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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2009**

 

**or**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom                 to                 **

 

**000-31321**

**(Commission File No.)**

 

**RIGHTNOWTECHNOLOGIES, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **81-0503640**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**136Enterprise Boulevard**

**Bozeman, Montana 59718-9300**

(Address of Principal Executive Offices) (Zip Code)

 

**(406) 522-4200**

(Registrant’s Telephone Number, Including Area Code)

 

**N/A**

(Former Name, Former Address and Former Fiscal Year,if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  Yes x No o

 

 Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o               |   | Accelerated filer  x         |
|-----------------------------------------------|--------|-----------------------------------|
|                                          |   |                              |
| Non-accelerated filer  o                 |   | Smaller reporting company  o |
| (Do not check if a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number of shares outstanding of the registrant’scommon stock, $0.001 par value, as of April 30, 2009 was 31,673,894

 

 

** **

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**RightNow Technologies, Inc.Quarterly Report on Form 10-Q**

 

**For theQuarterly Period Ended March 31, 2009**

 

**INDEX**

 
| ** **                                                                                                | ** ** | ** **                                                        | **Page** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|----------|
| **Part I.**                                                                                          |       | **FINANCIAL INFORMATION**                                         | 3        |
| Item  1.  Financial Statements                                                                  | 3          |
|                                                                                                      | a)         | Condensed consolidated balance  sheets (unaudited)                | 3        |
|                                                                                                      | b)         | Condensed consolidated  statements of operations (unaudited)      | 4        |
|                                                                                                      | c)         | Condensed consolidated  statements of cash flows (unaudited)      | 5        |
|                                                                                                      | d)         | Notes to  condensed consolidated financial statements (unaudited) | 6        |
|                                                                                                      |       |                                                              |     |
| Item 2.  Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 14         |
|                                                                                                      |       |
| Item 3.  Quantitative and Qualitative Disclosures  About Market Risk                                 | 24         |
|                                                                                                      |       |
| Item 4. Controls and Procedures                                                                           | 24         |
|                                                                                                      |       |
| **Part II.**                                                                                         |       | **OTHER INFORMATION**                                             | 26       |
| Item  1.  Legal Proceedings                                                                          | 26         |
|                                                                                                      |       |
| Item  1A.  Risk Factors                                                                              | 26         |
|                                                                                                      |       |
| Item 2.  Unregistered Sales of Equity Securities  and Use of Proceeds                                | 35         |
|                                                                                                      |       |
| Item 3.  Defaults Upon Senior Securities                                                             | 37         |
|                                                                                                      |       |
| Item 4.  Submission of Matters to a Vote of  Security Holders                                        | 37         |
|                                                                                                      |       |
| Item  5.  Other Information                                                                          | 37         |
|                                                                                                      |       |
| Item 6.  Exhibits                                                                                         | 38         |
|                                                                                                      |       |
| **SIGNATURES**                                                                                            | 39         |

 

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**Part I. FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**RightNow Technologies, Inc.**

**Condensed Consolidated Balance Sheets**

(In thousands)(Unaudited)

