Commtouch Reports Financial Results for the First Quarter of 2008

Commtouch® ( CTCH), a leading email and web defense technology provider, today announced its first quarter results for the period ending March 31, 2008.

First Quarter 2008 Highlights:

• Revenues for the first quarter of 2008 increased by 41% to $3,401 thousand compared to $2,405 thousand in the first quarter of 2007.
• Net income in accordance with US Generally Accepted Accounting Principles (US GAAP) for the first quarter of 2008 was $400 thousand compared to a net income of $267 thousand in the first quarter of last year, representing an increase of 50%. GAAP net income for the first quarter of 2008 included $534 thousand of stock-based compensation expenses (FAS123R), compared to $243 thousand of these expenses in the first quarter of 2007. This amount includes an expense of $183 thousand, most of which pertains to the acceleration of options of three board members who completed their multi-year terms on March 31, 2008.
• Non-GAAP net income for the first quarter of 2008 was $934 thousand compared to a net income of $510 thousand in the first quarter of 2007, representing an increase of 83%.
• Deferred Revenues (long-term and short-term) as of March 31, 2008 amounted to $3,230 thousand, a decrease of 6% over deferred revenues as of December 31, 2007.
• Operating cash flow in the first quarter of 2008 was $1,096 thousand, compared to $953 thousand in the first quarter of 2007.
• Cash, short term cash deposits and short and long-term marketable securities as of March 31, 2008 amounted to $15,530 thousand, compared to $14,407 thousand as of December 31, 2007. The increase is due to the above-mentioned positive operating cash flow and the receipt of $223 thousand, representing proceeds from the exercise of warrants and options.
• The Company re-valued its Auction Rate Securities (“ARS”) portfolio and recorded an unrealized loss of $87 thousand in other comprehensive income as a reduction of shareholders equity. As of March 31, 2008, the Company had $2 million invested in triple-A rated US municipal bonds, which are Auction Rate Securities (“ARS”). As a result of the deterioration in the US financial markets, these securities have recently suffered from multiple failed auctions. Following third party advice, and since the Company believes this impairment is temporary due to current market conditions, the Company recorded this unrealized loss and also reclassified its ARS investments as long-term investments on its balance sheet.
• The Company signed five new OEM licensing agreements during the first quarter of 2008. The Company’s global OEM partner count was 93 as of March 31, 2008.

Gideon Mantel, chief executive officer and chairman of the board of Commtouch said: “Our business remains strong and healthy. Our solution suite is a leader in combating the ever-growing spam problem. A number of the large accounts that we recently signed are now starting to generate business, and we have a healthy pipeline of potential new OEM license agreements. To top it off, we have been able to continue our strong growth, profitability and cash generation while investing in a new product line. We expect the new web security line to have a positive impact on our financials in 2009.”

Future Business Outlook

Based on current business activities and general economic conditions, Commtouch's management reiterates its full year 2008 guidance which it issued last quarter: 2008 revenues are expected to be in the range of $15 million to $16 million with annual non-GAAP earnings in the range of 16 to 19 cents per diluted share.

Based on the Company’s past experience, quarterly growth rates will likely fluctuate from quarter to quarter based on seasonality and specific customer launch dates. Traditionally, the second half of the year is seasonally stronger from a revenue standpoint than the first half.

The above outlook is as of the date of this release, and the company undertakes no obligation to update its estimates in the future.

Use of Non-GAAP Measures

Commtouch’s non-GAAP net income differs from results reported under U.S. GAAP due to non-cash items; since it is too early to determine the impact of stock-based compensation expense for the rest of the 2008 year, Commtouch is not providing guidance on GAAP net income. Stock-based compensation expense has a negative impact on net income.

This press release includes financial measures for net income (loss), basic and diluted earnings per share that exclude stock-based compensation expenses and are therefore not calculated in accordance with generally accepted accounting principles (GAAP). Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance that enhances management's and investors' ability to evaluate the company's net income or loss and earnings or loss per share and to compare it with historical net income or loss and earnings or loss per share.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management uses both GAAP and non-GAAP measures when evaluating the business internally and therefore felt it important to make these non-GAAP adjustments available to investors.

Financial Results Conference Call

The company has scheduled a conference call later today, Monday, May 5, 2008 at 11 a.m. EST.

To participate in the call, please dial one of the following numbers ten minutes prior to the start time of the call:

For those unable to listen to the live call, a replay of the call will be available the day after the call in the investor relations section of Commtouch’s website, at: http://www.commtouch.com/ir.

About Commtouch

Commtouch® ( CTCH) is the source of proven messaging and web security technology for scores of security companies and service providers, founded on a unique datacenter-based approach. Commtouch’s expertise in building efficient, massive-scale security services has resulted in its patented technology being used to mitigate Internet threats for thousands of organizations and hundreds of millions of users in over 100 countries. Commtouch’s Data Centers automatically analyze billions of transactions in real-time to identify new spam, malware and zombie outbreaks as they are initiated. Commtouch’s unmatched suite of security offerings – anti-spam, virus detection, reputation and zombie intelligence services – work together in a comprehensive feedback loop. Commtouch was founded in 1991, is headquartered in Netanya, Israel, and has a subsidiary in Sunnyvale, Calif. For more information and real-time statistics and trends, see: http://www.commtouch.com and the Commtouch Café blog at http://blog.commtouch.com/cafe.

Recurrent Pattern Detection, RPD, Zero-Hour and GlobalView are trademarks, and Commtouch is a registered trademark, of Commtouch Software Ltd. U.S. Patent No. 6,330,590 is owned by Commtouch.

This press release contains forward-looking statements, including projections about our business, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements in the future tense, and statements including words such as "expect," "plan," "estimate," "anticipate," or "believe" are forward-looking statements. These statements are based on information available to us at the time of the release; we assume no obligation to update any of them. The statements in this release are not guarantees of future performance and actual results could differ materially from our current expectations as a result of numerous factors, including business conditions and growth or deterioration in the Internet market, commerce and the general economy, both domestic as well as international; fewer than expected new-partner relationships; competitive factors, including pricing pressures; technological developments, and products offered by competitors; the ability of our OEM partners to successfully penetrate markets with products integrated with Commtouch technology; a slower than expected acceptance rate for our newer product offerings; availability of qualified staff; and technological difficulties and resource constraints encountered in developing new products, as well as those risks described in the text of this press release and the company's Annual Reports on Form 20-F and reports on Form 6-K, which are available through www.sec.gov.