Exclusive Interview: eGain Chairman Ashutosh Roy

Last Thursday, Reporter@Large featured eGain Communications (EGAN) as a company worth a look for Internet stock investors.

It appeared to me that there is no reason eGain should be trading at such a substantial discount toKana Communications (KANA). I based the note on eGain's market position, customer and revenue growth, Web based architecture, scalability and its ability to sign up corporate customers for its hosted solution.

Reporter@Large had the opportunity to sit down and speak with Ashutosh Roy, eGain's co-founder, chairman and chief executive officer.

Reporter@Large When talking about eGain, aren't we really talking about a complete Customer Relationship Management (CRM) solution, rather than simply email management?

Roy That is correct. We characterize ourselves as an e-commerce customer communications company, and the reason for it is that we believe the management of communications between the customers and a business is the most important piece of the relationship. So we have developed, integrated, and deployed multi-channel communication capabilities for email management, live Web collaboration, outbound email marketing, and for voice over IP.

Reporter@Large Obviously a big business with room to grow when you consider the amounts of money companies are willing to spend to acquire customers, but you're the answer to retaining these customers.

Roy That's exactly right. Our tag line now is "Gain and Sustain." In other words, gain customers and sustain relationships.

Reporter@Large How has your experience with "WhoWhere?" ( a company co-founded by Mr. Roy and sold to Lycos in 1998) helped with building and managing eGain?

Roy We took a lot of things away from WhoWhere. One was that it was important to take fundamentally long-term bets on behalf of your customers if you wanted to come out ahead. So the first thing we did when we started eGain was we did not look at what the market was doing at that time, we looked at where the market would be 3-4 years out. We made three strategic bets, we've stuck with them ever since, and they're now paying off: 1) It was a native Web-based architecture for everything we did. Which means no client-server in our shop at all. Our competitors are just now dumping their client server technologies and moving to the Web, so we are far ahead here, 2) Businesses didn't want a one-point solution, they needed a platform. So we went out with this platform strategy and added applications as we saw the market need for it, and 3) is a bet we made directly related from our WhoWhere experience and it is the notion that every business now is running faster than they can. This means that very few companies have the internal resources to manage and maintain their IT applications. So we saw the hosted delivery of applications as the wave of the future. Because of that initial bet we made on the hosted delivery and then having the option of licensed delivery, today we are the leader for the hosted application network with over 120 of our customers on our hosted network.

Roy Yes, and the second learning experience we took from WhoWhere was that we wanted to be in the Infrastructure business. We wanted to be in a situation where we would only be dependent on the overall growth of e-business and e-commerce. Whether it was books, shopping, or movies, we didn't care who won or lost. As long as the e-business and e-commerce opportunities took off, we wanted to benefit from that.

Reporter@Large Your revenue of $2.4 million representing 72 percent sequential growth for your most recent quarter actually beat out Kana's sequential growth. Can we expect more of a distancing between eGain and Kana in the near and long-term future?

Roy I think so and I'll tell you two things that are very relevant. There is a major business model difference between the way we are going about acquiring customers and accruing revenue from the way a typical license software company does that. What we do on the hosted side is we sign our customers up for a contract which averages a little over one year. But we accrue revenue every month, only as we perform the services. So what we have is in effect a strong booking of hosted, contractual revenue. Yet we are not recognizing it and it's not in our balance sheet, nor is it on our income statement. That's where you're seeing this organic growth of revenue growth coming from now. As we acquire more and more of the critical mass of hosted customers, you'll see the revenue ramp up, which is a cumulative impact of all our hosted customers as opposed to having to acquire and build revenue each quarter from scratch in the pure license model. This is something that investors need to take a second look at to understand just how valuable and desirable it is.

Reporter@Large Lets talk about eGain's approach to acquisitions.

Roy This quarter, all our growth was organic, as opposed to pulling together a lot of different businesses to try to make our numbers. We have a very integrated view for our acquisition strategies. Acquisitions have to help us meet our customers' needs in an integrated manner on a consistent Web-based architecture. We don't want to create a hodge podge of multiple solutions that are incompatible and then try to pass it off as one big piece -- customers can see through that very quickly.

Reporter@Large So the idea is to only acquire companies that help the network as a whole and help scale the entire platform.

Roy Exactly right.

Reporter@Large I know you've made moves into Europe and Australia. When can we expect to see results hitting eGain's top line and possibly bottom line?

Roy I think our European operations will begin showing results this year. Last quarter we announced our move into Australia. The pipeline there is quite attractive right now. We are in discussions right now on the Asian front, where we haven't made any announcements yet. But you can expect that, I would say, in the next quarter or so.

Reporter@Large On to the Kana Communications acquisition of Silknet Software. Where does this deal leave eGain (the deal was announced on Monday, one day before our interview)?

Roy We see the deal as a very expensive way to try and create a perception of motion. I think there are some synergies, but it looks to me like they're trying to back-fill their valuation with what they think is real meat. I have respect for Silknet, but I do believe they are in the system integration business, and this is not the business Kana is in. I think the deal just makes our story a lot more cogent and credible to our customers and shareholders. We are marching to a very methodical and predictable tune, which is we made these three bets early on, and whatever we do, whether it is build, buy, or partner, it will all reflect the same consistency in our strategic direction.

Reporter@Large So there may be a Silknet out there for eGain but you guys aren't even interested.

Roy No, we are not. We believe Silknet has good people and certainly some attractive customers. The question comes down to how much you pay for that and that's what is boggling my mind right now with regard to Kana's premium offering.

Reporter@Large Valuations aside for a moment, Kana will now bring 450 customers to the table opposed to eGain's 200.

Roy We believe that our acceleration is sufficient that we will achieve critical mass in a short period of time. The number of big customer names that we are signing up now is a testimony to our ability to win in a head-to-head battle with Kana. We have not seen Silknet in deals, competitive situations. Today, when we meet Kana, we win a lot more than we lose to them. We have heard that they are now deciding to discontinue their client server products. Well, guess what! 350 customers are not going to let you walk away from that model easily. We think Kana now has a huge challenge on its hands trying to integrate the companies they have bought (Kana has made 3 major acquisitions in the past 3 months), all who have client server technology, except Silknet. If they're going to walk away from their customers who have client server installations, it's a huge opportunity for us to get in and show those customers that we have been on the Web architecture for 2-1/2 years. This is the reason we made the Web architecture bet early on and now we will benefit from this transition.

Reporter@Large Right now eGain offers two applications, eGain Mail and eGain Live. I know you're prepared to roll out three new applications with real-time Web assistance and voice over Internet. When can customers and investors expect this to happen?

Roy We are anticipating these products to come out in the next 60-90 days.

Reporter@Large Investors love to hear about additional revenue streams. Do you expect that a solid amount of your customers will use a number of these solutions?

Roy Yes, close to a quarter of our deals made last quarter were joint email management and eGain Live deals. You can expect a strong acceptance and demand for our new products from new and existing customers.

Reporter@Large The value and story seems very clear to me for customers as well as investors.

Roy Yes. Our strategy is working very well. Our competition is doing all kinds of things to make sure that they can stay in the race and somehow justify their valuation(s). We're confident that we're building long-term value, which will get reflected out to both the capital markets and to our customers.

Reporter@Large That about wraps it up. Thank you for your time.

Roy Thank you Luke, Have a nice day.


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