Globes, August 6, 2003
"Spam isn't new to us"
| Commtouch's Gideon Mantel: Always optimistic but no forecast before February.
|After seeing its market cap fall from $1 billion to $1 million, Commtouch (Nasdaq: CTCH) is beginning to recover. The company recently completed a $3.1 million two-stage private placement at a value of $0.50-0.60 per share, reflecting a market cap of $13 million. The value reflects a 25% discount on Commtouch's market cap of $17 million, following a 10-fold rise in its share price to $0.75 in the past year.
New investors in Commtouch include Israel Seed Partners and Benny Landa, the founder of digital printer maker Indigo, sold to Hewlett-Packard (NYSE:HPQ) for $870 million 18 months ago.
Through investment company OZF, Landa invested $900,000 to acquire 7.2% Commtouch. He has no plans to involve himself in Commtouch's day-to-day business, or join its board of directors. Landa also recently acquired an 8.5% stake in Ophir Optronics (TASE:OPIR) for NIS 9 million.
Commtouch's second life involves focusing on spam. "We've been in the messaging business for 12 years, and spam is not something new for us," says Commtouch CEO Gideon Mantel, to explain the company's new strategy. "18 months ago, following cutbacks and streamlining, we only had our development department left. We realized that the problem of spam was becoming increasingly important for enterprises. We altered our technology to deal with spam."
Commtouch used to specialize in providing e-mail server programs and outsourcing e-mail management for enterprises. It failed big-time, but Mantel stayed optimistic all the way down. "An entrepreneur or high-tech CEO who isnít optimistic had better find a new job," he says. "You must be an optimist in this business. The fact is that we've brought Commtouch from the brink of closure to its current situation."
"Globes": Nevertheless, you gave investors the impression that business had stabilized and things 'would be all right'. In fact, that is not the case. Investors have lost almost all their money.
Mantel: "It's a question of perspective. Investors lost a lot of money on high-tech companies, especially Internet ones. Compared with Internet companies like Critical Path (Nasdaq:CPTHD) and Mail.com, we're in good shape. Our share has fallen less, though that is no great source of pride. The entire sector crashed, us included, and investors lost heavily."
So why did you display optimism all along?
"That's not true. Commtouch, was, very regrettably, the first Israeli company to fire employees. The facts are that on January 7, 2001, we published a profit warning and cut the company by 60%. No one preceded us. We saw the impending Internet crash before everybody, but despite the cutbacks and lay-offs, we were brought down, too. In any event, after the profit warning in 2001, I no longer expressed optimism."
You crashed, although you claim you saw it coming when other Israeli companies were actually holding on.
"Many Israeli Internet companies crashed. Except for BackWeb Technologies (Nasdaq: BWEB) and ourselves, there are almost no Israeli Internet public companies traded on Wall Street, so the comparison with other Israeli companies in general is irrelevant."
Before the great crisis, Commtouch was about to raise more money on Wall Street, and was on the verge of getting tens of millions of dollars. But the management decided not to issue shares below $40, a stubborn move that cost the company dearly. Nasdaq started to tumble, and Commtouch could not raise cash.
"I'm tired of answering that question. I feel great about our new field, and I'm proud that we kept wonderful people at the company so that Commtouch continues to be a great place to work. I hope we can rebuild the company."
Wouldnít it be easier if you had tens of millions in cash reserves?
"I donít know. I'm not sure how we'd look now if we had raised capital."
Mantel may be right. After all, $50 million, or even $70 million can evaporate as easily as the tens of millions of dollars already burned, although a residue would presumably have remained.
Commenting on the company's second life, Mantel says, "We've been developing an anti-spam product for the past 18 months, establishing our beta site and field test in January 2003. We formally launched the product six weeks ago."
He is, as usual, optimistic. "The product's uniqueness is derived from the way it handles spam. Spam is a huge problem for enterprises. It absorbs human resources, overloads networks, disturbs and distracts users. It's no negligible matter. People receive scores of spam messages every day. The cost is huge.
"On the other hand, it's very hard to identify spam. Unlike viruses and hacker attacks, sorting spam from regular mail is hard. The technological solution was content-based. In other words, e-mails were filtered according to their content to determine which were spam. But that isnít the right test. Using that approach, any e-mail containing the word 'sex' would thrown into the trash, but 'sex' is a legitimate word that appears in e-mails the user wants to receive. This content-based technology made a lot of errors and caused a great deal of damage.
