New-aged Internet metrics are taking over. Market valuations and
volatility are often functions of metrics such as page views, unique
monthly visitors, and the number of registered users at a site. Of
course I’m guilty as well. New metrics have to be created to explain
and support the business models of companies that carry the growth of
the 21st century economy on their backs, but deliver little or nothing
with regard to profitsfor the time being.
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 able
to 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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