Commtouch Reports Financial Results for the Third Quarter of 2008

Sunnyvale, Calif. – November 3, 2008 – Commtouch® (NASDAQ: CTCH), a leading email and web defense technology provider, today announced its third quarter results for the period ending September 30, 2008.

Third Quarter 2008 Highlights

• Revenues for the third quarter of 2008 increased by 24% to $3,622 thousand compared to $2,930 thousand in the third quarter of 2007.
• Net income in accordance with US Generally Accepted Accounting Principles (US GAAP) for the third quarter of 2008 was $644 thousand compared to net income of $639 thousand in the third quarter of last year. GAAP net income for the third quarter of 2008 included $363 thousand of stock-based compensation expenses (FAS123R), compared to $250 thousand of these expenses in the third quarter of 2007.
• Non-GAAP net income for the third quarter of 2008 was $1,007 thousand compared to a net income of $889 thousand in the third quarter of 2007, representing an increase of 13%.
• Deferred Revenues (long-term and short-term) as of September 30, 2008 amounted to $2,818 thousand, compared to deferred revenues as of December 31, 2007 of $3,435 thousand.
• Operating cash flow in the third quarter of 2008 was $671 thousand, compared to $759 thousand in the third quarter of 2007. Operating cash flow for the first nine months of 2008 was $2,358 thousand, compared to $2,140 thousand in the same period last year.
• Cash, short term cash deposits and short and long-term marketable securities as of September 30, 2008 amounted to $16,939 thousand, compared to $14,407 thousand as of December 31, 2007. The increase is due mostly to the above-mentioned positive operating cash flow and the receipt of $844 thousand, representing proceeds from the exercise of warrants and options.
• During the quarter, the company began to execute its share buy-back program. As of September 30, 2008, the company had expended $90 thousand for the repurchase of 36 thousand outstanding shares. As of the date of this press release, the company has repurchased a total of 339,595 shares at an average price of $2.02, investing a total of $686 thousand out of the full buy-back program of $4 million.
• The company signed seven new OEM licensing agreements during the third quarter of 2008. The company’s global OEM partner count was 106 as of September 30, 2008.

Gideon Mantel, chief executive officer and chairman of the board of Commtouch said: “I am optimistic, yet, given the current environment – I’m also very cautious. Commtouch is in an excellent position, with a stable and growing group of OEM licensees, continuing profitability, no debt and a strong cash level. This allows us the flexibility to weather the difficult economic environment, and enables us to take advantage of opportunities and invest in our future.

“In 2009, based on our current strong pipeline, I expect that we will continue to see overall growth in our email business. We will also be adding the initial sales of our very recently released web security product, which should become more significant as we progress through the year. While we look forward to attaining these goals, we will also be maintaining tight control over expenses. At the same time, we expect to continue taking advantage of the strong leverage in our successful business model, which will enable us to improve our profitability, grow our EPS and ultimately increase shareholder value.”

Business Outlook

Given the general negative economic climate and its effect on third quarter results, the company is taking a more conservative outlook and adjusting its 2008 guidance.

Full year 2008 revenues are expected to be between $14.2 million and $14.4 million, compared to the previously published guidance of between $15 million and $16 million.

Earnings per diluted share for the year are expected to be between $0.15 and $0.16 based on non-GAAP net income. Prior guidance was for earnings per diluted share of $0.16 to $0.19.

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, November 3, 2008 at 10 a.m. ET.

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

U.S.: 1 866 345 5855
UK: 0 800 404 8418
ISRAEL: 03 918 0609
INTERNATIONAL: +972 3 918 0609

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.