 
| ** **                                           | ** ** | **December  31, 2008** | ** ** | **March  31, 2009** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **Assets**                                           | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Cash and cash equivalents                            |       | $                           | 51,405     |                     | $          | 51,462 |   |
| Short-term investments                               |       | 34,412                      |       | 36,517                   |       |
| Accounts receivable                                  |       | 36,770                      |       | 24,220                   |       |
| Term receivables, current                            |       | 5,752                       |       | 4,810                    |       |
| Allowance for doubtful accounts                      |       | (2,277                      | )          | (1,901                   | )          |
| Receivables, net                                     |       | 40,245                      |       | 27,129                   |       |
| Deferred commissions                                 |       | 5,381                       |       | 5,331                    |       |
| Prepaid and other current assets                     |       | 2,150                       |       | 2,262                    |       |
| Total current assets                                 |       | 133,593                     |       | 122,701                  |       |
|                                                 |       |                        |       |                     |       |
| Long-term investments                                |       | 4,963                       |       | 4,980                    |       |
| Property and equipment, net                          |       | 10,141                      |       | 9,187                    |       |
| Term receivables, non-current                        |       | 3,547                       |       | 2,804                    |       |
| Intangible assets, net                               |       | 6,399                       |       | 6,104                    |       |
| Deferred commissions, non-current                    |       | 2,840                       |       | 2,322                    |       |
| Other                                                |       | 854                         |       | 848                      |       |
| **Total Assets**                                     |       | $                           | 162,337    |                     | $          | 148,946 |   |
|                                                 |       |                        |       |                     |       |
| **Liabilities and Stockholders’  Equity**       |       |                        |       |                     |       |
| Accounts payable                                     |       | $                           | 5,058      |                     | 3,932      |   |
| Commissions and bonuses payable                      |       | 5,665                       |       | 3,084                    |       |
| Other accrued liabilities                            |       | 11,165                      |       | 10,377                   |       |
| Current portion of long-term debt                    |       | 46                          |       | 46                       |       |
| Current portion of deferred revenue                  |       | 77,584                      |       | 72,885                   |       |
| Total current liabilities                            |       | 99,518                      |       | 90,324                   |       |
|                                                 |       |                        |       |                     |       |
| Long-term debt, less current portion                 |       | 22                          |       | 10                       |       |
| Deferred revenue, net of current portion             |       | 35,614                      |       | 30,322                   |       |
|                                                 |       |                        |       |                     |       |
| Stockholders’ equity:                           |       |                        |       |                     |       |
| Common stock                                         |       | 34                          |       | 34                       |       |
| Additional paid-in capital                           |       | 102,662                     |       | 104,345                  |       |
| Treasury Stock                                       |       | (13,209                     | )          | (15,007                  | )          |
| Accumulated other comprehensive income               |       | 1,916                       |       | 1,875                    |       |
| Accumulated deficit                                  |       | (64,220                     | )          | (62,957                  | )          |
| Total stockholders’ equity                      |       | 27,183                      |       | 28,290                   |       |
| **Total Liabilities and  Stockholders’ Equity** |       | $                           | 162,337    |                     | $          | 148,946 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements ofOperations**

(In thousands,except per share amounts) (Unaudited)

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Revenue:                          |       |                                             |       |   |   |
| Software, hosting and support     |       | $                                                | 24,556     |   | $ | 26,045 |   |
| Professional services             |       | 8,342                                            |       | 9,992 |   |
| Total revenue                     |       | 32,898                                           |       | 36,037 |   |
|                              |       |                                             |       |   |   |
| Cost of revenue:                  |       |                                             |       |   |   |
| Software, hosting and support     |       | 5,035                                            |       | 4,949 |   |
| Professional services             |       | 7,285                                            |       | 7,008 |   |
| Total cost of revenue             |       | 12,320                                           |       | 11,957 |   |
|                              |       |                                             |       |   |   |
| Gross profit                      |       | 20,578                                           |       | 24,080 |   |
|                              |       |                                             |       |   |   |
| Operating expenses:               |       |                                             |       |   |   |
| Sales and marketing               |       | 16,818                                           |       | 14,863 |   |
| Research and development          |       | 4,486                                            |       | 4,756 |   |
| General and administrative        |       | 3,516                                            |       | 3,446 |   |
| Total operating expenses          |       | 24,820                                           |       | 23,065 |   |
|                              |       |                                             |       |   |   |
| Income (loss) from operations     |       | (4,242                                           | )          | 1,015 |   |
|                              |       |                                             |       |   |   |
| Interest and other income, net    |       | 938                                              |       | 401 |   |
|                              |       |                                             |       |   |   |
| Income (loss) before income taxes |       | (3,304                                           | )          | 1,416 |   |
| Provision for income taxes        |       | (92                                              | )          | (153 | ) |
| Net income (loss)                 |       | $                                                | (3,396     | ) | $ | 1,263 |   |
|                              |       |                                             |       |   |   |
| Net income (loss) per share:      |       |                                             |       |   |   |
| Basic                             |       | $                                                | (0.10      | ) | $ | 0.04 |   |
| Diluted                           |       | $                                                | (0.10      | ) | $ | 0.04 |   |
|                              |       |                                             |       |   |   |
| Shares used in the computation:   |       |                                             |       |   |   |
| Basic                             |       | 33,532                                           |       | 31,784 |   |
| Diluted                           |       | 33,532                                           |       | 32,249 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**Condensed Consolidated Statements ofCash Flows**

