While 4Q2006 was not the typically strong quarter for cross-channel, cross-lifecycle customer service companies, 1Q2007 was the typically soft first quarter for software supplier. Customer growth slowed across the board. Company performance was down as well. Three companies had significant product activity. The others were quiet. Call it a seasonal adjustment. Call it the first quarter software supplier blues. Here are the highlights of 1Q2007 for the companies and products that we cover:

• ATG had good customer growth, no product activity and excellent financial performance.


• eGain had improved customer growth, some product activity, and significant slippage in financial performance.


• InQuira had flat customer growth, no product announcements, and mixed financial performance.


• InStranet had improved customer growth, minor product activity, and good financial performance.


• KANA slipped in customer growth, introduced a new version of its customer service suite, and had mixed financial performance.


• KNOVA had flat customer growth, made a minor product announcement, introduced a major new product version, and had flat financial performance. The biggest news about KNOVA was its acquisition by M2M Holdings. It will become a private company in 1Q 2007.


• RightNow had flat customer growth, no product activity, and mixed financial performance in 4Q 2006.

CROSS-CHANNEL, CROSS-LIFECYCLE CUSTOMER SERVICE: 1Q2007

Product and Company Viability Factors

This report is the ninth of our quarterly update reports on the products and companies in our practice on cross-channel, cross-lifecycle customer support.

These updates focus on the current state of product and company viability factors, factors that are important in your evaluation, comparison, and selection of customer service products. We examine customer growth, product activity, and company performance. We also examine key product and company events. We want to see continuing improvements in products, and we want to see continuing company growth of the suppliers. We don’t want to change our evaluation based on a quarter’s news, but we do want to raise a red flag when that news deviates from a positive trend, or to wave a green flag when that news is particularly good.

For key product and company events, we identify those occurrences that could have a significant impact on cross-channel, cross-lifecycle customer service technologies, applications, and the market landscape.

Note that we also offer a large body of research evaluating and comparing the products against a framework of customer requirements. If you need to or want to know our take on how the products stack up against each other and/or against your requirements, take a look at our research on http://www.psgroup.com/research_cccsv.aspx. This quarter, we plan to complete our evaluation of InQuira 8 and RightNow CRM 8.

A Seasonally Soft 1Q2007

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 and begin the budgeting process for the coming year. They can’t purchase against budgets that haven’t been approved.

Cross-channel, cross-lifecycle customer service software suppliers had a typically and seasonally soft 1Q2007. Customer growth slowed and company performance slipped for all the companies that we cover. InStranet, KANA, and RightNow made significant product news. ATG, eGain, InQuira, and KNOVA were very quiet in products. We’ll award no stars this quarter.

The Impact of SaaS

Software-as-a-Service (SaaS) licensing had a significant impact on company performance for ATG, eGain, KANA, and RightNow in 1Q2007. These companies all emphasize SaaS or On-Demand licensing of their products. KANA is the newest in SaaS as KANA On-Demand was announced on January 22. RightNow has always offered SaaS licensing but began last quarter to offer only SaaS licensing. ATG and eGain began to emphasize SaaS licensing last year.

As a company moves from perpetual licensing - where customers pay a relatively large, one-time licensing fee - to SaaS - where customers pay a relatively small, monthly license fee - financial performance slips in the short-term before it shows improvements in the long-term. Revenue and license revenue aren’t boosted by today’s big perpetual license fee payments. Net income also takes a hit, as companies’ cost bases remain steady. Long-term, companies have consistent, predictable revenue streams that grow in proportion to customer growth. They can adjust their cost bases to produce profits.

SaaS is also very good for customers. Small, monthly software fees are easier to justify than those seven figure perpetual license fees. SaaS licensing, especially SaaS licensing with hosted implementation, also gives customers freedom. They don’t get as invested in a product and in pervasive implementations. Suppliers have to continue to earn their customers’ business.

