Commtouch (CTCH) Dominates in the Cloud - Analyst Blog

Ken Nagy, CFA

Commtouch Software (CTCH) a provider of email defense and URL filtering solutions to enterprise customers and OEM distribution partners. The firm’s “in the cloud” technology has the ability to analyzes 2.5 billion messages a day, which is far superior to the competition’s static solutions which have little chance of catching new outbreaks. During late 2008, the Company released its URL filtering services. The web has more than double the revenue potential of the messaging market. The firm’s OEM business model gives Commtouch the advantage of recurring revenue, higher margins and less exposure to the end markets.

How it Works
As the user browses the web security device sends the requested URL to the Commtouch URLF solution within microseconds, its smart client checks the local cache for information. If it finds the relevant classification in the cache it extracts the necessary information, enabling integrating partners to determine if that URL should be allowed or blocked. (fully or partially) if the information does not reside in the local cache it quickly sends out a request to the to the data cloud and receives the latest available classification. The Commtouch Data cloud can be simultaneously accessed by hundreds of millions of users at one time.

The OEM Business Model
The OEM model has inherent advantages. Among them high margins, marketing risk to the end-customer is reduced, 90% of OEM’s renew, and the firm has the ability to cross sell. Further, market consolidation, such as IBM’s acquisition of Cobion, will strengthen Commtouch’s hold on the market since other OEM venders are unlikely to buy from competitors.

CTCH remains well positioned to achieve solid revenue growth and operating leverage as, virus problems become more complex given the company’s competitive advantage led by innovation and the OEM business model. The firm has four things that separate it from the pack in our opinion.

A technologically superior product.
A service based OEM business model that assures recurring revenues and high margins with less end market risk.
A strong balance sheet with no debt.
A growth platform in URL filtering that looks to be double the size of the message market.