Commtouch Reports Financial Results for the Third Quarter of 2007

Commtouch® (NASDAQ:CTCH), a leading email defense technology provider, today announced its third quarter results for the period ending September 30, 2007. Third Quarter 2007 Highlights: Revenues for the third quarter of 2007 increased by 57% to $2,930 thousand compared to $1,866 thousand in the third quarter of 2006. Revenues for the first nine months of 2007 increased by 58% to $7,952 thousand compared to $5,037 thousand as recorded in the first nine months of 2006. Net income in accordance with US Generally Accepted Accounting Principles (US GAAP) for the third quarter of 2007 was $639 thousand compared to net income of $149 thousand in the third quarter of last year, a 329% increase. For the first nine months of 2007, US GAAP net income was $1,389 thousand, as compared with a loss of $343 thousand in the first nine months of 2006. Non-GAAP net income for the third quarter of 2007, excluding $250 thousand of stock-based compensation expenses in connection with the Company's adoption of Financial Accounting Standards No. 123R, was $889 thousand compared to a net income of $315 thousand in the third quarter of 2006. For the first nine months of 2007, non-GAAP net income was $2,123 thousand as compared with net income of $152 thousand in the first nine months of 2006. Deferred Revenues (long-term and short-term) as of September 30, 2007 amounted to $2,771 thousand, an increase of 8% over deferred revenues as of December 31, 2006. Operating cash flow in the third quarter of 2007 was $759 thousand, compared to $354 thousand in the third quarter of 2006. In the first nine months of 2007, operating cash flow was $2,140 thousand, as compared with operating cash flow of $855 thousand in the first nine months of 2006. Cash, short term cash deposits and marketable securities as of September 30, 2007 amounted to $13,048 thousand, compared to $10,004 thousand as of December 31, 2006. The increase is due to the above-mentioned positive operating cash flow and receipt of proceeds from the exercise of warrants and options, in the amount of $1,386 thousand. The Company signed nine new OEM licensing agreements during the third quarter of 2007 and 28 in total for the first nine months of 2007, bringing the Company’s global OEM partner count to 82 as of September 30, 2007. "I am very pleased that we have continued delivering strong revenue growth, increasing profit margins and new licensing deals,” said Gideon Mantel, chief executive officer and chairman of the board. "The vast majority of 2007 revenues were generated from OEM agreements signed between 2004 and 2006, which represents the long-term strength of our business model and serves as one of the indicators of our future growth. "Additionally, we have built a meaningful market position, today protecting tens of millions of end users in tens of thousands of enterprises. We see a growing need for our solutions both due to the rising number of mailboxes worldwide, and the escalating levels of spam and malware. In the near future, we expect to invest additional resources to accommodate this significant industry demand, including developing additional products to address our partners' needs,” added Mr. Mantel. Use of Non-GAAP Measures This press release includes financial measures for net income (loss), basic and diluted earnings per share that exclude stock-based compensation expenses and are therefore not calculated in accordance with generally accepted accounting principles (GAAP). Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's net income or loss and earnings or loss per share and to compare it with historical net income or loss and earnings or loss per share. 