eGain: An offer you can't refuse
Still, there are companies in the Internet space that currently display strong and consistent revenue channels, and it's evident that their model will lead to profitability. Many of these companies can be found in the Business Services sector. Companies within this sector provide such things as email management solutions, Web site hosting, application services, and content aggregation to corporate customers. High-profile names include Exodus Communications (EXDS) , Critical Path Inc. (CPTH) , and Navisite Inc. (NAVI) among others.
These companies provide out-sourced solutions that save their customers time and money, while increasing efficiency and productivity. I came across such a company last August while attending the Internet World summer conference in Chicago. The technology and services being displayed by then-private eGain Communications (EGAN) had me in awe, to say the least. It quickly came to me that etailers and other high traffic Web sites would increasingly rely upon EGAN's email management system and customer support solution to add value to the company/customer relationship. Indeed, the potential for recurring revenue, while cutting costs and increasing productivity seemed enormous.
After arriving back home, I decided to research the space. Quickly, I uncovered an even more established company that was also private at the time, Kana Communications (KANA) .
Kana provides email management systems for Web companies that receive massive amounts of email inquiries from customers and clients. In addition, Kana supports Web site-based communication capabilities for its customers. Sound interesting? Maybe not yet, but the service has become a key ingredient for the success of hundreds of Web companies, including eBay (EBAY) which now handles more than 100,000 emails per week.
How It Works An email management system from Kana holds a knowledge base, which is basically a database of potential answers and/or responses to expected queries from customers. After reading a new email message, the system will dig into this database for a potential response. If the artificial "agent" can find an answer in the database, the system may trigger an automated response to the customer's inquiry. If no appropriate answer can be found, the artificial agent will then pass the inquiry on to a real-life customer-service representative who is best prepared to answer that specific question. The routing method adds value while saving time and money. Real life agents only receive questions they know they'll be able to answer. In addition, all emails and correspondence are kept on file, adding organization, depth, and personalization to the company/customer relationship.
Corporate Value The average customer service rep might be ableto properly handle anywhere between 50-200 email inquiries per day. We'll be generous and say 150. Now, eBay receives over 100,000 customer emails per week. By our numbers, this means that eBay would have to employ about 667 customer service reps to handle the load. With benefits, a rep could cost eBay $30,000 per year, so the company would spend $20 million a year. Enter Kana Communications. The initial set up and service will cost a company about $300,000 per year.
SURETRADE.com was able to slash its real-life agent handled customer service inquires to 30% of the total after signing up with eGain. If eBay could do the same thing, it will save more than $14 million. All while customer rep responses are personalized, organized, and done faster. In an Internet world of endless spending and negative earnings, services like those provided by Kana and eGain are a guiding light. It's no wonder then, on December 14, 1999, CMGI (CMGI) announced the formation of CMGI Solutions Inc, an operating company dedicated to providing end-to-end e-business solutions.
Stock Value Kana Communications is currently trading at $249 with a 7.2 billion-market capitalization. Revenues for the company's fourth quarter totaled $6.5 million, an impressive sequential increase of 71 percent over the third quarter of 1999. Kana reported revenues of $14.1 million for the year, a 513 percent increase over 1998. In addition, Kana signed up more than 300 new customers in fiscal 1999 bringing the total to more than 350120 of the customers were signed up in Q4 alone.
eGain trades at 37-7/8 with a market cap of $1.1 billion. In its most recent quarter, eGain reported revenues of $2.4 million, up from $1.4 million in its previous quarter and an impressive sequential increase of 72 percent. eGain added 75 customers during the quarter for a total of roughly 200.
Page views, unique monthly visitors, and the number of registered users at a site are the best metrics for valuation purposes of some Web companies. The best metrics for valuing most e-commerce companies are the number of customers, percentage of repeat customers, and most importantly revenue per customer. Well, Kana and eGain deal with corporate customers. The most important metrics become the total number of customers and the total revenues derived per customer.
It is then important to understand that both companies offer hosting as well as licensed solutions. Hosting services are more advantageous as they lock a customer into the respective company while delivering recurring revenue. More than 50 percent of eGain's customers lock into the company's hosted solution. Out of eGain's 75 new customers, 60 percent chose the hosted solution. Only 20 percent of Kana's 120 new customers opted for hosting. Why? One reason might be that eGain's infrastructure is 100 percent Web based while Kana operates on a client server architecture. This means that Kana's products have to be installed onto a customer's desktop, wasting time and money (just think about when it's time for an upgrade!).
In addition, eGain's platform was built to scale. The company currently offers eGain Mail and eGain Live to cater to its customers' email and real-time (text-only) Web assistance needs. (To use both services as hosted (ASP model) solutions, a company would pay eGain $5,900 per month.) eGain built its system with scale in mind so that a company using eGain Mail will be attracted to new customer support services as they are rolled out (i.e.- eGain Live). The company will soon introduce eGain Campaign (an application for pro-active customer communications and 1-to-1 online marketing), eGain Inform (allows customers to get immediate answers by enabling direct access to online personal and company information),and eGain Voice (a voice-over-Internet communication system).
Last and perhaps most importantly, by dividing eGain's market capitalization by its number of customers ($1.1B/200), we find that the market values each customer at approximately $5.5 million. The market values Kana customers ($7.2B/350) at a $15 million dollar premium, or $20.5 million each. Probably an unwarranted premium when you consider the factors listed above.
Both companies are attractive Internet investments that create awesome economies of scale and strong recurring revenue, but it appears there is no reason that eGain should be trading at such a substantial discount to Kana. Based on eGain's market position, customer and revenue growth, Web based architecture, scalability and its ability to sign up corporate customers for its hosted solution, it's a discount that's unlikely to last.
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