14.4m in Q1 of this year, an 11% increase.  A new mobile application to protect Android devices recently was introduced.  An iPhone version is expected later this year.  Those products will generate modest contributions in the near term.  Commtouch sells its technology to OEMs, not consumers, and it will take time for those companies to evaluate the new line.  But substantial growth could emerge over the next few years as the technology is implemented.  Meantime, business in the conventional Internet segment remains vibrant as new customers are added and existing clients add more services.  Margins promise to begin expanding again, following a contraction associated with last year's Command acquisition.  Earnings could keep rising at a fast clip as sales maintain their above average rate of growth.

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

Commtouch Software (CTCH $3.45) reported excellent on target Q1 results.  Revenues increased 35% to $5.51 million.  Fully taxed earnings advanced 25% to $.05 a share.  Margins narrowed a bit due to the Command acquisition, which added an antivirus product line in Q3 of last year.  Results benefited from cross selling the acquired line to existing customers.  New customers expanded the number of packages they bought, as well.  Diversification into the mobile Internet market could reinforce growth in upcoming periods.  Commtouch hopes to introduce that technology before long.  The company also hired a corporate development executive to pursue acquisition targets more methodically.  Commtouch ended Q1 with $14.4 million in cash and remains cash flow positive.  Earnings visibility is clear since most revenue is earned ratably on long term contracts.  Our 2011 estimates are unchanged.

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Commtouch Software ( Nasdaq - CTCH ) -- Momentum Intact

Commtouch Software (CTCH $3.25) shares declined 15% in price during the recent market decline.  The downdraft started before the general indexes swooned, moreover, suggesting the potential for company specific problems.  If anything, demand for Commtouch's Internet security products increased as a result of the world's latest problems.  Smam, scams, and virus activity often surge during crises.  The company has indicated that its business remains strong, recurring revenue is being collected without disruption, new accounts continue to be added, and existing customers are starting to add the anti-virus line acquired last fall.  Sales remain on track to advance 32% to $24 million.  Earnings are poised to reach $.25 a share (+32%).  Commtouch remains well capitalized.  Further acquisitions are being pursued to leverage the company's 15% organic growth rate.  (Please click on "Labels" button below to pull up all the previous reports on file about Commtouch.)

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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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Commtouch ( Nasdaq - CTCH ) - Follow-up Report

Commtouch (CTCH $3.80) appears on track to report excellent on target Q4 results.  Sales of the company's core Internet security products is continuing to expand at a 10%-20% rate, fueled by the addition of new customers and greater penetration of existing accounts.  A new line of anti virus software, acquired last September, is generating additional impetus.  The consolidation of that operation has been smooth, and cross marketing opportunities are starting to bear fruit.  Commtouch signs contracts with OEMs and Internet providers that are recognized as revenue over time.  So results will build up as those deals go into effect, setting the stage for a steady upward progression in 2011 and beyond.  We continue to estimate that 2010 sales finished around $18 million, producing income of $.20 a share (fully taxed).  In the current year a move to $24 million and $.25 a share appears to be a realistic target.  Additional acquisitions may be completed during the upcoming year.  Commtouch already provides the most comprehensive product line in the industry.  Further deals could cement that position.

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

Commtouch Software (CTCH $3.80) reported excellent on target Q3 results.  Sales advanced 18% to $4.60 million.  Earnings rose 50% to $.06 a share.  The income figure excludes non cash stock option expense, and one time costs associated with the acquisition of Authentium's Command division.  That deal brought the company an anti virus product line to complement its existing anti spam and web security products.  The transaction was consolidated for one month of the quarter, adding $300,000 to revenues.  Integration of the acquired unit is expected to be finished by the end of the year.  We estimate that revenues will benefit by the same monthly rate in Q4, helping send the full year total to $18.0-$18.5 million.  Operating costs may rise during the consolidation process, so incremental earnings are not expected to materialize until the start of 2011.  For all of 2010 we continue to estimate income will improve by 33% to $.20 a share.  Note - Our earnings figures reflect a 10% income tax rate.  Commtouch currently does not pay taxes due to the availability of extensive tax loss carryforwards.

Cross selling opportunities promise to accelerate growth in 2011.  Commtouch has relationships with more than 140 OEMs and Internet providers.  Sales of the acquired anti virus line into that customer base could generate substantial leverage.  The company also hopes to sell its legacy products into Command's base, which consists of 15 large users.  The sales cycle tends to be fairly lengthy.  And Commtouch recognizes revenue on a month to month basis, not as a one time shot.  So the build up is likely to be a steady but gradual one.  We estimate 2011 sales will reach $24 million to provide earnings of $.25 a share.  A somewhat stronger performance is possible.  Growth promises to remain at above average levels in subsequent years as new business pyramids higher.  In 2-3 years income could reach $.40-$.50 a share on sales of $35-$40 million.
 

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Commtouch (CTCH - Nasdaq)

Commtouch (CTCH - $3.85) is a leading provider of email and web security software products.  The company sells its technology to OEM (third party) software providers, which include the software in more comprehensive solutions.  Commtouch also markets to ISPs (Internet service providers) who either deploy the security features in their own systems, or make it available to end users for a fee.  A recent acquisition expanded Commtouch's product line to include viruses.  That operation already supplies blue chip customers such as Google, Microsoft, and McAffee.  Commtouch hopes to cross sell the line into its own customer base, dislodging virus software from other vendors.  The company also wouldn't mind selling its line of spam blockers and URL checkers to the acquired customer list.

Commtouch earns a share of the revenue generated by its OEMs when they sell complete solutions to end users.  So marketing costs are relatively low, focused mainly on cultivating existing relationships and finding new ones.  Research and development costs are steep in relation to sales, but those efforts have kept Commtouch's technology ahead of the competition.  Superior product performance enables the company to maintain lofty profit margins.  Prior to the latest acquisition pretax income was running at approximately 30% of revenues.  The combined rate likely will fall modestly in the short run, as the new operation is integrated.  But overall profits should benefit from the transaction.  Commtouch paid $4.2 million in cash for all of the assets purchased, with another $3.8 million contingently due based on 2011 results.  No new shares were issued.  Cash on hand totalled more than $16 million before the initial payout, and cash flow from operations currently is greater than $1.0 million per quarter.  Commtouch has no debt.  So finances should remain robust.

Excluding the acquisition, Commtouch was headed towards full year revenues of $17 million.  The deal will be consolidated starting in September.  The acquired business was generating about $1.0 million per quarter prior to the combination.  We estimate full year revenues will finish at $18 million, including the transaction.  Our $.20 a share earnings estimate assumes no profit contribution from the virus operation in 2010.  That figure excludes non cash stock option expense.

Next year earnings should benefit from organic growth of 20% or more plus a full year's contribution from the acquired line.  We estimate income will rise 25%-50% to $.25-$.30 a share on sales of $24-$25 million.  Integration costs, which will impact 2010 results, will abate.  And margins should benefit from the resulting operational savings, plus cross marketiong opportunities.  Growth promises to be sustained at a rapid pace beyond.  As more personal and corporate data are stored on computers spending on defensive software is likely to expand to fend off attacks real and imagined.  Commtouch holds a technology lead along with 155 OEM business relationships.  Existing accounts are likely to grow as the volume of data and electronic messages keeps burgeoning.  And new customers are likely to come on board.

In 2-3 years sales could attain $40 million to produce earnings of $.45 a share.  Applying a P/E multiple of 20x suggests a target price of $9 a share, potential appreciation of 140% from the current quote.