(In thousands)(Unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended  March 31, 2009** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                                   | ** ** | **2009** | ** ** |
| **Operating activities:**                                            |       |                                                       |       |   |   |
| Net income (loss)                                                    |       | $                                                          | (3,396     | ) | $ | 1,263 |   |
| Non-cash adjustments:                                                |       |                                                       |       |   |   |
| Depreciation and amortization                                        |       | 1,954                                                      |       | 1,887 |   |
| Provision for losses on accounts receivable                          |       | 89                                                         |       | 57 |   |
| Stock-based compensation                                             |       | 1,266                                                      |       | 1,516 |   |
| Changes in operating accounts:                                       |       |                                                       |       |   |   |
| Receivables                                                          |       | 7,447                                                      |       | 13,569 |   |
| Prepaid expenses                                                     |       | (448                                                       | )          | (126 | ) |
| Deferred commissions                                                 |       | (404                                                       | )          | 525 |   |
| Accounts payable                                                     |       | 1,758                                                      |       | (1,107 | ) |
| Commissions and bonuses payable                                      |       | (1,523                                                     | )          | (2,553 | ) |
| Other accrued liabilities                                            |       | 534                                                        |       | (716 | ) |
| Deferred revenue                                                     |       | (3,434                                                     | )          | (9,429 | ) |
| Other                                                                |       | (173                                                       | )          | — |   |
| Cash provided by operating activities                                |       | 3,670                                                      |       | 4,886 |   |
|                                                                 |       |                                                       |       |   |   |
| **Investing activities:**                                            |       |                                                       |       |   |   |
| Net change in investments                                            |       | (1,970                                                     | )          | (2,251 | ) |
| Acquisition of property and equipment                                |       | (1,522                                                     | )          | (684 | ) |
| Cash used in investing activities                                    |       | (3,492                                                     | )          | (2,935 | ) |
|                                                                 |       |                                                       |       |   |   |
| **Financing activities:**                                            |       |                                                       |       |   |   |
| Proceeds from issuance of common stock under  employee benefit plans |       | 414                                                        |       | 78 |   |
| Excess tax benefits of stock options exercised                       |       | 51                                                         |       | 89 |   |
| Common stock repurchased                                             |       | —                                                     |       | (1,798 | ) |
| Payments on long-term debt                                           |       | (11                                                        | )          | (12 | ) |
| Cash provided (used) by financing activities                         |       | 454                                                        |       | (1,643 | ) |
|                                                                 |       |                                                       |       |   |   |
| Effect of foreign exchange rates on cash and cash  equivalents       |       | 278                                                        |       | (251 | ) |
|                                                                 |       |                                                       |       |   |   |
| Increase in cash and cash equivalents                                |       | 910                                                        |       | 57 |   |
|                                                                 |       |                                                       |       |   |   |
| Cash and cash equivalents at beginning of period                     |       | 43,681                                                     |       | 51,405 |   |
| Cash and cash equivalents at end of period                           |       | $                                                          | 44,591     |   | $ | 51,462 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**RightNow Technologies, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

(Unaudited)

 

**(1) Business Description andBasis of Presentation**

 

***Business Description***

 

RightNow Technologies, Inc. (the “Company” or “RightNow”)provides on demand customer relationship management (“CRM”) software andservices that help consumer-centric organizations improve customer experiences,while reducing costs. RightNow’s solutions go beyond traditional customerrelationship management solutions to support a business’ externalcustomer-facing channels as well as sales, marketing and customer serviceoperations.  Approximately 1,900corporations and government agencies worldwide depend on RightNow to achievetheir strategic objectives and better meet the needs of those they serve.Founded in 1997, RightNow is headquartered in Bozeman, Montana, with additionaloffices in North America, Europe, Asia, and Australia. The Company operates inone segment, which is the customer relationship management market.

 

***Basis ofPresentation***

 

The accompanying condensed interim consolidatedfinancial statements are unaudited. These financial statements and notes shouldbe read in conjunction with the audited consolidated financial statements andrelated notes, together with management’s discussion and analysis of financialcondition and results of operations, contained in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2008.

