NetGenesis Predicts The Future From Mouse Trails

Vendor Genesis

NetGenesis, Inc. (NASDAQ: NTGX) has been developing web analytics software since 1994. Their original product, NetAnalysis, provided metrics to measure site traffic. It has since evolved into the NetGenesis 5 product suite that provides analytics to measure stickiness, frequency, and other sophisticated site visit characteristics. The analytics applications can be used in conjunction with third party campaign management and content management products from vendors such as Annuncio and Vignette. The analytics data can be merged with catalog and transaction data. This enables sites powered by NetGenesis to provide relevant content, marketing campaigns and site promotions targeted to customers based on their web behavior and purchasing history.

NetGenesis targets the Fortune 500 and high traffic dot-coms whose client web traffic ranges from 10 - 200 million hits per day. Retail, financial services and high technology are strong vertical markets. Some of the company's flagship clients include 3Com, Lotus, Barnes & Noble, and Charles Schwab.

NetGenesis hopes its new product suite will speed revenue growth; since 1996 NetGenesis has watched its own revenues grow at slower pace than those of its competitors. Figure 1 shows annual revenue from 1996 though 1999. Figure 2 shows quarterly data for the first three calendar quarters of 2000.

Figure 1.

*Accrue's Fiscal Year Ends 3/31, thus data reflects revenue one quarter ahead of the other vendors

Figure 2.

*Accrue's Fiscal Year Ends 3/31, thus data reflects revenue one quarter ahead of the other vendors

NetGenesis' average annualized revenue growth from 1997 through 1999 was 148%. Accrue, its closest competitor, had average annualized revenue growth of 487% over that same period. NetGenesis has experienced significant stock devaluation since going public at the end of February this year. The stock traded at $59 per share on 2/29/2000, approximately 95% higher that its current price of $2 5/8 per share on 11/14/2000. Accrue, Net Perceptions, and WebTrends are each off their 12-month highs, but NetGenesis has had the largest devaluation (current price as a percentage of 12-month high price) and has the lowest market capitalization of the group.

WebTrends competes primarily in the low to mid-market, but does have a presence in many large organizations. It is also quite likely that WebTrends will compete in the mid to high-end market in the near future. Net Perceptions is a borderline competitor in this market because it focuses primarily on personalization software, but it does have a web analytics product that analyzes web data at the transaction level.

TEC considers relative revenue growth and stock valuation as important indicators to long-term viability in the web analytics market. This market is primarily composed of small, unprofitable vendors with low revenue multiples for the software industry. Thus consolidation is likely to occur. WebTrends and Accrue both reported profits for 3Q00, and as of 11/14/2000 WebTrends had a revenue multiple considerably higher than any of the other vendors.

Accrue Software, Inc. (NASDAQ: ACRU) sells Accrue Insight 5, a suite of applications grouped into four categories that provide analytics for campaign management, content management, e-commerce transactions, and partner relationship management. WebTrends, Corp. (NASDAQ: WEBT) sells two enterprise level products, Commerce Trends 3.0, which provides web analytics and campaign management, and Enterprise Reporting Server, which provides reporting and report management. Net Perceptions, Inc. (NASDAQ: NETP) sells applications primarily in three categories: commerce, knowledge management, and personalization.

Vendor Strategy and Trajectory

NetGenesis' strategy has been to increase the functionality of NetGenesis 5 over previous products such as NetAnalysis, and to develop web analytics consulting services to move the company away from being a niche web statistics vendor towards being a supplier of online-customer information. This is an important move as the e-businesses of NetGenesis' target market become more sophisticated.

NetGenesis' competitive advantage comes from the combination of scalable, sophisticated analytics applications and analytics consulting services. Services represented 42% of the $6.5M in revenue generated in 1999, and 43% of the $5.8M in revenue generated during 2Q00 (note that the 3Q00 10-Q was not yet released at the time of writing). Future product and service enhancements are focused in these areas:

• Improving scalability to handle high traffic websites
  
  
• Improving integration by focusing on multiple database support, metadata schema extensions, and data source independence
  
  
• Improving analytic capabilities by enhancing metrics, segmentation, and predictive modeling
  
  
• Expanding reporting capabilities with report groups for vertical industries
  
  
• Enhancing consulting offerings in strategy and analysis, training, and implementation

NetGenesis has forged partnerships with a number of technology vendors to support these enhancements. Business development has focused on three areas:

• E-business Platform Vendors - Partnerships with vendors such as IBM, Oracle, Sun, and Vignette include co-development agreements to allow NetGenesis applications to integrate with widely used databases, servers, and content management software.
  
  
• Marketing Applications Vendors - Partnerships with Annuncio, Net Perceptions, and Double Click expand the analytics functionality of NetGenesis applications.
  
  
• Systems Integrators - Partnerships with integrators such as Deloitte, Digitas, and IBM Global Services provide NetGenesis with an indirect sales channel and implementation services.

NetGenesis told TEC that future partnerships would continue in these areas, with a particular emphasis on marketing applications vendors. NetGenesis will focus on ensuring that its applications can run synchronously with technology from other vendors.

ANALYSIS

Vendor Strengths

NetGenesis is in the right market at the right time. Net Perceptions is the only vendor facing shrinking revenues, and it is unclear if its web analytics product is to blame. Besides Net Perceptions, demand is high and double to triple digit revenue growth is the case across the board.

