Kana Software, Inc.

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Kana Software, Inc.

181 Constitution Drive
Menlo Park, California 94025
Telephone: (650) 614-8300
Fax: (650) 614-8301
Web site: http://www.kana.com

Public Company
Incorporated: 1996 as Kana Communications, Inc.
Employees: 450
Sales: $86.9 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: KANA
NAIC: 511210 Software Publishers

Kana Software, Inc. provides enterprise-level software solutions for customer relationship management (CRM) and enterprise relationship management (ERM). Initially, Kanas software focused on e-mail management and offered companies a way to automate large amounts of customer e-mail as well as to launch targeted outbound e-mail communications to their customers. Through a series of acquisitions of other software companies, Kana expanded its software to include a broad range of CRM and ERM applications, allowing the company to position itself as a single-source solution.

E-Mail Management Software: 1996-99

Kana Software, Inc. was founded in 1996 as Kana Communications, Inc. by sports enthusiast and entrepreneur Mark Gainey. Gainey had originally intended to launch a sports-themed Web business, but then he realized that there was an opportunity to help companies deal with large amounts of customer e-mail. Many of the sporting goods companies that he dealt with were ignoring e-mail messages because they had no efficient way of responding to them. Instead of developing a Web-based sporting goods business, Gainey founded Kana Communications with $27 million in financing to develop software that would make it easy for businesses to communicate with customers via e-mail and other Web-based communication channels.

Kana released its first e-mail management software in March 1998. In mid-1998 Kana released version 2.0 of its Customer Messaging System (CMS), an enterprise-class e-mail management application. Priced at $79,500 for a server with ten users, the Customer Messaging System enabled businesses to manage and respond to customer e-mail. Version 3.0 was released at the end of 1998 and added an optional module, Kana Direct, that created e-mail lists from specific message categories, thus giving the CMS outbound as well as inbound capabilities. With Kana Direct, companies could build customized lists and send targeted e-mail messages. Other available modules included Kana Classify, which analyzed inbound messages and sorted them, and Kana Link, which let companies connect to other customer databases and exchange information with them. Pricing for version 3.0 started at $39,500.

From 1996 to 1999, Kanas software focused on managing inbound and outbound e-mail and other Web-based communications. Its software facilitated the delivery of specific and personalized messages to each customer. By mid-1999, the company had more than 100 customers, including eBay, eToys, Priceline.com, Ford Motor Company, and Northwest Airlines. Kana went public on September 22, 1999, offering 3.3 million shares at $15 each. The initial public offering (IPO) raised $44.6 million. In the previous two years, Kana reported losses of $1.4 million in 1997 and $7.4 million in 1998. In spite of the companys losses, its stock price rose to a high of $82 by the end of October.

Using 15 percent of its stock valued at $262 million, Kana acquired another e-mail marketing software publisher, Con-nectify. The acquisition enabled Kana to release version 4.0 of its e-mail management system. The release included an upgrade of Kana Response, which provided automated customer service, as well as Kana Commerce, an application designed to facilitate a range of transactions, and Kana Connect, which incorporated Connectifys technology. Customers could license Kana 4.0 starting at $50,000 or access it as an outsourced service from $5,000 a month.

Before the end of 1999, Kana acquired two more software companies that specialized in providing Web-based customer assistance. They were Princeton, New Jersey-based Business Evolution, Inc., which was acquired for $140 million in stock, and San Mateo, California-based NetDialog, Inc., which was acquired for $90 million in stock. The acquisitions increased Kanas workforce to approximately 350 employees. Kana announced that the acquisitions would enable it to market two new products: Kana Realtime, which was based on Business Evolutions technology and enabled companies to communicate with customers in real time over the Web, and Kana Assist, an online self-service product based on NetDialogs technology that helped customers obtain information from a companys web site.

Kana also opened regional offices in Munich, Germany, and Sydney, Australia, in December 1999. The company had previously opened a London office in January 1999. Its European customers included Dutch KLM Airways, Iceland Air, and British Airways Travel Shops. Its Australian office was designed to provide customer support in Australia and New Zealand and serve as a prelude to expansion into Asian markets. While Kana gained more than 300 customers during 1999, it posted much heavier losses. For the year it lost $118.7 million on revenue of $14.1 million.

An Expanded Line of Software: 2000-01

In February 2000, Kana and Silknet Software Inc. of Manchester, New Hampshire, announced they would merge in a stock-for-stock deal valued at $4.2 billion. The two companies offered complementary e-business and CRM software solutions, with Kana offering online customer communications solutions for marketing, sales, and service, and Silknet providing an e-business platform and applications. Silknets customer-facing applications allowed e-commerce customers as well as customer service representatives to view a customers complete history, including their order status, previous inquiries, and preferences, among other items. The merger, which was completed in July 2000, increased Kanas workforce to 600 employees in the United States, Europe, and Australia. By mid-2000 Kana had more than 800 employees.

