NETTING IT OUT

Customer Service suppliers began 2008 with a bang as a customer growth spurt that began in 2Q2007 continued in 1Q2008. They acquired new customers and did additional business with existing customers at a very high level. No soft first quarter this year. Companies like Aetna, Choice Hotels, Siemens Transportation Systems (the locomotive manufacturer), and Verizon Wireless made major investments in customer service software. They understand that delivering excellent customer service is the key to satisfaction, retention, and profitability. They understand that effective and efficient customer service can lower costs to serve. That’s critical in times like these when revenues are down.

Good customer growth means good financial performance, and financial performance was good for all the customer service suppliers that we cover. eGain and KANA set company records in quarterly revenue license and license revenue. Once again, those $1 million plus or “seven-figure” transactions made the quarter for several of the firms.

Product activity was slow. Customer service suppliers are gearing up for delivering major new product versions in the next two quarters. However, like clockwork, RightNow introduced its regular, quarterly release.

Company activity was generally slow, too. KANA made the biggest news by expanding its partnership with IBM to include joint development, marketing, and sales, and OEMing IBM’s SOA technology as the foundation for the next generation of customer service products.

Customer Growth, Product Activity, and Company Performance

With this report, we begin our fourth year of our quarterly updates on the products and companies in customer service. These updates focus on factors that are important in the evaluation, comparison, and selection of customer service products. More specifically, we examine these factors in our quarterly updates:

• Customer acquisition and customers growth

• Product activity

• Company activity including hiring

• Company financial performance

In our evaluations of quarterly performance, we want to see continuing customer growth, ongoing improvements in products, steady company viability, and good financial performance. We don’t want to change our evaluations based on a quarter’s news, but we do want to raise a red flag when that news deviates from a positive, multi-quarter trend, or to wave a green flag when that news is particularly good. When significant product and company events occur, we identify and highlight those that could have an impact on customer service products and technologies, suppliers, and the market landscape.

No Seasonal Slowdown in 1Q2008

First quarter is typically the slowest quarter of the year for software suppliers. In fourth quarters, customers make year-end decisions and spend whatever is left in their budgets, working to a “use it or lose it” reality. In first quarters, customers implement that software. They begin their next budget cycles. Usually they’re not ready to spend.

But there was no seasonal slowdown for customer service. Customers have kept buying products and licensing services, now for the fourth consecutive quarter, a trend that started in 2Q2007 after a seasonably slow 1Q2007. For example, both eGain and KANA, two of the public companies in our coverage, set quarterly records for both revenue and license revenue. And eGain had its best ever quarter in net income!

What Recession?

Economists say that we’re heading into or already in a recession. Markets are off. Credit is tight. Consumer spending is down. Corporate spending is down, too. Customer service is thriving in these times, and, by the large number of open job positions that customer service companies are trying to fill, customer service suppliers seem to think that growth will continue.

Delivering excellent customer service is critical in tough economic times. Retention is key. You’ve got to make every effort to keep the customers that you have so that they buy from you when they’re comfortable spending again. Many of those efforts should be customer service efforts.

Also, when spending is down, lowering costs can maintain profitability. An investment is a customer service system can lower your cost to serve. With today’s customer service technologies and SaaS licensing options, the ROI on customer service software is fast and predictable. Cross-channel, cross-lifecycle customer service software makes Web self-service more effective and more efficient, enabling customers to get more answers and solve more problems more quickly without your assistance. Customer service software delivers these same benefits to your agents who act on your customers’ behalf, answering questions and solving problems.

This Report

The report currently covers these eight customer service suppliers and products:

• eGain Service

• empolis:SLS

• InQuira 8

• InStranet Contact Centers In-Line

• KANA Service Solutions

• KNOVA Application Suite

• RightNow Service

• Talisma CIM Suite

This quarter, we welcome Talisma to our coverage, although, as we were about to publish this report, on May 21, Talisma was acquired by nGenera Corporation. (See our analysis of Talisma, below.) We also welcome empolis. We added empolis in an update to our 4Q2007 report. Now, let’s take a look at 1Q2008 performance for each of our eight suppliers individually.

EGAIN

Record Breaking Financial Performance in 1Q2008

eGain broke its financial performance records this quarter with its highest quarterly revenue since 2001 and its highest quarterly net income ever! As a result, customer continued at a good level. Product and company activities were incremental.

Customers

eGain focuses exclusively on acquiring enterprise customer accounts. The company offers both perpetual and subscription licenses for its products with no incentives to influence customers licensing decisions.

Last quarter, eGain adopted a corporate policy not to disclose customer acquisition and growth information. We’ll have to begin to use other information as proxies for customer growth. Last quarter, we attempted to infer customer growth from available financial information. It wasn’t too satisfying. This quarter we’ll use the information that eGain makes available: license revenue and hosting revenue. License revenue comes from sales of on-premise licenses for eGain’s products. Hosting revenue comes from sales of on-demand/SaaS licenses for eGain’s products and for hosting services. In any given quarter, the combination of license revenue and hosting revenue is the sum of what new customers spend for software and what existing customers spend for additional software. That maps pretty well to customer growth but without the detail of numbers of customers, numbers of deals, and the split between new customers and existing customers. In Table A, we present eGain’s license revenue and hosting revenue for the past five quarters.

License and Hosting Revenue
Download the PDF to see the table.
Table A. eGain’s license and hosting revenue for the last four quarters is presented in this table.

eGain’s customer growth appears to be quite strong. Hosting revenue has been steadily increasing at a good quarterly growth rate. eGain is acquiring new hosting customers and retaining existing hosting customers. License revenue is lumpy but definitely moving in the right direction. Closing or delaying large deals is the reason for lumpiness. This quarter’s license revenue included two large transactions totaling approximately $1.5 million. These transactions “made” the quarter. eGain is at a revenue level that quarterly performance swings on closing a few large deals. However, for whatever the reason, eGain has made big leaps in license revenue in its 1QFY2008 and 2YFY2008. This fiscal year, on-premise customer growth has climbed to a new level. We’ll see in the next few quarters whether eGain can sustain this very good level of customer growth.

Products

In 1Q2008, eGain introduced eGain Service 7.6.4, a maintenance release of its flagship customer service offering. Enhancements include localization in Brazilian Portuguese and improvements in workflow and self-service. eGain also releases a service pack for the OEM version of its products, the version resold by Cisco.

Company

On January 8, the firm announced a partnership with Cystelcom. Based in Madrid, Cystelcom provides communications solutions for multi-channel contact centers. The firm will sell eGain Service in Spain. eGain has been quite successful in Europe.

Going forward into 2Q2008, eGain has continued to expand its international sales channel. On April 20, the firm announced a partnership agreement with Consilium Software, a Singapore communications solutions provider to the Asia Pacific market. As part of the agreement, Consilium will resell and provide implementation, support, and training services around eGain customer services software offerings.

Careers

The careers section of eGain’s Web site lists openings for 13 types of positions in R&D, sales, professional services, and technical support at the firm’s Mountain View, CA headquarters; its Pune, India office; and its Slough UK EMEA headquarters office. That’s the same number as last quarter. The largest number of openings continues to be in R&D and sales. eGain has approximately 300 employees.

This report continues...