Commtouch Reports First Quarter 2013 Results

PRESS RELEASE

MCLEAN, Va., May 16, 2013 /PRNewswire/ -- Commtouch® (NASDAQ: CTCH), a leading provider of Internet security technology and cloud-based services, today announced its first quarter 2013 financial results for the period ending March 31, 2013.

First Quarter 2013 Financial Highlights:

-- Revenues in accordance with US Generally Accepted Accounting Principles (US GAAP) totaled $7.9 million for the first quarter of 2013 compared to $6.8 million for the sequential fourth quarter of 2012 and $5.9 million in the first quarter of 2012. -- Non-GAAP revenues totaled $8.1 million for the first quarter of 2013 compared to $7.0 million for the sequential fourth quarter of 2012 and $5.9 million in the first quarter of 2012. The difference between non-GAAP and GAAP revenue is derived from the fact that deferred revenues consolidated from acquired companies are recorded based on fair value rather than book value for GAAP purposes. -- During the first quarter, the company recognized expenses related to its previously announced acquisitions, as well as related integration, severance and streamlining expenses, totaling approximately $0.3 million. First quarter 2013 GAAP net income (loss) and earnings per diluted share data include the impact of these costs. -- GAAP net loss for the first quarter was $1.3 million compared to net loss of $0.5 million for the sequential fourth quarter of 2012 and net income of $1.2 million in the first quarter of 2012. First quarter 2013 and fourth quarter 2012 data includes the aforementioned acquisition related expenses. -- GAAP net loss per diluted share for the first quarter was $0.05, compared to a net loss of $0.02 for the sequential fourth quarter of 2012 and GAAP earnings per share of $0.05 in the first quarter of 2012. First quarter 2013 and fourth quarter 2012 data includes the aforementioned acquisition related expenses. -- Non-GAAP net income for the first quarter 2013 was $0.1 million compared to $0.3 million for the sequential fourth quarter of 2012 and $1.6 million in the first quarter of 2012. -- Non-GAAP earnings per diluted share for the first quarter 2013 were $0.00, compared to $0.01 for the sequential fourth quarter of 2012 and $0.06 in the first quarter of 2012. -- Cash used for operating cash activities during the quarter was $0.2 million. -- Cash as of March 31, 2013 was $4.9 million, compared to $5.1 million as of December 31, 2012. Cash usage during the quarter included integration and severance costs associated with the two acquisitions completed during the fourth quarter of 2012. "We achieved a major milestone in the evolution of the company with the launch of our first new cloud-based offering in the quarter," said Shlomi Yanai, chief executive officer at Commtouch. "The introduction of our private label Email Security-as-a-Service solution marks the first step in the long-term strategic plan we outlined 12 months ago. Moreover, we initiated a major effort to integrate the two acquisitions we closed in the fourth quarter and completed two key elements of this process with the creation of one global sales and marketing organization and one world-wide engineering team. Through this initiative we eliminated redundancies and achieved a 15 percent headcount reduction since December 31, 2012. These actions put us on track to meet the profitability targets we outlined at the beginning of this year."

"I am delighted by the traction that our new products have garnered in the market among new and existing customers," Mr. Yanai added. "Our broadened product portfolio is enabling Commtouch to increase our footprint within existing customers as well as expand our reach to new customers, including resellers, distributors, hosting providers and mobile application developers. Our global sales and marketing organization has developed a channel initiative to focus on these opportunities."

"The integration of our Q4 2012 acquisitions is proceeding smoothly and we expect this process to be largely complete in the third quarter," said Brian Briggs, chief financial officer at Commtouch. "While we continue to invest in our global sales capability, we have turned our focus to streamlining the organization and improving our cost structure. As a result of these efforts, we remain on track to generate cost synergies and a return to profitability in the second half of 2013. In addition, we bolstered our balance sheet with the addition of a line of credit with two large Israeli banks after the close of the first quarter."

For information regarding the non-GAAP financial measures discussed in this release, please see "Use of Non-GAAP Financial Information" and "Reconciliation of Non-GAAP to GAAP Financial Information."

Business Highlights:

