Bearish Market Chews Up CRM Firms Profits

Vendors aren't immune to economic cycles, cut earnings estimates, jobs

Theory had it that in an economic downturn, companies would increasingly turn to CRM software that could help them acquire new customers and make existing customers more profitable.

For many customer relationship management companies, that theory has not resulted in improved sales or profits, as evidenced by the handful of earnings results expected to trickle in over the next few weeks. At least nine companies that develop software to manage customer interactions have announced this month that first-quarter earnings will fall well short of previous estimates. Several of those companies announced layoffs as well.

Companies evaluating CRM software may take a chance on a vendor with a troubled financial record, but the mitigating reasons have to be compelling, said an IT manager for a large manufacturing company thats evaluating e-CRM solutions as it looks to do more business through the Web.

"It really depends on the nature of how you plan to use the product. If its less critical a piece, you might take a risk on a company," said the IT manager, who requested anonymity. "But if its front-end [e-commerce] or direct sales, youd have to go with a com- pany you know is going to be around to support its product. The implementation is difficult enough the first time around—you dont want to have to go through it all over again."

"The CRM companies do provide the capability to help companies get to the gross margins theyre trying to get to, but theyre still not immune to the economic cycle were in," said Tony Treccapelli, co-managing partner of Arthur Andersen Co.s Internet Services Group, in New York. "The markets all about showing profits now."

For some companies, its also about survival. Once high-flying Kana Communications Inc. stands as perhaps the most dire case. The CRM software company, once poised to become a market leader after merging with Silknet Software Inc. a year ago, announced that it was down to its last $20 million in cash. Given that it spent $30 million in operating expenses last quarter, the future looks grim for the Redwood City, Calif., company.

Kana shed 220 employees in February as it sought to slow its burn rate. The company expects to post revenues of $24 million to $25 million for the quarter, well short of analysts consensus estimate of $42.2 million. Losses will more than double from the same quarter a year ago, Kana officials said.

Kana last week decided to merge with Broadbase Software Inc., which is slightly better off, in a deal valued at $75.5 million. Broadbase, of Menlo Park, Calif., reported that its losses for the first quarter will be higher than expected, though the company still has $130 million in cash on hand.

While those two companies software products overlap in several areas, early indications are that Kanas operational applications for customer service and contact centers will be integrated with Broadbases analytics and marketing automation applications in the new companys offerings.

Kana and Broadbase are not alone. Onyx Software Corp. reported a revenue shortfall and said it will reduce its work force by about 17 percent. On the same day, MicroStrategy Inc., which has moved aggressively into the analytical CRM space over the past year, announced that it will shed 600 jobs. The companys revenues are flat, and losses appear to be larger than expected, said MicroStrategy officials, in Vienna, Va.

Even E.piphany Inc., considered to be one of the more successful CRM companies, announced that it would miss its earnings targets by a "wide margin," though the company has not yet announced layoffs. Like many technology companies, E.piphany, in San Mateo, Calif., blamed longer sales cycles caused by continuing economic uncertainty. As earnings warnings rolled in early this month, it became apparent that the crucial final week of the quarter, when companies typically close deals, was a dud throughout the sector.

Firepond Inc. announced a restructuring, resulting in a 20 percent reduction in the number of its employees. In addition, look for cuts at BackWeb Technologies Inc., which announced that it will take the "necessary objectives to maintain a strong cash position" in the face of stagnant revenue growth and widening losses.

The big players in the Web content and commerce management space felt the pinch, as well. BroadVision Inc. and Art Technology Group reported earnings shortfalls, with BroadVision promising to shed 15 percent of its employees. Open Market Inc. said it will cut 25 percent of its work force because it, too, has missed its revenue targets.

C.J. Ritterbusch, director of marketing at Club Colors, of Schaumburg, Ill., said such bad financial news goes with the territory when dealing with e-business software companies. Club Colors is a customer of Blue Martini Software Inc., which late last month announced that it will cut 70 to 80 positions, or 14 percent of its work force, in the face of a weaker-than-expected quarter.

"I dont have concerns about them at this point," Ritterbusch said, referring to Blue Martini. "Were pretty self-sufficient and day-to-day dont rely on them for support too much. That was one of the driving factors that made us choose Blue Martini in the first place."