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Commtouch Software Ltd. (CTCH)

Q2 2013 Earnings Call

August 6, 2013 10:00 AM ET

Executives

Monica Gould – IR

Shlomi Yanai – CEO

Brian Briggs – CFO

Analysts

Jay Srivatsa – Chardan Capital

Ken Nagy – Zacks Investment

Presentation

Operator

Greetings, and welcome to the Commtouch 2013 Second Quarter Results Conference 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, Monica Gould, Investor Relations for Commtouch. Thank you, Ms. Gould. You may now begin.

Monica Gould

Thank you, and welcome to Commtouch’s second 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 very much, Monica. Good day, everyone and thank you for joining us. Commtouch delivered solid second quarter performance with revenue growth of 42% year-over-year and 2% sequentially. Those results were slightly lower than our expectations and included an internet revenue from our new Cloud-based offerings. Most notably, our Email Security-as-a-Service solution and our new mobile security for Android detection service, which we launched in the first quarter. The rollout of our new services has gone well with several important wins in the second quarter.

We won key new customers in hosting clients for our private label Email Security-as-a-Service product. Those initial contracts have the potential to grow substantially as customers begin to rollout the services. We are pleased with the initial (traction) that our new offerings is granted. Demand for those products from both new and existing customers remains robust and validate our strategy to transform Commtouch from a best-in-class embedded malware detection service provider to a supplier of the complete Cloud-based security-as-a-service solution.

As we lead organization through this transformation, we anticipated some execution challenges. As previously announced, we have been investing in the build out of our worldwide sales and marketing organizations to support the rollout of our new upcoming Cloud-based offerings. However, it is taking us longer than expected to complete some key hires and ramp up in this area. As such, we believe it is prudent to moderate our full year outlook to account for the potential of a more gradual new product sales rep. We now anticipate GAAP revenue of $32 million to $33 million for 2013 down from $34 million to $43 million results we provided previously.

While we are disappointed that those transformation challenges have impacted our short-term outlook, our confidence in our strategy has never been higher. We continue to evolve and broaden our product portfolio enabling us to expand our addressable market by increasing our market share with existing customers as well as expanding our reach to new customers, including retailers, distributors, hosting providers, and mobile application developers.

Throughout 2013, we have been gearing up to launch our second major Cloud-based product offering with the release of our new Cloud-based web security solution during Q4 2013. This offering will focus on web security in the Cloud services, which are easy to provision and use. Those services will be built on the market-leading security detection platforms and will be delivered by our partners as private label services. This go-to-market strategy will allow our partners to quickly be able to deploy Cloud-based web security to their existing customer base as part of Commtouch continued new product initiatives.

Our research and development efforts of the advanced (inaudible) detection services, we remain on track for release toward the end of 2013. I am also pleased to report that our efforts to integrate the two acquisitions we completed in the fourth quarter of last year are nearing completion and we continue to streamline the business to achieve cost synergies. Lastly, we are delighted to welcome David Earhart to our Board of Directors. David currently serves as a Senior Vice President of CA Technologies Security business and has extensive experience in security, networking, storage, and system management. He has a long track record of building high-performing teams and scaling businesses.

In summary, while I am disappointed with the transformation of challenges, which have impacted the growth of our sales and marketing expansion, I am very encouraged by the demand we are seeing for our new products in the marketplace. This combined with our upcoming product launches give us confidence in our strategy to transform the company and position Commtouch for a long-term growth and improve profitability.

With that, I would like to hand the call to Brian to further elaborate on the quarterly results. Brian, please go ahead.

Brian Briggs

Thank you, Shlomi and hello everyone. I will now provide you with a summary of our second quarter 2013 results. For the more detailed results, please refer to the press release we issued earlier today. In addition, please note that we compile our financials under U.S. GAAP which includes non-operating expenses. In order to better analyze our business performance, I will also discuss certain financial metrics on a non-GAAP basis, excluding these non-operating items. You can refer to today’s press release for a full reconciliation of our GAAP and non-GAAP results.

GAAP revenue for the second quarter of 2013 was $8.1 million, up 2% sequentially from Q1 2013 and up 42% from a year ago. The Q4 2012 acquisitions of our German and Icelandic operations accounted for the majority of the year-over-year revenue increase. Non-GAAP revenues for the second quarter totaled $8.2 million compared to $8.1 million for the sequential first quarter of 2013 and $5.7 million in the second quarter of 2012.

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