-- Commtouch introduced three new products during the quarter, including: o Private label Email Security-as-a-Service, the first major release in a series of planned cloud-based product introductions, which combines premium protection against email-based threats such as spam, phishing and malware, with maximum cost-efficiency and minimum time to market. The Commtouch platform delivers market-leading detection at a competitive price point, streamlines resource utilization, and delivers Quality of Service (QoS), which leads to increased customer satisfaction, reduced churn, and helps service providers and security vendors grow revenue and market share. o On-Premise Email Security for the service provider market, a cloud-based service that augments the company's market-leading messaging security suite of cloud-assisted Anti-Spam, Virus Outbreak Detection, IP Reputation, and Antivirus services with on-premise technology components that integrate easily into service provider environments. The new solution enables customers to improve email QoS while reducing the cost of delivery. o Mobile Security Service for Android, which represents the first to market cloud-assisted antivirus and Web security services created exclusively for partner delivery with a single, easy to integrate client SDK. Importantly, this service uses very little memory, bandwidth, and battery time, and will therefore not impact device performance or the user experience. -- The company remains on track to launch its new cloud-based Web security solutions and Advanced Persistent Threat (APT) Detection Service in the second half of 2013. -- Commtouch continued to invest in its global sales and marketing capabilities during the first quarter and began to develop its channel strategy aimed at expanding the company's customer footprint to include distributors, resellers, hosting providers and mobile application developers. The company signed new long-term agreements for its recently introduced cloud-based Email Security-as-a-Service offering, including its first private label hosting provider win. -- Key new client wins announced during the quarter reflected the company's enhanced international sales and marketing penetration, including: o Return Path, a leading provider of email intelligence solutions, which integrated Commtouch's URL filtering into Return Path's email intelligence solutions for both enterprises as well as mailbox providers to detect and prevent piracy of email senders' platforms. o NetCologne, one of the leading regional Internet and telecommunication service providers in Germany, which integrated Commtouch's On-Premise Email Security into its existing email infrastructure to protect against spam, malware, and phishing. o NETGEAR, a global networking company that delivers innovative products to consumers, businesses, and service providers, integrated Commtouch's Antivirus solution into its Network Attached Storage products for small and medium businesses as well as enterprises. -- In February, Commtouch's product portfolio was recognized by Info Security Products Guide, the industry's leading information security research and advisory guide, with top honors throughout Commtouch's product categories. The company's GlobalView URL Filtering solution was named the gold winner of the 2013 Global Excellence Award for Best Social Media, Web Filtering, and Content Security Solution. Commtouch was also named silver winner in the Best Email Security and Management category, as well as bronze winner in three categories: Best Overall Security Company of the Year, Best Anti-Malware, Anti-Spam, or Antivirus and Tomorrow's Technology Today. These prestigious global awards recognize security and IT vendors with advanced, ground-breaking products and solutions that are helping set the bar higher for others in all areas of information security. Business Outlook

Based on current expectations, the company is reiterating its financial outlook for the full year 2013. The company continues to anticipate full year 2013 revenue between $34.0 million and $35.0 million, an increase of approximately 42% to 46% compared with full year 2012. GAAP and non-GAAP net income guidance includes a higher level of sales and marketing expense versus 2012 to support a strengthened global sales platform. Full year 2013 GAAP net income is expected to be greater than $2.0 million and non-GAAP net income is expected to be greater than $3.5 million.

During the second quarter of 2013, the company expects to recognize additional expenses related to its previously announced acquisitions, as well as related integration, severance and streamlining expenses. The impact of these charges is reflected in the aforementioned full year 2013 GAAP net income guidance. The company expects the impact of these integration and streamlining activities to positively impact the financial performance of the business during the second half of 2013.

The company plans to continue to strategically invest in the build-out of its global sales and marketing efforts. The impact of these investments is reflected in the full year 2013 GAAP net income guidance.

The above outlook is as of the date of this release, and the company undertakes no obligation to update its estimates in the future.

Use of Non-GAAP Measures

Non-GAAP financial measures consist of GAAP financial measures adjusted to exclude: stock based compensation expenses, amortization and impairment of acquired intangible assets, executive termination costs, deferred taxes, acquisition related costs and adjustments to earn-out obligations. The purpose of such adjustments is to give an indication of the company's performance exclusive of non-cash charges and other items that are considered by management to be outside of the company's core operating results. The company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with the company's consolidated financial statements prepared in accordance with GAAP. Company management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions.

These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. The company believes this adjustment is useful to investors as a measure of the ongoing performance of our business. The company believes these non-GAAP financial measures provide consistent and comparable measures to help investors understand the company's current and future operating cash flow performance. These non-GAAP financial measures may differ materially from the non-GAAP financial measures used by other companies. Reconciliation between results on a GAAP and non-GAAP basis is provided in a table immediately following the Consolidated Statements of Income. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management uses both GAAP and non-GAAP measures when evaluating the business internally and therefore felt it important to make these non-GAAP adjustments available to investors.

Financial Results Conference Call

The company has scheduled a conference call later today, May 16, 2013 at 10:00 a.m. ET to review the first quarter 2013 highlights, as well as walk through a strategic overview of the evolution of the company's growth strategy.

To participate, please call one of the following teleconferencing numbers by dialing in at least 10 minutes before the conference call commences. If you are unable to connect using the toll-free numbers, please try the international dial-in number.

US Dial-in Number: 1-877-407-8289 Israel Dial-in Number: 00-800-2246-2666 International Dial-in Number: 201-689-8341

at:

10:00 a.m. Eastern Time, 5:00 p.m. Israel Time

The call will be simultaneously webcast live from a link on Commtouch's Web site at www.commtouch.com.

For those unable to listen to the live call, a webcast replay of the call will be available from the day after the call in the investor relations section of Commtouch's corporate Web site.

About Commtouch

Commtouch® (NASDAQ: CTCH) is a leading provider of Internet security technology and cloud-based services for vendors and service providers, increasing the value and profitability of customers' solutions by protecting billions of Internet transactions on a daily basis. With twelve global data centers and renowned technology, Commtouch's email, Web, and antivirus capabilities easily integrate into customers' products and solutions, keeping more than 350 million end users safe. To learn more, visit http://www.commtouch.com.

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