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, Thursday, November 1st, 2007 at 11 a.m. EDT. To participate in the call, please dial one of the following numbers ten minutes prior to the start time of the call:   U.S.: 1-888-407-2553; UK: 0-800-917-9141; ISRAEL: 03-918-0688; INTERNATIONAL: +972-3-918-0688 For those unable to listen to the live call, a replay of the call will be available the day after the call in the investor relations section of Commtouch’s website, at: http://www.commtouch.com/ir. About Commtouch Commtouch Software Ltd. (NASDAQ:CTCH) is dedicated to protecting and preserving the integrity of the world's most important communications tool -- e-mail. Commtouch has over 16 years of experience developing messaging software and is a global developer and provider of proprietary anti-spam, Zero-Hour™ virus protection and Reputation Service solutions. Using core technologies including RPD (Recurrent Pattern Detection™), the Commtouch Detection Center analyzes billions of email messages per month to identify new spam and malware outbreaks within minutes of their introduction into the Internet. Integrated by more scores of OEM partners, Commtouch technology protects thousands of organizations, with hundreds of millions of users in over 100 countries. Commtouch is headquartered in Netanya, Israel, and has a subsidiary in Sunnyvale, Calif. For more information, see: www.commtouch.com. The site includes the Commtouch online lab detailing spam statistics and charts. Recurrent Pattern Detection, RPD, Zero-Hour and GlobalView are trademarks, and Commtouch is a registered trademark, of Commtouch Software Ltd. U.S. Patent No. 6,330,590 is owned by Commtouch. This press release contains forward-looking statements, including projections about our business, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements in the future tense, and statements including words such as "expect," "plan," "estimate," "anticipate," or "believe" are forward-looking statements. These statements are based on information available to us at the time of the release; we assume no obligation to update any of them. The statements in this release are not guarantees of future performance and actual results could differ materially from our current expectations as a result of numerous factors, including business conditions and growth or deterioration in the Internet market, commerce and the general economy, both domestic as well as international; fewer than expected new-partner relationships; competitive factors, including pricing pressures; technological developments, and products offered by competitors; the ability of our OEM partners to successfully penetrate markets with products integrated with Commtouch technology; a slower than expected acceptance rate for our newer product offerings; availability of qualified staff; and technological difficulties and resource constraints encountered in developing new products, as well as those risks described in the text of this press release and the company's Annual Reports on Form 20-F and reports on Form 6-K, which are available through www.sec.gov.       COMMTOUCH SOFTWARE LTD.   CONDENSED CONSOLIDATED BALANCE SHEETS     September 30 December 31 2007 2006 Unaudited Audited In US$ thousands   Assets: Current Assets: Cash and cash equivalents $8,948 $8,004 Short term cash deposit 1,600 Marketable securities 2,500 2,000 Trade receivables 1,227 570 Prepaid expenses and other accounts receivable 144 196 Total current assets 14,419 10,770   Long-term lease deposits 30 13 Severance pay fund 738 607 Property and equipment, net 777 609 Total assets 15,964 11,999         Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable 330 344 Employees and payroll accruals 559 503 Accrued expenses and other liabilities 418 379 Short-term deferred revenue 2,096 2,032 Total current liabilities 3,403 3,258   Long-term deferred revenue 675 542 Accrued severance pay 835 706 Total liabilities 1,510 1,248   Shareholders’ equity 11,051 7,493 Total liabilities and shareholders’ equity $15,964 $11,999         COMMTOUCH SOFTWARE LTD.   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   (In US$ thousands, except per share amounts)           Three months ended Nine months ended September 30 September 30 2007 2006 2007 2006 Unaudited Unaudited Unaudited Unaudited   Revenues $2,930 $1,866 $7,952 $5,037   Cost of revenues 357 (a)220 989 (a)646   Gross profit 2,573 1,646 6,963 4,391     Operating expenses:   Research and development 559 (a)422 1,554 (a)1,251   Sales and marketing 874 (a)636 2,510 (a)1,959   General and administrative 620 (a)518 1,908 (a)1,667   Total operating expenses 2,053 1,576 5,972 4,877         Operating profit (loss) 520 70 991 (486)   Interest and other expense, net 119 79 398 192   Equity - loss of