Mantel to Gates, do you read me? Over.
Commtouch is hoping for something from Microsoft.
Gitit Pincas 28 Jul 05 20:24
There are investors whose eyes brim with tears when they hear the name Commtouch Software Ltd. (Nasdaq:CTCH). They remember how in the halcyon days of 2000, Commtouch’s share was worth $68. They remember that the “Israeli Yahoo!” had a market cap of $1 billion. Ah! What profits they made on the way up, and what a loss they made on the way down.
Commtouch’s share is now traded at $0.56, reflecting a market cap of $30 million. This is not a typo. The company never carried out a share split or distributed a dividend to cause a technical fall in its share price. This is real, it burns and it hurts. It might be assumed that someone once burned by Commtouch would not again follow the company and its CEO Gideon Mantel. I am not saying this; Mantel himself said it a few years ago during an interview after some change or other to the company’s business model.
Those who did not lose their money on Commtouch might consider its current share price an interesting opportunity. Last week, the company participated in a conference held by Financial Communication Noam Yellin Ltd. in Tel Aviv, where Mantel gave a presentation in an effort to explain the company’s present direction. One member of the audience was an investor who recently took a small position in the company. After the presentation, we asked for the rationale behind the investment, “This company has burned almost $120 million. Something has to come out of that, don’t you think?” was his reply.
A capital market rule says this logic isn’t always true. It should be remembered that Commtouch has changed its business mode, strategy, vision, and DNA many times, and every time the new promising path led nowhere. Although this reduces the probability that the same thing might happen this time, it does not eliminate the possibility altogether.
“Commtouch isn’t just about fighting spam,” said Mantel in his presentation. “We’ll soon launch an anti-virus product, and we’ll later launch anti-spam and anti-virus products for two new fields: VoIP, which will unquestionably get spam; and the web (http). Current threats on the web are immense, and existing companies are unable to stop them. Commtouch has the solution.”
Mantel was not broken by Commtouch’s hard times. He learned from them. He says, “It possible to see how we recovered from the 2000 crisis. I think we’re doing very well, and meeting our targets. We learned from our mistakes. There were people we were able to learn from. I think something very interesting has been created here a company that will become profitable by mid-2006.”
Needless to say, this is refreshing, since Commtouch has never made a profit to date.
Commtouch model 2005 calls itself an e-mail protection company. Its solutions block spam and viruses in real time. The company analyzes 1.5 billion messages a month (0.5% of all e-mails), and claims its technology can defend against over one million attacks a day on average.
How does Commtouch do it? It installs a server alongside an enterprise’s e-mail server. E-mails go through this server, which creates a kind of signature the identity of the sender, delivery route, and so on. This creates a large database, which Commtouch’s technology can draw on to identify and intercept spam, while letting innocent e-mails through.
Mantel says Commtouch’s technology, called “recurrent pattern detection” (RPD) can spot spam and virus attacks in real time. It identifies recurrent patterns in global e-mail movement, and can stop attacks almost as soon as they occur, before they reach millions of users. “Existing anti-spam and anti-virus solutions examine the content of a message. We check their characteristics,” explains Mantel. “These days attacks are tougher. Once, a 17-year old kid hacked computers in order to destroy them. Now, hackers want to steal your credit card or use your computer as a zombie to send spam. The threats are worse than in the past.”
Mantel uses data from an FBI study, which estimated the damage to companies from spam at $55 billion a year. “If all large enterprises have defenses and anti-virus protection, how are they being hurt?” asks Mantel, answering his own question, “We conclude that current anti-virus solutions on the market simply don’t provide the right remedy.”
It sounds almost crazy for Mantel to claim that most anti-virus companies fail to do their job. We’re not talking about two-bit companies, but industry giants like Symantec (Nasdaq:SYMC) and McAfee Inc. (NYSE:MFE), which might be able to teach Netanya-based Commtouch a thing or two.
