Kana Wanna Keep Growing

By Dave Marino-Nachison (TMF Braden)
December 6, 1999

With emerging e-businesses spending so heavily to acquire customers, user retention has risen to the fore in the minds of both companies and investors, and several customer relationship management (CRM) companies have posted impressive gains of late. But keeping customers is just as important to CRM companies as to their clients.

Kana Communications (Nasdaq: KANA) hopes to maintain its client list -- and widen its revenue stream -- by broadening its service offerings. With a balance sheet still rich with cash following its September IPO, Kana's been doing it largely through acquisition.

Today Kana shares rose more than 5% in early trading after the company said it added two new services through the acquisition of a like number of privately held companies for a combined approximately $230 million in stock.

Business Evolution Inc. provides Kana with Realtime, which lets companies and customers engage in live two-way dialog over the Internet, while Assist -- the product of NetDialog Inc. -- is an online self-service application meant to automate customer service inquiries and ease the reliance on actual representatives. Kana's Connect service -- which lets companies profile and track customers, then hit them with targeted e-mails -- was the product of another acquisition.

And what Kana doesn't want to do itself, it'll make available through partnerships with companies like workforce management software developer Blue Pumpkin. All told, Kana's mix represents an impressive suite of offerings.

Clearly investors are valuing Kana primarily on promise: Nine-month operating and net losses were more than three times revenues, gross profits expanding on strong software license performance despite the service operations costing more to run than they brought in. Recent strength in the company's shares has been driven in large part by holiday-related optimism about e-commerce and perceived added demand.

But Kana has been trying to back up its share price appreciation with top-line and customer growth, signing a total of 125 new customers in Q2 and Q3 -- including such well-known companies as CNET (Nasdaq: CNET), Gateway (NYSE: GTW), Microsoft (Nasdaq: MSFT), and many of the Internet's most-visited websites. (The Motley Fool is also a customer.) Customer number 200 joined the fold in Q3. It's also worth pointing out that Kana's customers include not only pure-play e-businesses but traditional companies with online components, such as General Motors (NYSE: GM) and Gap (NYSE: GPS).

With that in mind, what investors should probably watch in Kana's case is how -- or if -- each of its acquisitions ends up affecting Kana's income statement and balance sheet relative to how much in cash and/or equity it ends up paying out. With Kana running steep operating losses, the cash hoard won't last forever, so the company's ability to make smart purchase decisions, as well as effectively integrate and market their by-products, may become the key to Kana's continued success over the next few years.

Related Links:
Kana
Kana Message Board
StockTalk, 6/19/1999, Clarify Inc.

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