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Commtouch and go

Revenues are down, losses are up and cash is low. What now?

The third-quarter of Commtouch Software (Nasdaq:CTCH) raise two tough questions. Can it survive? Should it?

Commtouch, which provides outsourcing services for e-mail, reported dropping revenue, huge charges, dwindling cash reserves and enormous layoffs. It faces a rapidly emptying kitty and no prospects of raising money on the market.

This year it dismissed 400 of its 500 employees in three waves. It has perhaps 20 people left at its Israeli R&D center, after announcing another 75 job cuts on October 27.

Third-quarter revenue dropped to $4 million, 8.4% less than in the second quarter, and 23.8% less than in the third quarter of 2000. The company lost a pro forma $6.4 million, compared with $7.6 million in sequential and $16.2 million in the parallel.

After factoring in one-time charges, its loss climbed to $27.8 million or $1.61 per share. For the second quarter it reported losing a net $8.5 million, and in the parallel, $10.2 million.

Running out of cash
Unlike many other companies, Commtouch did not play coy about its one-time charges, which relate to write-downs for goodwill amortization and depreciation of other assets relating to a past acquisition, "unrecoverable investments", and restructuring expenses.

Commtouch ended the third quarter with $5.4 million cash. Having ended the second quarter with $9.7 million cash, it evidently spent $3.7 million in a single quarter, for all its streamlining.

Unless something fundamental changes during the fourth quarter, Commtouch will be starting 2002 without a cent.

Nor can the company expect to raise any money from external sources. When its stock was peaking in March 2000, at $66 per share, it planned to raise $180 million in a second offering. But then its stock crashed to $40 per share, and the company shelved its plan to offer securities.

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"The uncertain economic environment and recent tragic events have brought much of business decision-making to a standstill. These factors have significantly impacted Commtouch's ability to convert its pipeline of prospects into revenue," commenterd CEO Gideon Mantel.

Mantel added that while paring costs to the bone, it will sustain development of its core business and maintain relations with its customers.

How Commtouch can do that while staying afloat is unclear, especially given that business plans dating from mere weeks before are dead.

For instance, a month ago Mantel told that the company would begin to market a new product to provide enterprises with hosting services for backup systems. It has not announced any such advance.

Mantel himself adds, "Based on our current cash balance of $5.4 million and revised projections of revenues and related expenses, the company should have sufficient cash to continue operations.

"However, the success of this plan is predicated on implementation of additional cost reduction programs, successful retention of existing customers and renegotiation of existing contractual obligations. Some of those factors are not within our control."

Mantel has not given up the idea of raising additional capital, or finding other strategic alternatives. Sounds like Commtouch may be heading for the block.

"Despite current economic conditions, we remain optimistic about the future growth of enterprise messaging outsourcing and our actions are designed to enable Commtouch to successfully participate in this emerging market," Mantel concludes.

Thing is, Commtouch doesn't have much time to put these plans into effect.