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Commtouch Software Ltd. (CTCH)

Q1 2013 Earnings Conference Call

May 16, 2013 10:00 a.m. ET

Executives

Monica Gould - Investor Relations, The Blueshirt Group

Shlomi Yanai - Chief Executive Officer

Brian K. Briggs - Chief Financial Officer

Analysts

Jay Srivatsa - Chardan Capital Markets

Ken Nagy - Zacks Investment Research

Gunnar Hansen - Sidoti & Company

Dick Mills - RAMCO Management

George Melas - MKH Management

Presentation

Operator

Greetings and welcome to the Commtouch 2013 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Monica Gould, Investor Relations for Commtouch. Thank you, Ms. Gould. You may now begin.

Monica Gould

Thank you Melissa and welcome to Commtouch’s First Quarter 2013 Financial Results Conference Call. I would like to remind everyone that the Safe Harbor statement issued in today’s press release also covers the content of this conference call. With me on the call today are Mr. Shlomi Yanai, Chief Executive Officer; and Mr. Brian Briggs, Chief Financial Officer.

I would now like to hand the call over to Mr. Shlomi Yanai.

Shlomi Yanai

Thank you, Monica. Good morning everyone and thank you for joining us. Q1 was a significant quarter for Commtouch, with revenue growth of 34% year over year and 17% sequentially. This growth in our overall results were in line with our expectations and were a direct result of our execution on our previously discussed strategy.

Commtouch reached a significant milestone during the first quarter of 2013 and a transformation to a full Cloud-based security service provider with the introduction of our first new Cloud-based offering. We launched our private label Email Security-as-a-Service solution at the end of January, marking a major step in the long-term strategic plan we outlined 12 months ago. We are seeing very good demand from both new and existing customers for this service, as well as two other solutions we introduced during the first quarter, which I will elaborate on later.

We initiated a major effort to integrate the two acquisitions we completed last quarter FRISK and Eleven, while at the same time streamlining the business to achieve cost synergies. I’m pleased to report that integration is proceeding smoothly and we completed two key elements in the process with the creation of one global sales and marketing organization and a unified engineering group. Our efforts to eliminate redundancies yield 15% headcount reduction and we have other initiatives planned for the second quarter, including integration and westernization of G&A functions. Those actions put us on track to meet profitability target as we outlined at the beginning of this year and we expect the integration process to be largely completed by the first quarter.

I would like to provide a little more color on our product introductions and customer wins before turning the call over to Brian to discuss the financial results. We launched the Commtouch private label Email SaaS platform, our first major release in a series of planned Cloud-based product introductions. This solution combines premium protection against email-based threats such as spam, phishing and malware, with maximum cost-efficiency and minimum time to market. The platform delivers market-leading malware detection at a competitive price point, streamline utilization, and delivers Quality of Service. As a result, our solution helps vendors and service providers grow revenue and market share, reduce churn and improve customer satisfaction.

Our second new product launch is our Mobile Security Service for Android, which represents the first ever malware detection solution that offers cloud-assisted antivirus and Web security services for Android, delivered through a single, easy to integrate client SDK. This solution offers a very large market opportunity for Commtouch with more than 400 million Android devices in use around the globe.

Our third product introduction during the first quarter was our Cloud-assisted on-premise Email Security for service providers, which augments existing market-leading messaging security suite and cloud-assisted malware detection services which Commtouch has. This solution enables customers to improve email Quality of Service while reducing the cost of delivery.

We are delighted by the reception of our new products have received in the market from both new and existing customers. Our broadened product portfolio is enabling us to extend our addressable market by creating a market share with existing customers as well as expanding our reach to new customers, including resellers, distributors, hosting providers and mobile application developers. During the quarter, we began to develop a channel strategy aimed at existing and expanding our opportunity with these customers and are pleased to report that we already closed our first Private Label hosting provider win.

The strength of our product portfolio was recognized by the industry leading information security research and advisory guide at the RSA Conference in the first quarter. Info Security Products Guide awarded top honors to Commtouch across all our product categories.

We remain on track with our plans to launch our new cloud-based Web security solutions and our Advanced Persistent Threat Detection Service in the second half of 2013. The successful rollout of our new solutions, combined with our planned product introductions give us confidence in our full year guidance of $34 million to $45 million in GAAP revenue.

During the quarter, we gained new customers, both in the U.S and internationally. In addition to our new customer wins, we also continue to expand our relationship with existing customers. for example NETGEAR, a global networking equipment vendor which has been a long time Commtouch customer for all our email and web security solutions, recently integrated our Antivirus services into its ReadyNAS line of Network Attached Storage products SMBs and enterprises.

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