IPO Investors Look for Some Insight Into E.piphany

If you like to buy technology stocks and you can stomach the risk associated with initial public offerings, then you might be interested in the upcoming IPO of Palo Alto-based E.piphany.

That’s the kind of analysis that E.piphany’s flagship E.4 System software performs for companies such as Lucent Technologies, Hilton Hotels and Microsoft. The software churns through massive amounts of customer data and identifies customer patterns and relationships that companies can use to improve their marketing and boost sales.

Database analysis software is already catching on among traditional companies. The California State Automobile Assn., for instance, is using E.4 to comb through its databases and identify auto club members who are likely to be interested in cruises and other travel packages, said Daniel St. John, CSAA’s director of database marketing.

Analysts say demand for E.4 could grow even more as companies realize that the reams of customer data they collect on their Web sites could be put to use if they were properly interpreted.

E.piphany’s all-in-one analysis software is a dramatic improvement over the assorted database tools it was designed to replace, according to customers and analysts.

“It used to be that I had to buy a database and a query tool and a bunch of gnarly things and stack them all together and teach it the specifics about my business,” said Frank Gillett, a senior analyst who follows software development research for Forrester Research in Cambridge, Mass. “Instead of going to a hardware store and buying all the individual pieces to build a door, now I can buy a door already mounted in a door frame.”

But E.piphany’s technology is likely to be overtaken in the next two years by even more sophisticated software packages that will be able to analyze customer data instantly and let marketers tailor special deals for customers--especially Web shoppers--on the fly, he said.

To survive in that environment, “at a minimum, [E.piphany] will have to create strong partnerships with other players” that sell business-planning software, Gillett said. A possibility is that E.piphany will be acquired by a company such as California’s Santa Clara-based Vantive or San Mateo-based Siebel Systems that makes a more comprehensive software package for front-office automation and customer interaction, he said.

In a filing with the Securities and Exchange Commission, E.piphany acknowledges that many of its competitors “have significantly greater financial, technical, marketing, service and other resources” to devote to developing and selling new products, and that “some large companies may attempt to build capabilities into their products that are similar to the capabilities of our products.”

But for the present, E.piphany is growing. The firm collected more than $5.1 million in the first half of 1999, compared with less than $3.4 million in all of 1998, according to its SEC filing. About 60% of that revenue is from licensing its software, and the rest is from consulting services that are often needed to implement the software.

The company’s revenue doesn’t make up for its spending on sales and marketing--$6.4 million, it’s biggest expense in the first half of 1999--or its investment in research and development, which came to $2.9 million for the first half of the year. E.piphany lost $10.3 million in 1998, and lost an additional $9.3 million in the first half of 1999. The company has an accumulated deficit of $22.8 million since its founding in November 1996, according to the SEC filing.

Despite the heavy losses, investors can find some positive signs in E.piphany, said David Menlow, president of IPO Financial Network in Springfield, N.J., who is lukewarm about the stock.

For one, vaunted Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers owns an 18.5% stake in the firm, and Information Technology Ventures owns 18.4% of the start-up.

Another plus is that E.piphany’s insiders bought their shares at an average price of $1.68, and an offering price of $10 would be six times as high--a relatively modest spread. That should allay investors’ fears that the insiders are using the IPO to “make a big score on the backs of new investors,” Menlow said. “The higher the average insider cost, the more we view that as a sense of commitment to the company.”

E.piphany, which could go public as early as this week, plans to sell 4.2 million shares for between $9 and $11 each to raise $38 million for general corporate purposes. Menlow and Gillett agree that the stock may hold its value in early trading, but it is not likely to balloon the way other high-tech IPOs have.

E.piphany will have nearly 26 million shares outstanding after the public offering, and if the shares end up trading at around $10, that would give the company a market capitalization of about $260 million.

“To justify a quarter-billion valuation they have to show a huge amount of growth,” Gillett said. “I wouldn’t go after this.”

Credit Suisse First Boston, Hambrecht & Quist and Merrill Lynch are underwriting the offering. E.piphany plans to trade on Nasdaq under the symbol EPNY.

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Times staff writer Karen Kaplan can be reached at karen.kaplan@latimes.com.