 

The accompanying interim condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States. In the opinion ofmanagement, the interim condensed consolidated financial statements and noteshave been prepared on the same basis as the audited consolidated financialstatements in the Annual Report on Form 10-K necessary for the fairpresentation of the Company’s financial position at March 31, 2009, andresults of operations and cash flows for the three month periods ended March 31,2008 and 2009.  This includes alladjustments (consisting of only normal recurring adjustments) necessary for thefair presentation of the Company’s financial position. The interim periodresults are not necessarily indicative of the results to be expected for thefull year.

 

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management of the Company to make a number of estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses, and disclosures of contingent assets andliabilities.  Management evaluates these estimates on an on-going basisusing historical experience and other factors, including the current economicenvironment, and management believes these estimates to be reasonable under thecircumstances.  Estimates and assumptions are adjusted when facts andcircumstances dictate.  Illiquid credit markets, volatile equity markets,foreign currency fluctuations, and declines in consumer spending have combinedto increase the uncertainty inherent in such estimates and assumptions. Significant items subject to such estimates and assumptions include: elementscomprising our software, hosting and support sales arrangements and whether theelements have stand-alone and/or fair value; whether the fees charged for ourproducts and services are fixed or determinable; the carrying amount ofproperty and equipment and intangible assets; estimates regarding therecoverability and respective fair value of auction-rate securities and allother investments; valuation allowances for receivables and deferred income taxassets; and estimates of expected term and volatility in determiningstock-based compensation expense.   As future events and theireffects cannot be determined with precision, actual results could differsignificantly from those estimates.

 

**(2) Certain Risks andConcentrations**

 

The Company’s revenue is derived from thesubscription, license, hosting and support of its software products andprovision of related professional services. The markets in which the Companycompetes are highly competitive and rapidly changing. Significant technologicalchanges, changes in customer requirements, or the emergence of competitiveproducts with new capabilities or technologies could adversely affect theCompany’s operating results. The Company has historically derived a majority ofits revenue from customer service software solutions. These products areexpected to continue to account for a significant portion of revenue for theforeseeable future. As a result of this revenue concentration, the Company’sbusiness could be harmed by a decline in demand for, or in the prices of, theseproducts or as a result of, among other factors, any change in pricing model, amaturation in the markets for these products, increased price competition or afailure by the Company to keep up with technological change.

 

Financial instruments subjecting the Company toconcentrations of credit risk consist primarily of cash and cash equivalents,short and long-term investments, and accounts and term receivables. The Companymaintains cash, cash equivalents, and short-term investments with variousdomestic and foreign financial institutions. The Company’s cash balances withits financial institutions may exceed deposit insurance limits. Short andlong-term investments are investment grade, interest-earning securities, andare diversified by type and industry.  The entire balance of long-terminvestments consists of auction rate securities (“ARS”) and a repurchase putoption associated with the ARS as further described in Note 7.

 

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The Company’s customers are worldwide with historicalsales of approximately 68% to 75% in North America, 20% to 24% in Europe and 6%to 8% in Asia Pacific. No individual customer accounted for more than 10% ofthe Company’s revenue in 2008 or the three months ended March 31, 2009.One customer represented 22% of term receivables at December 31, 2008 andtwo customers  represented 36% of termreceivables at March 31, 2009. Beginning in 2007, our change to subscriptions from license arrangementsrequires that we no longer record additions to term receivables. ** **As a result, thecustomer concentration as a percentage of term licenses have increased sincethe change.  No individual customeraccounted for more than 10% of the Company’s accounts receivable at December 31,2008 and March 31, 2009.

 

As of December 31, 2008 and March 31, 2009,assets located outside North America were 12% and 14% of total assets,respectively. The loss from operations outside of North America totaled $4.3million and $232,000 for the three months ended March 31, 2008 and 2009,respectively. Revenue by geographical region follows (in thousands):

 
| ** **    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|          |       |                                             |       |   |   |
| North America |       | $                                                | 22,357     |   | $ | 26,997 |   |
| Europe        |       | 8,066                                            |       | 6,440 |   |
| Asia Pacific  |       | 2,475                                            |       | 2,600 |   |
|          |       | $                                                | 32,898     |   | $ | 36,037 |   |

 

**(3) Revenue Recognition**

 

The Company earns its revenues from the delivery ofsoftware, hosting, and support services, and from the delivery of professionalservices. Software, hosting and support services are sold under subscriptionarrangements and, to a lesser extent, license arrangements.  Hosting and support services involve theremote management of the software, technical assistance, and unspecified productupgrades and enhancements on a when and if available basis. Professionalservices include consulting, training and development services.