"Commtouch's solution uses statistics. We sample 20 million pieces of e-mail on the Internet daily. The data we obtain from Internet and service providers helps us identify spam using other tools."
Are you allowed to look at the e-mails?
"We donít read the mail. We donít relate to the content at all, but look for common denominators. We check the virtual envelopes: who sends them, what's the subject; what's the IP address, and other parameters. We have tools to analyze the mail and send the information to a database that serves our customers."
Nevertheless, isn't there privacy infringement?
"If you send an e-mail to your wife saying, 'I love you', it's a discrete event, and it won't interest our system. Only bulk mailings will be checked for spam, not ten, or 50, or 100 e-mails. The system looks for bulk mailings with an identical structure. In addition, the human eye also looks at it. When the system identifies a spam pattern, it is sent under a digital signature to the database. There is no privacy infringement."
After developing tools to check a message's structure, Commtouch developed the ancillary products. "We developed a bridge that is placed in the enterprise between the firewall and the e-mail server. This is where messages are examined in accordance with the enterprise's specific instructions. For instance, if an enterprise wants to ensure that all e-mails from "Globes" are received, it gives the order; if it doesnít, it gives a specific instruction. E-mails are packaged under a digital signature, sent to the database for comparison with existing files, and the enterprise is informed if they're legitimate e-mails. The process is very fast, and does not affect e-mail communications between entities.
"The advantages of the system for an enterprise are immense. First, it's fast. Second, it's secure, and it costs the enterprise nothing. The enterprise's computer departments don't program commands or waste resources on the issue. That's why there's such great interest in us. We've already had sales, not yet extensive, but we're steadily expanding the number of our distributors. We recently announced that we had 22 distributors."
Commtouch, of course, is not the only company in the field.
"This is a hot field nowadays with heavy demand," says Mantel. "Like every hot field, there's competition. Commtouch is not alone. There are a lot of competitors, but, as I said, there are different theories about how to deal with spam. There are scores of companies that have adopted the content-filtering approach, and other that have adopted our model that includes a database and gateway located at the enterprise. Prominent anti-spam companies are Brightmail, Cloudmark, Postini, and IronPort Systems "
Aladdin Knowledge Systems (Nasdaq: ALDN) also has a competing product.
"As the analysts say, the potential is great," adds Mantel. "A substantial proportion of enterprises across the world will buy anti-spam solutions, since spam causes so much damage. Microsoft (Nasdaq:MSFT) recently estimates the cost at $18 billion a year."
Microsoft could become a competitor.
"Microsoft has Exchange, an e-mail system in itself, but it does not have an anti-spam solution. Microsoft does not operate a data center that identifies spam. It supplies enterprises' computer departments basic tools to fight spam, but they're not enough."
That could change, and if so, Commtouch will be in big trouble. In the meantime, Mantel has set a target: "A lot of entities, both large and small, will try to provide a partial or full anti-spam solution. The way to become a significant player is quickly win market share. Our aim is win market share quickly and become one of the top five companies in the field in the coming year."
How will that affect revenue?
"I can't provide forecasts until February 2004. We'll run with the new system for two quarters, after which we'll feel more comfortable providing forecasts. But I can tell you that the price per user per year will begin at $20, and will fall as the number of users grows. That's acceptable as revenue in accounting. If we sell a product for one year's use at $12, the revenue is recognized as spread throughout the year at $1 per month."
Have you begun selling?
"Yes, though there won't be substantial sales in the third quarter."
Will you reach $500,000 in sales in the fourth quarter?
"I won't give forecasts. We must see how the product is received. There's a market, but we'll know more in a few months. We're operating in a new market. There's no company experience in this industry, so it's hard to make forecasts. Secondly, we're a public company that has experienced violent swings, and we want to be cautious."
Commtouch had $1 million in cash reserves as of March 31, 2003. After raising $850,000 in convertible bonds in May and $3.1 million in cash, and with an approximate cash burn rate of $1 million per quarter, the company now has about $4 million in cash, which should last for a year, i.e. through mid-2004.
Can you achieve $2-3 million in quarterly sales in a year?
"Maybe, but I won't give forecasts until February 2004."
Hypothetically, will you be profitable with $2-3 million in quarterly sales?
"That depends on our marketing efforts. We're now focusing on North America, but the problem of spam is global, and we might want to expand. Our board is discussing these matters now, but the direction we'll take isnít yet clear."
Published by Globes [online] - www.globes.co.il - on August 6, 2003