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CommTouch announces Q4 shortfall, forecasts difficulties in 2001

Company says future revenues to reach only half of former predictions

CommTouch Software

(Nasdaq:CTCH) today announced that both its fourth-quarter results for 2000 and its first quarter results in 2001 will fall significantly below expectations. Although the company's warning had been expected, the severity of it was surprising.

CommTouch announced that its revenues for the fourth quarter of 2000 will only reach $5.5-$5.6 million, half the sum forecast by analysts. CommTouch also predicts that its annual revenues will come to no more than $45 million, compared to a previous forecast of $70 million for 2001.

We are updating our revenue forecast for 2001 to reflect the market's new reality in particular the changes which took place in the second half of 2000 in the portals, dot.com and e-commerce sectors. The new forecast will reflect the longer sales process, said Gideon Mantel, CommTouch's CEO.

In addition to the company's poor results, CommTouch has also officially announced the collapse of its e-mail sales strategy to dot.com companies and small community websites. Many of these divisions were once considered the CommTouch centerpiece, but are now being closed down, due to a lack of growth in that sector of the market. CommTouch is also laying off 105 employees, or 20% of its workforce.

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CommTouch's collapse is hardly surprising, as the company's entire business model had been based on a typical dot.com formula. CommTouch had been proud of its millions of e-mail boxes, which it had managed for other Internet companies looking to offer clients e-mail addresses with unique suffixes. However, these companies have been collapsing one after the other recently, and it is clear that they could not continue to pay CommTouch for e-mail boxes that do not generate any profit for them.

To CommTouch's credit, the company identified this problem well before the fourth quarter plunge, and changed direction setting its sights on outsourcing to large organizations. CommTouch intends to host its client's e-mail servers so that e-mail management will not fall under the client's technical division, but will instead be directed outside of the firm. CommTouch is cooperating in this field with

Microsoft

(Nasdaq:MSFT), which is a large shareholder in CommTouch. The latter's systems work well with Microsoft's Exchange services. CommTouch explained today that sales in this sector are increasingly rapidly.

CommTouch's biggest problem will be its lack of cash. Though the company currently has reserves of $30 million, no one can tell how long it will last. CommTouch insists that it should become profitable by the fourth quarter of this year, but this date hardly seems realistic. At any rate, CommTouch spent far more than $30 million in 2000, so its cash is not expected to last much later than the fourth quarter.

CommTouch had indeed planned a repeat stock issue six months ago, when its shares had been trading at $60, but called the issue off after the stock collapsed. CEO Mantel today said he was sure the company's cash reserves would last at least until the year's end, thanks to significant expenditure cuts already under way. As for the stock price, Mantel said that at $2.50 with a market cap of less than $40 million, the stock represents a real opportunity for buyers. As for a takeover, Mantel said he would not sell the company at its current price, but that naturally, should an offer come up, it would be brought to the company's shareholders for consideration.