 

The Company recognizes revenue for subscriptions andlicenses when all of the following criteria are met: a) the Company hasentered into a legally binding agreement with the customer; b) thesoftware has been made available or delivered to the customer; c) theCompany’s fee for providing the software and services is fixed or determinable;and d) collection of the Company’s fee is probable.

 

Subscriptions include access to the Company’s softwarethrough its hosting services, technical support, and product upgrades when andif available, all for a bundled fee. The Company accounts for subscriptions inaccordance with Emerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables* (“EITF 00-21”).Under EITF 00-21, value is allocated to each deliverable of an arrangementusing prices established when the elements are sold stand-alone. Stand-alone salesof subscription agreements are evidenced by subscription renewals andstand-alone sales of professional services are evidenced by rates charged forconsulting, education and development services in stand-alone transactions. Thearrangement fee is then allocated to the individual elements based on theirrelative fair values. Revenue for subscriptions are recognized over thecontractual period and professional services are recognized as incurredprovided that the above criteria have been met.

 

Under the Company’s subscription contracts, theCompany applies EITF 00-21 to its subscriptions as opposed to Statement ofPosition 97-2, Software Revenue Recognition (“SOP 97-2”) because thecustomer does not have the right to take possession of the software withoutincurring a significant incremental penalty. In accordance with Emerging IssuesTask Force Issue No. 00-03, *Application of AICPAStatement of Position 97-2, Software Revenue Recognition, to ArrangementsThat Include the Right to Use Software Stored on Another Entity’s Hardware*(“EITF 00-03”), such arrangements are considered service contracts and arenot within the scope of SOP 97-2.

 

The Company’s revenue also is, to a lesser extent,earned under license arrangements. Revenue under these arrangements isrecognized pursuant to the requirements of SOP 97-2, *SoftwareRevenue Recognition*, and SOP 98-9, Modification ofSOP 97-2, *Software Revenue Recognition with Respect toCertain Transactions*, issued by the American Institute of CertifiedPublic Accountants.  Licenses generallyinclude the same elements as subscriptions, plus the right to take possessionof the software for no additional fee and are sold for a period of time (a “term”license) or perpetually. Term contracts are non-cancelable, and generally covera period of two years, but can range from a period of six months to five years.For term contracts, the Company treats the software license, hosting andsupport services as single element for purposes of allocating revenue. TheCompany has established vendor specific objective evidence of fair value forthe term license bundle based on stand-alone sales of the bundled items. Whensold with professional services, revenue is allocated between the softwarelicense, hosting and support element and the professional services elementusing the relative fair value method. Revenue for the term license element isrecognized ratably over the period of the arrangement and revenue forprofessional services in these arrangements is recognized as performed.

 

Sales of perpetual software licenses include hostingand support services for a period of time, typically one year. The Company hasestablished vendor specific objective evidence for the combined element ofhosting and support elements of perpetual license sales, based on the pricescharged when sold separately. Accordingly, revenue for the perpetual softwarelicense element is determined using the residual method and is recognized upondelivery. Revenue for the hosting and support elements is recognized ratably overthe contractual time period.

 

The Company’s policy is to record revenue net of anyapplicable sales, use or excise taxes.

 

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If an arrangement includes a right of acceptance or aright to cancel, revenue is recognized when acceptance is received or the rightto cancel has expired. If the fee for the license has any payment term that isdue in excess of the Company’s normal payment terms (over 90 days), thefee is not considered fixed or determinable, and the amount of revenuerecognized (a) for perpetual license arrangements is limited to the amountcurrently due from the customer, or (b) for term license or subscriptionarrangements is limited to the lesser of the amount currently due from thecustomer or a ratable portion of the total unallocated arrangement fee.