Kana continued to expand internationally by opening an office in Tokyo and selecting a vendor to market and distribute a Japanese version of its CRM software, Kana Response. In October, the company formed a Japanese subsidiary, Kana Japan. In the United States, Kana formed an extensive marketing and development relationship with IBM Corp. that called for the two companies to integrate their e-business software into an overall enterprise relationship management solution, with IBM also reselling Kanas e-business software system. As a result of its merger with Silknet, Kana expanded its focus from CRM to what it called ERM, or enterprise relationship management. ERM included everything from data analysis to personalization to customer service.

In October 2000, Kana announced the release of Kana 6, which incorporated technologies acquired from Silknet. Kana 6 expanded Kanas e-mail management applications by adding more customer service capabilities for retail Web sites and e-businesses. Kana 6 included marketing and sales modules to manage product offerings to Web shoppers, giving customer service representatives access to customers marketing preferences and history. It also included a virtual agent that served as an onscreen customer service representative to answer customers questions. Kana 6 also supported computer-telephony integration. Pricing ranged from $50,000 to $250,000, with implementation for larger Global 2000 companies running to seven figures.

In January 2001 Jay Wood, former chairman and CEO of Silknet Software, became Kanas chairman and CEO when Michael McCloskey resigned for health reasons. It was under McCloskeys direction that Kana embarked on a string of acquisitions in 1999 and 2000 and expanded its CRM and ERM software offerings. At the time McCloskey resigned, Kanas workforce had grown to more than 1,000 employees. For 2000, Kana reported a 748 percent increase in revenue to $119.2 million, due primarily to the acquisition of Silknet. For the year, the company reported a pro forma net loss of $84.8 million, compared to a pro forma net loss of $32 million in 1999.

One of Woods top priorities was to implement a restructuring plan that would cut expenses by $30 to $40 million annually. In March 2001, Kana cut its workforce across the board by 20 percent, laying off 220 employees. Other aspects of the restructuring included focusing on an integrated ERM software solution, realigning the companys sales force, reorganizing its professional services business, and reducing its real estate commitments. At the time, Kanas stock was trading near its 52-week low at less than $3 a share, well down from its 52-week high of $175.50 a share.

In April 2001, Kana announced it would acquire Broadbase Software, Inc. and change its name to Kana Software, Inc. Broadbase specialized in customer analytics software, something that was missing from Kanas ERM solution. The combined companies would have some 1,300 customers. Jay Wood became chairman, with Broadbase president and CEO Chuck Bay serving as president and CEO of the new company.

At the time of the announcement, both companies were experiencing financial difficulties. Kana anticipated slumping revenue, an increase in net loss per share, and a dwindling cash supply. Broadbase had recently posted a fourth quarter net loss of $87.9 million, and its stock was trading at less than $1 a share. Kanas stock had also plummeted to below $1 a share.

Company Perspectives:

Founded in 1996, Kana provides the industrys leading external facing eCRM [e-commerce customer relationship management] solutions to the largest businesses in the world, helping them to better service, market to, and understand their customers and partners, while improving results and decreasing costs in contact centers and marketing departments. Through comprehensive multi-channel customer relationship management that combines best-in-class Kana iCARE Architecture with enterprise applications, Kana has become the fastest-growing provider of next generation eCRM technology.

Like Kana, other companies providing CRM and ERM software solutions were anticipating revenue shortfalls for 2001, and analysts were predicting a shakeout in the CRM sector. The merger with Broadbase gave Kana an additional $130 million in cash, which the company desperately needed after reporting that it was down to its last $20 million in cash before the merger. However, Kana reported first quarter revenue of $24.2 million, operating losses of $38.6 million, and a net loss of $752.9 million, which included restructuring costs, goodwill, and other one-time charges. As part of its cost-cutting efforts, Kana closed down Kana Online, the business unit that hosted its software as an application service provider (ASP).

Kana completed its merger with Broadbase at the end of June 2001. In the second half of 2001, Kana gained some support from IBM. As part of its strategic alliance with IBM, Kana integrated its Web-based products with IBMs WebSphere Commerce Suite. Kana also introduced several other new products, including a new call center CRM system that it characterized as the first Web-based, multichannel Java service software. Titled Kana Service 7 EJB, the software enabled call centers to handle complex inquiries and improve their service levels. Kana also introduced Service Analytics to measure and improve customer service operations at all customer touch-points. It was based on Broadbase technology and was integrated into Kanas other customer service applications.

In the final two months of 2001, Kana gained an additional $55 million in equity financing from Technology Crossover Ventures and funds associated with Amerindo Investment Advisors. The investments served to reassure Kanas customers and enhance the companys long-term prospects. Kana also introduced its iCare Suite, which combined software technology from Kana and Broadbase to create modules for automating e-mail management, developing a knowledge base, generating reports, and saving customer histories.

