Even though investment house CIBC Oppenheimer questions the viability of the email and instant messaging sector in which CommTouch and its rival

Critical Path

(Nasdaq:CPTH) operate, it still rates the Israeli company a Buy.

Other investment houses have stopped covering companies whose shares have plunged below $1.

But analysts Avivit Mannet-Kalil and Ronen Schwartzman note that both CommTouch and Critical Path, who are leaders in the mail-server market and instant messaging sectors, released poor results for the first quarter.

The two analysts say that the firms' poor results combined with the industry's murky future raise the question as to whether or not this sector will still exist in the near future. They write that CommTouch is operating at a high risk, and that its first quarter results show that it is still ailing.

Sales for CommTouch's first quarter of this year came to $4 million. For the first time the company posted a gross loss. Its cash reserves declined by $16 million, to $13 million. The company fired 280 workers, reducing its workforce to 201 employees.

CommTouch is aware of its dire cash situation, and plans to raise $5 million in order to make through the year, the analysts write. But its reduction in operating costs will only be felt in the third quarter, raising a question over the company's ability to reduce its cash burn rate in the short term.

Mannet-Kalil and Schwartzman say that the economic slowdown in the United States, mainly in Internet telephony, is the main factor hindering CommTouch's sales.

The analysts believe that it will take time for the firm to establish a marketing strategy via distribution channels. They also point out that the economic uncertainty against which CommTouch slashed its workforce has not helped advance its new strategy.

According to the analysts, the two positive items in CommTouch's quarterly results is the 10-day reduction in Days Sales Outstanding (DSO) to 64 days, and the rise in deferred revenues, which rose by $245,000 to $1.7 million.

CommTouch' rival Critical Path evinces just how bad things are, Oppenheimer says. Critical Path restated its financial results for its third quarter, and revised its results for its fourth quarter and for the year 2000. The company is suspected of fraudulent accounting.

Critical Path also announced a 36% drop in sales in the first quarter of this year, compared with the fourth quarter of 2000. It showed a loss of $42.3 million less one-time costs, and recently announced a 40% reduction in staff.