affiliate       (49)   Net income (loss) attributable to ordinary and equivalently participating shareholders $639 $149 $1,389 ($343)       Earning (loss) per share- basic $0.01 $0.00 $0.02 ($0.01)   Earning (loss) per share- diluted $0.01 $0.00 $0.02 ($0.01)   Weighted average number of shares outstanding: Basic 75,195 70,984 74,198 64,624   Diluted 83,580 77,313 82,305 64,624   (a) Reclassified               Supplementary Financial Information   Unaudited Reconciliation of GAAP Financial Information to NON-GAAP   (In US$ thousands)   Three months ended September 30   GAAP FAS123R Non GAAP GAAP FAS123R Non GAAP 2007 Adjustments 2007 2006 Adjustments (a) 2006 Unaudited   Revenues $2,930 $2,930 $1,866 $1,866   Cost of revenues 357 8 349 (a)220 3 217   Gross profit 2,573 (8) 2,581 1,646 (3) 1,649     Operating expenses:   Research and development 559 64 495 (a)422 41 381   Sales and marketing 874 45 829 (a)636 20 616   General and administrative 620 133 487 (a)518 102 416   Total operating expenses 2,053 242 1,811 1,576 163 1,413               Operating profit 520 250 770 70 166 236   Interest and other expense, net 119 119 79 79   Net income $639 $889 $149 $315       Earning per share- basic $0.01 $0.01 $0.00 $0.00   Earning per share- diluted $0.01 $0.01 $0.00 $0.00   Weighted average number of shares outstanding: Basic 75,195 75,195 70,984 70,984   Diluted 83,580 83,580 77,313 77,313   (a) Reclassified             Supplementary Financial Information   Unaudited Reconciliation of GAAP Financial Information to NON-GAAP   (In US$ thousands)   Nine months ended September 30   GAAP FAS123R Non GAAP GAAP FAS123R Non GAAP 2007 Adjustments 2007 2006 Adjustments (a) 2006 Unaudited   Revenues $7,952 $7,952 $5,037 $5,037   Cost of revenues 989 21 968 (a)646 9 637   Gross profit 6,963 (21) 6,984 4,391 (9) 4,400     Operating expenses:   Research and development 1,554 185 1,369 (a)1,251 123 1,128   Sales and marketing 2,510 133 2,377 (a)1,959 60 1,899   General and administrative 1,908 395 1,513 (a)1,667 303 1,364   Total operating expenses 5,972 713 5,259 4,877 486 4,391               Operating profit (loss) 991 734 1,725 (486) 495 9   Interest and other expense, net 398 398 192 192   Equity - loss of affiliate - - (49) (49)   Net income (loss) $1,389 $2,123 ($343) $152       Earning (loss) per share- basic $0.02 $0.03 ($0.01) $0.00   Earning (loss) per share- diluted $0.02 $0.03 ($0.01) $0.00   Weighted average number of shares outstanding: Basic 74,198 74,198 64,624 64,624   Diluted 82,305 82,305 64,624 64,624   (a) Reclassified           COMMTOUCH SOFTWARE LTD.   CONDENSED CONSOLIDATED CASH FLOW DATA   (In US$ thousands)         Three months ended Nine months ended September 30 September 30 2007 2006 2007 2006 Cash flow from operating activities Unaudited Unaudited Unaudited Unaudited   Net income (loss) $639 $149 $1,389 ($343)   Adjustments: Depreciation 108 53 280 143 Compensations related to options issued to employees and consultants 269 201 783 608 Equity in losses of affiliate - - - 49   Changes in assets and liabilities: Increase in trade receivables (314) (7) (657) (103) (Increase) decrease in prepaid expenses and other receivables (36) (45) 52 (19) Increase (decrease) in accounts payable 75 68 5 (17) Increase (decrease) in employees and payroll accruals, accrued expenses and other liabilities 57 (171) 95 (132) (Decrease) increase in deferred revenues (40) 105 197 669 Increase (decrease) in accrued severance pay, net 1 (2) (2) - Other - 3 (2) - Net cash provided by operating activities 759 354 2,140 855   Cash from investing activities   Purchase of marketable securities - 500 (500) 500 (Increase) decrease in long - term lease deposits (8) (4) (17) 2 Proceeds from sale of Fixed Assets - - 2 - Purchase of property and equipment (69) (126) (467) (268) Net cash (used in) provided by investing activities (77) 370 (982) 234   Cash flows from financing activities   Proceeds from options and warrants exercises 257 638 1,386 1,984 Net cash provided by financing activities 257 638 1,386 1,984   Increase in cash and cash equivalents 939 1,362 2,544 3,073 Cash and cash equivalents at the beginning of the period 9,609 5,697 8,004 3,986 Cash and cash equivalents at the end of the period $10,548 $7,059 $10,548 $7,059