For 2001, Kana reported revenue of $86.9 million, a net operating losses of $939.6 million, and a net loss of $942.9 million. Through the first half of 2002, many companies in the CRM software sector reported revenue shortfalls as spending on CRM and ERM software softened. In addition to Kana, which reported a second quarter decline in revenue from $23.6 million the previous year to $17.2 million, other CRM software companies with declining revenue included E.piphany Inc., Siebel Systems Inc., AskJeeves Inc., Applix Inc., and Aspect Communications Corp. Kana projected that third quarter revenue would be flat compared to the second quarter, while others in the sector expected things to get worse before they got better. According to some analysts, companies that would succeed in the CRM and ERM sector would have to provide enhanced solutions that brought a quicker return on investment.

Principal Subsidiaries

Kana Japan.

Principal Competitors

Applix Inc.; AskJeeves Inc.; Aspect Communications Corp.; Blue Martini Software Inc.; E.piphany Inc.; FineGround Networks Inc.; Oracle Corp.; PeopleSoft Inc.; SAS Institute Inc.; Siebel Systems Inc.

key Dates:

Kana Communications, Inc. is founded to develop e-mail management software.
Kana goes public in September, then acquires three smaller software companies: Connectify; Business Evolution, Inc.; and NetDialog, Inc.
Kana merges with Silknet Software, Inc. in a transaction valued at $4.2 billion.
Kana merges with Broadbase Software, Inc. and changes its name to Kana Software, Inc.

Further Reading

Beizer, Doug, How Can We Help You? PC Magazine, July 1998, p. 40.

Callaghan, Dennis, Bearish Market Chews up CRM Firms Profits, eWeek, April 16, 2001, p. 37.

Clancy, Heather, Battling for ShareKana Enters e-CRM Fray, Computer Reseller News, July 10, 2000, p. 44.

, IBM, Kana Ink Development Pact, TechWeb, August 17, 2000.

Colkin, Eileen, Integrated Kana Set to Offer Full E-CRM Suite, InformationWeek, July 2, 2001, p. 55.

Conlin, Rob, IBM Helps Struggling Kana Hang On, CRMDaily.com, July 10, 2001, available at http://www.crmdaily.com.

, Kana and Silknet Announce $4.2B Merger, E-Commerce Times, February 7, 2000, available at http://www.ecommercetimes.com.

, Kana Buys Broadbase for $71M, E-Commerce Times, April 10, 2001, available at http://www.ecommercetimes.com.

, Kana Expands Customer Support to Europe and Australia, E-Commerce Times, December 27, 1999, available at http://www.ecommercetimes.com.

, Kana Unwraps Java Call Center App, CRMDaily.com, May 30, 2001, available at http://www.crmdaily.com.

Degnan, Christa, E-mail Tools Focus on Customer Relations, PC Week, October 18, 1999, p. 10.

Dembeck, Chet, Kana Buys BEI and NetDialog, E-Commerce Times, December 7, 1999, available at http://www.ecommercetimes.com.

Drucker, David, CRM Coupling Aims to Bridge Customer Data, InternetWeek, February 14, 2000, p. 8.

Gareiss, Dawn, Kana Makes Online Customer Service a Top Priority, InformationWeek, May 15, 2000, p. 78.

George, Tischelle, Kana Deals Bolster Service Offerings, Information Week, December 13, 1999, p. 213.

Gollobin, Kelly, Michael McCloskey-Kana, Computer Reseller News, November 6, 2000, p. 96.

Gonsalves, Antone, Kana Readies New Version of I-CRM Suite, TechWeb, October 7, 2000.

Grygo, Eugene, Kana, Silknet Merger Wares to Remain Viable, InfoWorld, February 14, 2000, p. 20.

Hall, Mark, Emerging to Applause, Computerworld, June 12, 2000, p. 40.

Hibbard, Justin, E-Mail Mining Tools, Information Week, December 14, 1998, p. 91.

Kuchinskas, Susan, Acquisition Begets New Kana Software Offering, Mediaweek, October 4, 1999, p. 60.

Leibowitz, Alissa, Kana Communications Inc., Venture Capital Journal, November 1, 1999.

Morphy, Erika, Kana Secures $55M in New Funding, CRMDaily.com, November 29, 2001, available at http://www.crmdaily.com.

Rodriguez, Karen, Software Firms Vying for Dominance, The Business Journal, April 2000, p. 3.

Songini, Marc L., CRM Market Appears Headed for Shakeout, Computerworld, April 16, 2001, p. 23.

, Struggling CRM Vendor Closing ASP Unit, Computerworld, June 4, 2001, p. 14.

Sweat, Jeff, Kana and IBM Strike CRM Deal, InformationWeek, August 21, 2000, p. 44.

, Kana Puts on a New Face, InformationWeek, October 23, 2000, p. 165.

Tillett, L. Scott, Kana Integrates E-Mail with Online Service, InternetWeek, October 16, 2000, p. 12.

Walker, Christy, Kana Gets a Handle on Customer Messages, PC Week, January 4, 1999, p. 45.

David P. Bianco