“Unlike them, I’m not driven by content, but look for patterns, recurrences and method. Our solution asks the database in real time and gets an answer immediately, compared with the several hours for current anti-virus companies. This is why we don’t make silly mistakes, claims Mantel. “In general, we don’t see ourselves as protectors for companies, but as in integrators for information security companies.”
Commtouch says it has patented its technology. “We began patent procedures three years ago, with the understanding that the matter would reach the courts in 2006-07, and anyone without a patent would disappear. There are already entities infringing on our patent, and we taking cautious measures against them. We believe that some companies will sign licensing agreements with us soon.”
Commtouch’s sales model is to use distributors and original equipment manufacturer (OEM) agreements. OEM agreements generate 20-30% of product sales. The company currently has 28 OEM partners, seven of whom signed contracts during the second quarter, and Commtouch now protects thousands of enterprises in over 100 countries.
There’s a similarity between the new and old Commtouch. In both incarnations, it hoped to develop from revenue from Microsoft (Nasdaq:MSFT), a former partner, among others. Microsoft was once a shareholder in Commtouch. It didn’t work in the past, but Mantel hopes it will this time, “although it’s impossible to know for certain.”
A few weeks ago, Microsoft acquired Sybari Software for an undisclosed amount. Sybari is an anti-virus and anti-spam company that provides enterprises with means of defense against hostile programs and attacks. It is a major distributor for Commtouch, and Commtouch now believes that it has found a back door to Microsoft for a new relationship.
“I assume it will take time before Microsoft’s salespeople understand our product, but I hope there’ll be a big upside for the company in late 2005,” says Mantel. Asked why he thinks it will work out better this time, since Microsoft previously a shareholder in Commtouch, but showed zero commitment to it, Mantel replies “They can neglect us if they want. Today, we’re a stage further ahead it’s product marketing, not OEM. We can go with other companies; it won’t be so simple for them. We have unique technology, and our patent is a major deterrent element. Information security is an intensely competitive industry, and Microsoft only entered it now, so we think it will lean more toward collaboration. Nonetheless, there are obvious risks in such a dance with a giant like them and a midget like us; I’m not saying there aren’t.”
This is the time to mention Mantel’s first round with Microsoft chairman and chief software architect Bill Gates. In 1999, Commtouch signed a cooperation agreement with Microsoft that included an option to acquire 4.7% of Commtouch for $20 million, which Microsoft subsequently exercised. The cooperation agreements between Microsoft’s MSN portal and Commtouch’s branded e-mailboxes also included offering messenger and other programs to Commtouch customers. At the time, Commtouch said this was a framework agreement that would be expanded later. In practice, it simply evaporated within a few quarters.
The interesting thing was that Microsoft, which only two years previously had acquired Hotmail for $400 million, invested in Commtouch, an apparent competitor. Microsoft sought to use Commtouch to enter into outsourcing.
This was not Commtouch’s only connection with Microsoft. Microsoft co-founder Paul Allen, who left the company in the 1980s, invested $20 million in Commtouch before its IPO, through two entities.
A lot of water has since flowed under the bridge. Commtouch currently has $740,000 in quarterly revenue, and a loss of $1 million. Mantel announced preliminary figures from the company’s financials at the Noam Yellin conference. He said expenses were about the same at more or less $1.5 million, and its booking was over $1.5 million. The cash burn rate had fallen from $1 million to under $500,000, and the company had $3.9 million in cash, after a series of capital raisings over the preceding two years, mostly from its original shareholders. This is a very positive point: Mantel is talking about a positive cash flow rate by the end of the year, and profitability in 2006. “We have money to run the operation,” he said.
“Globes”: What will the company look like in three or four years?
Mantel: “I don’t want to toss out numbers. We don’t give guidance, and not before the end of the year, but over time, we should achieve quarter-on-quarter double-digit growth. We have a lot of OEM agreements, we’ve kept our expenses at $4-5 million over recent quarters, and we’ll make profits from the middle of next year. We’ve gone through a lot as a company, and I’m quite proud of where we are now.”
Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2005
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