1Q2007 Performance

In Table A, we summarize the 1Q2007 performance of the cross-channel, cross-lifecycle customer service suppliers that we track. Results shown are relative to 4Q2006.

Summary of 1Q2007 Results in Customer Service
Please download the formatted PDF to view the table at http://www.psgroup.com/detail.aspx?ID=826.
Table A. 1Q2007 results of the leading suppliers of cross-channel, cross-lifecycle customer service are summarized in this table.

Suppliers and Products

Just a reminder, we offer up-to-date research on these leading cross-channel, cross-lifecycle product offerings and their suppliers:

A Soft 1Q2007

ATG had a seasonably soft 1Q2007. Customer growth slowed. There was no product activity. Company performance slipped across all financial metrics due both to seasonality and to a business model shift from perpetual licensing to Software-as-a-Service licensing.

Customer Accounts

ATG acquired nine new customer accounts during 1Q2007, and ATG’s eStara business unit, which offers click-to-chat and click-to-call functionality through Software-as-a-Service (Saas) licensing, acquired 35 new customer accounts in 1Q2007.

ATG customer growth dropped considerably from 18 new customer accounts in 4Q2006. Looks like ATG got the old first quarter software supplier blues. Unfortunately, we don’t have historical customer growth numbers for eStara. Off a base of about 850 customer accounts, ATG had very modest customer growth during 1Q2007. Add in eStara, and customer growth looks much better.

eStara, which ATG acquired in 3Q2006, has always offered its products as SaaS. After offering only perpetual licenses since its founding, ATG began to emphasize SaaS licensing early in 2006. To date, ATG has 73 SaaS customers. The firm has gotten good traction with its On-Demand products.

Products

ATG made no product announcements during 4Q2006 and has made none to date in 1Q2007. Going forward into 2Q2007, the firm remains quiet in products.

Company

Bob Burke, ATG’s President and CEO, stated, “ATG had a great first quarter marked by strong revenue growth and cash flow from operations…We are very pleased with our fast start to 2007 and expect to carry this momentum into the second quarter and remainder of the year.” The numbers, shown in Table B aren’t quite as good as Burke describes.

ATG Financials
Please download the formatted PDF to view the table at http://www.psgroup.com/detail.aspx?ID=826.
Table B. ATG’s high-level financial results for the past five quarters are shown in this table.

Compared with 4Q2006, revenue was down almost 10 percent and license revenue fell by almost 40 percent. The top line slippage led to more significant slippage on the bottom line as GAAP income swung to a loss and non-GAAP income fell almost as steeply.

Two factors contributed to the drop in performance and they’re factors that explain the performance of other companies covered in this report: eGain, KANA, and RightNow. The first factor is seasonality. First quarters are usually soft for software suppliers. For ATG, that softness showed up in customer growth and license revenue. The second factor is a business model shift from perpetual licenses to SaaS licenses. Customers who sign perpetual licenses pay the entire license fee at one time.

Customers who sign SaaS licenses pay a monthly fee, which is much smaller than the perpetual license fee. Perpetual licenses give suppliers lots of money now. SaaS licenses give them a steady revenue stream. Both customers and suppliers benefit from the SaaS model, but there’s some breakage to suppliers in shifting to SaaS. That breakage is lower quarterly revenue, license revenue, and income. We believe that ATG has the corporate mass, the customer base, and the level of SaaS traction to make the transition smoothly.

ATG IS HIRING. Looking at the Careers section of its Web site, we found 41 open positions, up significantly from 29 in 4Q2006. The openings are spread pretty evenly across R&D, marketing, sales, customer service, professional services, and general and administrative. ATG currently has about 380 employees. 41 openings mean more than 10 percent growth in staff.

Our Take on ATG

We believe that ATG is positioned for growth in 2007. The firm will rebound from the soft 1Q2007 because the shift to SaaS licensing is getting good traction, eStara has made and is making significant business contribution, the ecommerce focus is yielding good results, and ATG is staffing to support growth.

This report continues...

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