Commtouch: Defending Inboxes, Growing Revenues

| About: CYREN Ltd. (CYRN)

I was recently reminiscing with my brother about the fun we used to have in 1999 picking stocks. I recall how he had told me that he had made such-and-such profits in a stock. I asked what did the company do, and he said, “Who cares what they do. What’s important is that they have four letters in their symbol and they trade on Nasdaq.”

A perfect case in point was Commtouch (CTCH), at that time in the email hosting business, which was a high flyer that at that time traded above $80/share, and then proceeded in the course of two years to trade well under a dollar a share. As I have mentioned numerous times, this is another example of a hyped Israeli company that flew and then, when the hype died down and investors started focusing on the business, crashed and burned. At that time I was working at a venture capital firm and I accompanied a company that we were doing due diligence on to meet with Commtouch to get their opinion of the company. The one thing I remember from that meeting was how they kept saying over and over how email is the “killer-app.” Eight years later the irony of that comment as it pertains to the “ new” Commtouch is striking. Email turned out to be the “killer-app” in more ways than one. Due to spam and viruses, email that is left unprotected can literally kill a network, and cause huge amounts of damage. And that’s where Commtouch is looking for its niche. Today, they are focused on email defense. By the year 2010, Gartner predicts that there will be 2.5 billion mailboxes. With over 180 billion messages per day, 85% of which are spam, Commtouch develops and provides proprietary anti-spam, Zero-Hour™ virus protection and Reputation Service solutions.

Commtouch appears to have found its business model. Q1 revenues increased over 63% from same period last year, and they generated operating cash flow of $953 thousand during Q1 2007.

Gideon Mantel, CEO and Chairman of the Board said, “Again, we achieved good financial results with increasing revenues and profitability. To cap it off, we generated almost one million dollars in positive operating cash flow and signed a record eleven new licensing deals during the quarter.

“The majority of our revenues is derived from our anti-spam product,” Mr. Mantel continued. “We are now just starting to see the demand and revenue growth in our Zero-Hour virus outbreak protection product line, which we launched in 2005. Most recently, we rolled out our new Reputation Service at the end of last year, and we expect to see the benefits from this product starting in several quarters. It has been quite an accomplishment to continue developing leading edge security solutions while at the same time increasing our profitability.”

It goes without saying that this is for speculative investors, but with the company turning profitable in a market that is growing quickly, the future looks bright.

Disclosure: Author’s fund is long CTCH

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