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Siebel Systems

( SEBL) and may get most of the ink when it comes to customer relationship management (CRM) software, but a few small-cap players have stolen traders' attention.

In particular,

Chordiant Software

( CHRD) has soared a whopping 182.3% in the past 12 months and


( EPNY) enjoyed a 68.2% spring. Both outperformed the 59.7% rise in the Goldman Sachs Software Index.

"There has been a renaissance in terms of investor interest in these smaller names," observed RBC Capital Markets analyst Cameron Steele. But "the easy money has been made in a lot of these," he cautioned.

In fact, these smaller CRM companies are only nibbling at a tiny piece of the market. Still, some hold promise if you pick and choose carefully, as many are likely to be gobbled up by larger companies, investors and analysts say. There has been tremendous consolidation in software overall, and merger mania is finding its way to the CRM space as well.

In late 2003, for example, Vancouver-based



went on a wild ride as an acquisition target. First, venture capital firm Oak Investment Partners made an all-cash offer to buy the firm. Then, rival

Onyx Software

( ONXS) threw in its own all-stock bid before

CDC Software

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, a subsidiary of

( CHINA), trumped both offers. (Pivotal shareholders vote on CDC's offer -- $2 per share in cash or $2.14 in cash and stock -- next month.)

Meanwhile, Onyx is a potential takeover target itself as it fights to remain relevant, a challenge for companies that sell primarily to small- and medium-sized businesses. The firm's cash position has fallen to a precariously low $11.8 million and its stock has plummeted 20.8% in the past year. The company preannounced disappointing quarterly results Jan. 12, and CEO and co-founder Brent Frei said he's stepping aside when a successor is found.

"It's hard for small companies with weak balance sheets to sell software in this environment," said Wedbush Morgan Securities analyst Nathan Schneiderman. "The model that seems to work is selling large deals to big corporations."

CRM Favorites & Alternatives

Among smaller CRM players who sell to bigger corporations, Chordiant is the current leader and Wall Street's favorite, although it's currently trading at nearly 47 times 2004 consensus estimates. Chordiant has a strong, defensible position in the insurance and retail banking space, said Steele. Its roster of customers includes



Metropolitan Life

. (Steele has an outperform rating on Chordiant and his firm has done banking with the company.)

Financial institutions are often technology innovators, so Chordiant stands to gain an early lift with the rebound of information technology spending, adds a money manager whose firm is one of the top 20 institutional holders of Chordiant shares. "They're right in the sweet spot," quipped the source, who asked to remain anonymous.

Chordiant also boasts rare sales visibility because it recognizes its revenue from big deals over two years, noted JMP Securities analyst Pat Walravens. Thanks to the visibility from those elephantine deals, the company boasted 80% visibility on its first-quarter revenue guidance back in October, at the beginning of its fourth quarter. "That's a pretty nice position to be in," said Walravens, who rates Chordiant a strong buy. (His firm hasn't done investment banking with the company.)

For those concerned about having missed Chordiant's run, consider CRM vendor

Kana Software

( KANA), whose shares have underperformed the market with a 31.2% gain in the past year. "The stock is really undervalued," said Pacific Growth Equities analyst Patrick Mason, who has an overweight rating on Kana. The company currently has an enterprise value-to-sales ratio of about 1.4 -- far lower than peers with ratios of 3 to 4.

"They've struggled this year, is what it's come down to," said Mason, who expects the company to turn a 25% revenue decline this year into an 8.4% increase next year.

Kana "was acting like people thought they might miss this" quarter, said Mason, who is forecasting they won't. Kana reports its fourth-quarter results Thursday. (Pacific Equities hasn't done any banking with Kana.)

A more controversial name is E.piphany.

The pros: E.piphany has a "very strong" cash position -- sitting at $264 million -- and its J2EE-compliant technology is "well-respected," Schneiderman said. The company has a global 2000 base of customers, meaning the largest 2,000 companies worldwide, and will hit an important milestone this year when its first deal with 1,000 seats -- or number of users who can be on the system -- goes live.

The con: E.piphany has yet to post a profit, although "they're getting damn close," Schneiderman said. Last quarter, E.piphany lost $4.3 million on $24.2 million in revenue. Schneiderman said the company could reach break-even in the fourth quarter and he expects its bottom line to move into the black next year.

The consensus estimate gathered by Thomson First Call, however, doesn't project positive earnings until 2005 and three analysts have sell ratings on E.piphany.

Rich Parower, co-manager of the


Seligman Global Technology fund, has decided to stay away from E.piphany. "I just can't get comfortable that they're going to be profitable for a while yet," he said. "It's just a matter of is it a good economic business or isn't it? I'm not sure."

While Parower expressed interest in finding the CRM survivors, he's steered clear of the sector so far -- even avoiding industry leader Siebel, whose stock he believes has run ahead of itself. (His firm hasn't done banking with any of the CRM companies he covers.)

Clearly, other investors have taken a more aggressive approach to the CRM sector and have found that good things often do come in smaller packages.