NetGenesis has a comprehensive analytics product and its Professional Services organization has expertise in designing measurement strategies for e-businesses. The company offers both standard implementation services and strategic analytics consulting services. NetGenesis has also produced an e-metrics white paper, which it claims has been recommended reading at a number of universities and has led to winning numerous customers.

NetGenesis 5 includes a core analytics platform and a packaged extensibility layer (NetGenesis Developer Kit) that is leveraged both by NetGenesis and its partner community to build on top of the platform. This allows third parties to offer value-added solutions that leverage the core platform. The company's product has a number of useful capabilities including, near real-time integration of online data into a data mart and sharing summary profiles of customers' web behavior with offline data. NetGenesis also claims to be a leader in the areas of user identification, analysis of dynamic sites, and analysis of multi-property sites.

Vendor Challenges

Although NetGenesis has developed an extensive partnership network, the long-term impact of its agreements may cause problems. Consider the partnership with Net Perceptions. NetGenesis partnered with Net Perceptions to use its personalization technology and since that agreement was signed Net Perceptions has added campaign management and e-commerce analytics applications to its product line. These applications compete with NetGenesis' offerings and incorporate Net Perceptions personalization technology. Furthermore Net Perceptions had shrinking revenues, layoffs and management departures during 3Q00. Thus continued support for NetGenesis' products by Net Perceptions is questionable.

Gaining certification for analytics metrics by an independent third party is a challenge to all web analytics vendors. The industry lacks a widely accepted, formal certification process similar to, for example, ISO certification for manufacturers. Auditing organizations such as ABC Interactive and IAB do exist, but these standards organizations have yet to agree on simple web traffic measurements (see Traffic Audits Make Strange Bedfellows: Part I - The Why's And What's Of Auditing and Traffic Audits Make Strange Bedfellows: Part II - The Audit Process).

BOTTOM LINE

Vendor Predictions

NetGenesis should continue to enjoy triple digit revenue growth over the next 12 months. The demand for sophisticated web analytics is just beginning to explode and NetGenesis is among the top vendors, positioned with a sophisticated offering to take advantage of the opportunity. As Figures 1 and 2 indicate, NetGenesis has not had the momentum of some of the other web analytics vendors. The introduction of NetGenesis 5 and related consulting services should help fuel growth provided that investments in sales and marketing and product development remain strong. Figures 3 and 4 illustrate NetGenesis' spending compared with other web analytics vendors.

Figure 3.

*Accrue's Fiscal Year Ends 3/31, thus data from 1Q00 was used to represent this calendar period

Figure 4.

*Accrue's Fiscal Year Ends 3/31, thus data from 1Q00 was used to represent this calendar period

Figure 3 indicates that NetGenesis' raw spending is consistent with other vendors. Although revenues continue to be lower than competitors, NetGenesis has not cut off spending in these key areas. Figure 3 indicates that NetGenesis' expenses as a percent of revenues is very high. This suggests that available cash is being funneled towards sales and marketing and product development. These factors are critical to their long-term chances of success.

TEC predicts that over the next 12 months market pressures will force larger CRM vendors to acquire small web analytics vendors with good technology to integrate in their own offering. Many potential clients are demanding a single vendor solution to meet their CRM related needs. As NetGenesis attempts to sell its products to larger clients it must be aware that web analytics is a key component of a CRM initiative that may include traditional business intelligence, personalization and recommendation, campaign management, call center management, and many other analytics and operational components. Thus NetGenesis is an attractive acquisition target for CRM vendors. This would be beneficial to clients because tight integration among CRM components enhances functionality and reduces implementation time.

Vendor Recommendations

In the short-term NetGenesis appears to be on the right track with its product and service enhancements. A particular focus on scalability and integration with other business application vendors should be a top priority.

In the long-term NetGenesis needs to consider how they plan to remain competitive in a young, consolidating market. NetGenesis does claim to be on a track to profitability, but a low valuation makes the company a prime target to be acquired by a larger vendor (within either the web analytics market, the business intelligence market, or the CRM market) for its technology. NetGenesis should consider focusing future business development and product development on making its product integrate seamlessly with products from the top vendors in each of these markets.

User Recommendations

Organizations looking to add sophisticated reporting and web behavior analysis tools should consider NetGenesis' offering. The list of vendors providing web analysis tools as sophisticated as those of NetGenesis is relatively short. A small number of vendors represent the majority of the market. You may consider other vendors such as Informix that have web analytics tools (see: Informix Decides To Start Analyzing Websites) but these tools are not as sophisticated in analyzing web behavior.

Integration with other systems may be a concern if you plan to include web analysis and multi-channel campaign management as part of a larger CRM initiative. NetGenesis is still a niche product compared to full CRM suites such as those sold by Siebel or E.piphany. NetGenesis does have an open data model built on top of a standard relational database as well as a rule-based import process, adapters and activators, but the company has no formal co-development partnerships in place with any major CRM vendor. Without CRM partnerships, potential clients should be particularly cautious of integration issues between their CRM applications and NetGenesis' applications. Be sure to get references from previous clients who faced integration of the same products before making a purchase decision.

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