Critical Path's crisis should not affect us, says Commtouch officer

The rival's original Q4 report made us look bad. We reported a slowdown that they never mentioned, says CFO Eli Parnpas
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The problems at Critical Path (Nasdaq:CPTH) shouldn't affect us, protest officers at the company's Israeli rival,

CommTouch Software

(Nasdaq:CTCH).

Problems indeed. Before the bell on Friday February 2, Critical Path (Nasdaq:CPTH) announced that its results published on January 18 were inaccurate. Investment banks lined up to downgrade the share. The next day the lawyers pounced, announcing a series of class action suits on behalf of investors who bought Critical Path shares from January 19 to February 1, the day before the company admitted that its statement was wrong.

The fur and fallout flew: On Friday the San Francisco-based company's Israeli rival

CommTouch Software

(Nasdaq:CTCH) promptly took a drubbing from investors.

I don't believe that the problems at Critical Path will affect us directly, Commtouch CFO Eliezer Parnpas told TheMarker.com.

Problems at Critical Path is phrasing matters delicately. But Parnpas' caginess is only proper, considering that the investigations that the American company is facing are far from over.

On January 18, Critical Path reported fourth-quarter 2000 revenue of $52 million and profits of $11.5 million, not including one-time charges. The results would seem to be overstated. Today Critical Path says it has discovered several transactions that put its fourth-quarter results into question. The company has also suspended President David Thatcher and VP World-Wide Sales William Rinehart, pending a revenue-recognition probe.

On Friday, Critical Path sank 60% in pre-opening trade, straight to a 52-week low. But Nasdaq's management suspended trade in the share for the whole of the Friday session.

The problems are specific to the company and have nothing to do with Commtouch, Parnpas said. At this stage it would seem that Critical Path did not behave according to the standards expected of companies traded on Nasdaq, especially regarding investor relations.

Asked if Critical Path's recalculation of results affects Commtouch, Parnpas noted that if anything, the Critical Path's original report had made Commtouch look bad. Commtouch had released an earnings warning noting a slowdown in the dot.com market. But Critical Path, Commtouch's rival in Web-based email, made no mention of any slowdown in its January 18 statement. Now it's clear that Critical was hurt by the slowdown, Parnpas says, but adds that the investigations into the American company shouldn't touch on Commtouch in any way.

TheMarker.com: Do you expect an influx of customers disappointed with Critical Path?

Parnpas:

We don't intend to build on Critical's failures. I am sure that some companies will come to us for service, because Critical Path has damaged its reliability in the eyes of investors. But we sell primarily through marketing, which isn't how Critical operates.

Analysts at the Tel Aviv-based brokerage Central Securities Corporation recently wrote that Commtouch's survival during the cold hi-tech winter depend to a great degree on its ability to attract a buyer. Possible names that came up included Tioga Technologies (Nasdaq:TIGA),

BackWeb

(Nasdaq:BWEB),

Lanoptics

(Nasdaq:LNOP), and

Orckit Communications

(Nasdaq:ORCT). But the brokerage added that all these potential buyers were burning cash fast and watching their share prices dive.

TheMarker.com: When your share price dropped from a high of $60 to around $3.5 today, speculation swirled that Critical Path might buy Commtouch. Is that still possible?

Parnpas:

We never formally announced negotiations of anything of the kind I assume that if the shareholders receive an offer they can't refuse, they won't hesitate to accept it.

I can't tell you whether Critical Path ever expressed interest in buying Commtouch. But we're an attractive prospect for a merger today, because our valuation is low, and our share price is at an all-time low. As we've said before, we believe the company's market cap will rise. In any case I can say that institutional investors are very interested in the company and have even been buying stock on the market.

TheMarker.com: Is Commtouch considering more lay-offs beyond the 100 workers recently dismissed?

Parnpas:

We were forced to lay off 20% of our staff to streamline operations under the harsh conditions we encountered. We've already finalized our budget for 2001, which factors in the condition of the market and its uncertainty. We hope to meet the goals we set for the coming year. If things pan out as we hope, we won't have to fire any more of our 400 employees.

Commtouch is due to file its formal statement for the fourth quarter and for 2000 this week. According to its earnings warning, its revenue should range from $5.5 million to $6 million for the quarter, down 60% from pre-warning forecasts. The company did not reveal its expected losses. In the third quarter, Commtouch lost $7.5 million, but had predicted a shift to profits in the fourth quarter.