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Kana and i2 Sink After Warning

Updated from July 2

Shares of i2 Technologies (ITWO)and Kana (KANA) sank Wednesday amid analyst downgrades after the software makers warned of disappointing earnings and revenue a day earlier, while E.piphany (EPNY)shares rose despites its preannouncement.

Shares of i2 sank 18 cents, or 12%, to $1.32 in recent trading. The supply-chain management software maker's bad news also dragged down shares of competitor Manugistics (MANU), which fell 97 cents, or 17%, to $4.73 in recent trading.

"I think basically people are looking at i2 numbers and saying supply chain is extremely weak across the board," said Goldman Sachs analyst Chris DeBiase, who downgraded i2 to market performer from market outperformer. "They're shooting both of them today."

Kana shares also dropped, falling $1.32, or 37.1%, to $2.24 in recent trading. But E.piphany, another customer relationship management software maker that warned Tuesday, escaped the wrath of investors and actually rose 16 cents, or 4.4%, to $3.76 in recent trading.

UBS Warburg and A.G. Edwards downgraded their ratings to sell on i2, which has suffered as tight IT spending has led to a large drop in its deal sizes. Standard & Poor's on Wednesday also lowered its corporate credit rating on i2 to B from B+ and its rating on $350 million in convertible notes to CCC+ from B-.

"We recommend investors sell the stock as we question whether or not ITWO can find a sustainable long-term business model," UBS Warburg analyst Ken Carey said in a note. He cited the company's declining maintenance and license revenue, cash burn rate, and expense structure and noted the company is an unattractive acquisition target because of its current valuation, more than $400 million in debt and quarterly losses. Carey previously had a hold rating on i2, and his firm has done banking business with i2.

A.G. Edwards analyst William Broun said it remains to be seen whether both i2 and Manugistics will be strong enough to benefit when IT spending improves, given that neither company is expected to earn an operating profit for the next several quarters. Broun lowered his rating from a hold and his firm hasn't done any banking business with i2.

DeBiase noted that i2's deal sizes tumbled to $240,000 from $560,000 in the March quarter. In addition, the June-ending quarter was the first since i2 went public that it closed fewer than five deals under $1 million. The company managed to close only one seven-figure deal, compared to nine in the March quarter. DeBiase's firm has done banking business with i2.

DeBiase said he is expecting i2 to announce plans to lay off 15% to 20% of its staff when it reports final results in mid-July.

Dallas-based i2 said it expects to report second-quarter revenue of $117 million to $120 million, down from $168.4 million in the first quarter and $241 million in the same quarter last year. That's also more than 20% short of the $150.9 million consensus estimate gathered by Thomson Financial/First Call.

i2 said second-quarter license revenue is expected to fall between $25 million and $26 million. The company expects to post a GAAP loss of between $85 million to $88 million, which includes $8 million of intangibles, amortization and restructuring-charge adjustments. In a press release, CEO Sanjiv Sidhu said the company expects to break even in the next three to four quarters.

i2 also announced that executives Philip Crawford, president of European, Asian and Middle East operations, and Chief Marketing Officer Katrina Roche are leaving to "pursue other career opportunities."

Customer relationship management software maker Kana's preannouncement, meanwhile, prompted W.R. Hambrecht analyst Rich Petersen to lower his rating to market perform from buy and Pacific Growth Equities analyst Patrick Mason to put his buy rating under review until he gets more information on the company's official earnings call.

Mason noted that Kana's cash is expected to be $46 million, down from $51 million last quarter. The company said it expects cash to stay above $40 million. But deferred revenue rose and the company signed two large deals totaling $9 million, with less than $1 million recognized in the second quarter. Mason said those details help give him added confidence that Kana's future may not be as gloomy as the preannouncement suggests.

Petersen, however, said he was lowering his rating until he could get more information on Kana's costs and confidence that it can reach and maintain breakeven.

Kana reported its revenue and earnings would fall short of estimates. Kana said it expects second-quarter revenue to total only $17 million, about 34% less than the $25.8 million expected by analysts polled by Thomson Financial/First Call. Menlo Park, Calif.-based Kana said it expects to report a net loss of $24 million to $30 million, including losses of $14 million to $18 million from the reassessment of a long-term project.

Kana said in a press release that it expects third-quarter revenue to be roughly in line with second-quarter results. Analysts were expecting a slight increase to $26.6 million.

Meanwhile, fellow customer relationship management player E.piphany enjoyed a minor boost as analysts pointed to the company's strong cash position.

"We think E.piphany has a lot going for it, including very good products, very happy customers and something more than $3 in gross cash per share," Legg Mason analyst Paul Krieg said in a note. But he said he is concerned about the company's sales organization. "We just don't see much upside to valuation in the near term," added Krieg, who has a hold rating on E.piphany. Neither Krieg or his associate Tony Borck holds E.piphany shares.

E.piphany warned that its net loss for the quarter ending June 30 is not expected to exceed 18 cents a share, compared with a net loss of 28 cents a share in the year-ago period. Revenue is expected to total $19 million, including $6.5 million in license revenue, the San Mateo, Calif., company said.

Wall Street was expecting the company to report a pro forma net loss of 16 cents a share on $23.3 million in revenue, according to Thomson Financial/First Call.

But the poor results of Kana and E.piphany don't necessarily spell disaster for the CRM market and its leader Siebel Systems (SEBL), whose shares hit a new 52-week intraday low Tuesday.

Earlier Tuesday, another company in the CRM field, Onyx Software ( ONYX), said it expects second-quarter results to exceed the current Wall Street consensus estimate of a loss of 3 cents a share. And fellow CRM software maker Pivotal (PVTL) also is expected to meet estimates, said Nathan Schneiderman, an analyst at Wedbush Morgan Securities.

"I don't think it's fair to say it's just the CRM companies that are getting clobbered," Schneiderman said. "But it is a difficult environment to sell this kind of software."

"The smaller companies have been clobbered, but their license revenues have shrunk to a level that allows them to be able to deliver some sequential growth in license fees, whereas companies like Siebel ad E.piphany are having a hard time," he added.

E.piphany is having a harder time than Siebel, though, because it has tried to compete head-on with the market leader, while the entire CRM space has become more crowded as such enterprise software makers as PeopleSoft (PSFT), Oracle (ORCL) and SAP (SAP) have jumped into the fray, Schneiderman said. Schneiderman has buy ratings on Siebel and Pivotal and hold ratings on E.piphany and Onyx. His firm hasn't done banking with any of the companies.

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