E-Mail IPO Extravaganza

Three companies targeting corporate e-mail customers are scheduled to
launch IPOs next week. Two of these companies – Kana Communications and
eGain Communications — sell competing e-mail management software, while
the third (Yesmail.com) provides direct marketing e-mail services. Today
we’ll look at the software competitors.

Company: Kana Communications
Nasdaq Ticker: KANA
Shares Offered: 3.3 million
Proposed Price Range: $11-$13
Offering Amount: $39.6 million
Lead Underwriter: Goldman Sachs

Kana Communications makes software designed to allow corporate customers
to handle large volumes of inbound and outbound e-mail, as well as
Web site-based communications. The software enables companies to provide
personalized responses to each customer. In addition to selling its
software, Kana provides outsourced e-mail hosting services.

Among Kana’s customers are pure Internet players such as eBay, eToys and
priceline.com and traditional corporations such as Chase Manhattan, Ford Motor, The Gap Stores and Northwest Airlines.

Founded in 1996 and named after Chairman Mark Gainey’s dog, Kana
Communications has experienced strong sales growth in the past year.
Revenues in the first half of 1999 were $3.6 million, an increase of
445% over the $656,000 in the first two quarters of 1998. Software sales
have accounted for 78% of revenue this year, with service revenues
making up the other 22%.

Losses also have increased, though at a slower pace. Kana reported a
$9.8 million net loss in the first two quarters this year, 300% more
than the $2.4 million incurred in the same period a year ago.

The market for high-volume e-mail software and services is growing
rapidly. International Data Corp. predicts the number of e-mail messages
sent per day will near 8 billion by 2002, almost four times the 2.1
billion in 1998.

Naturally, this has attracted a number of competitors, including
Annuncio, Brightware, eGain Communications (more on it later), Mustang
Software, Silknet Software, Lucent and Oracle.

One thing that should help Kana hold its own in this market is its broad
customer base. No single customer makes up more than 10% of its revenue,
and more than 100 customers have spent in excess of $50,000 for Kana
software and/or services. This indicates that Kana has a compelling
story to tell.

Throw in blue-chip backing in the form of lead underwriter Goldman Sachs
and A-list venture capitalists Draper Fisher Jurvetson and Benchmark
Capital Partners, and Kana Communications appears poised for a
well-received IPO.

Company: eGain Communications
Nasdaq Ticker: EGAN
Shares Offered: 5 million
Proposed Price Range: $9-$11
Offering Amount: $50 million
Lead Underwriter: BancBoston Robertson Stephens

Like Kana, eGain Communications offers software and services that help
companies conduct e-commerce. In addition to handling e-mail, eGain’s
software enables businesses to provide real-time online assistance to
Web site visitors. Its primary product is the Email Management System
(EMS) software, which allows customer service departments to route and
reply to customer requests made via e-mail.

Formed in September 1997, a year after Kana, eGain didn’t ship its first
product until last September. In the fiscal year ended June 30, the
company reported $1 million in sales against a net loss of $11 million.

eGain’s customers also include a mix of traditional companies such as
Intel and Mazda and Internet entities such as Quote.com, Snap.com and
Go2Net. However, its customer base is narrower than Kana. Two companies
(FCC National and WebTV) combined have accounted for 26% of eGain’s
revenues in the past year. This leaves eGain vulnerable to a big revenue
hit should it lose one or both customers.

On the plus side, eGain’s revenues are well-distributed in terms of what
the company offers, with software sales comprising 46.4%, service
revenues at 40.1% and hosting revenues at 13.5% in the recent fiscal

One troubling trend: Software license revenue actually declined from
$201,000 in the quarter ended March 31 to $193,000 in the quarter ended
June 30.

Overall, eGain’s IPO strikes me as somewhat premature and risky. Expect
a lukewarm reaction from investors.

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