 

Certain customers have license agreements that providefor usage fees above fixed minimums. Usage of the Company’s software requiresadditional fees if used by more than a specified number of users or for morethan a specified number of interactions. Fixed minimums are recognized asrevenue ratably over the term of the arrangement. Usage fees above fixed minimumsare recognized as revenue when such amounts are known and billed.

 

Separate contracts with the same customer that areentered into at or near the same time are generally presumed to have beennegotiated together and are combined and accounted for as a single arrangement.

 

Professional services revenue is recognized asperformed, based on hours incurred, unless sold in conjunction with a termlicense or subscription where objective and reliable evidence (including vendorspecific objective evidence) for the term or subscription element does notexist, in which case professional services revenue is recognized ratably overthe contractual period. The Company has determined that the professionalservice elements of its software arrangements are not essential to thefunctionality of the software. The Company has also determined that itsprofessional services (a) are available from other vendors, (b) donot involve a significant degree of risk or unique acceptance criteria, and (c) arenot required for the customer to use the software.

 

**(4)  Sales Commissions**

 

Sales incentives paid for subscriptions are deferredand charged to expense in proportion to the revenue recognized. Salesincentives paid for licenses and professional services are expensed when earned,which is typically at the time the related sale is invoiced. Sales incentiveexpense was $3.2 million and $2.8 million for the three months ended March 31,2008 and 2009, respectively. Deferred commissions were $8.2 million and $7.7million at December 31, 2008 and March 31, 2009, respectively.

 

**(5) Net Income (Loss) Per Share**

 

A reconciliation of the denominator used in thecalculation of basic and diluted net loss per share is as follows (inthousands):

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|                                                                              |       |                                             |       |   |   |
| Weighted average common shares outstanding for  basic net income (loss) per share |       | 33,532                                           |       | 31,784 |   |
| Effect of dilutive securities:                                                    |       |                                             |       |   |   |
| Employee stock options                                                            |       | —                                           |       | 465 |   |
| Weighted average shares outstanding for dilutive  net income (loss) per share     |       | 33,532                                           |       | 32,249 |   |

 

The following common stock equivalents were excludedfrom the computation of diluted earnings per share because their impact wasanti-dilutive (in thousands):

 
| ** **             | ** ** | **Three Months Ended   March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                               | ** ** | **2009** | ** ** |
|                   |       |                                                   |       |   |   |
| Employee stock options |       | 4,424                                                  |       | 5,416 |   |

 

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**(6) Comprehensive Income (Loss)**

 

Comprehensive income (loss) for the comparative periodswas as follows (in thousands):

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|                                             |       |                                             |       |   |   |
| Net income (loss)                                |       | $                                                | (3,396     | ) | $ | 1,263 |   |
| Other comprehensive income (loss):               |       |                                             |       |   |   |
| Unrealized gain (loss) on short-term investments |       | 196                                              |       | (129 | ) |
| Unrealized loss on long-term investments         |       | (415                                             | )          | — |   |
| Foreign currency translation adjustments         |       | (25                                              | )          | 88 |   |
| Comprehensive income (loss)                      |       | $                                                | (3,640     | ) | $ | 1,222 |   |

 

**(7)  Fair Value**

 

Effective January 1, 2008, the Company adoptedthe provisions of Statement of Financial Accounting Standards No. 157, *Fair Value Measurements* (“SFAS 157”). SFAS 157 defines fair value , establishes a framework for measuring fair valuein GAAP, and enhances disclosures about fair value measurements. Fair value isdefined under SFAS 157 as the exchange price that would be received for anasset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. Valuation techniques usedto measure fair value under SFAS 157 must maximize the use of observable inputsand minimize the use of unobservable inputs. The standard describes a fairvalue hierarchy based on three levels of inputs, of which the first two areconsidered observable and the last unobservable, that may be used to measurefair value, which are the following:

 

·                           Level 1 — Quotedprices in active markets for identical assets or liabilities.

 

·                       Level 2 — Inputs otherthan Level 1 that are observable, either directly or indirectly, such as quotedprices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the assets orliabilities.

 

·                       Level 3 — Unobservableinputs that are supported by little or no market activity and that aresignificant to the fair value of the assets or liabilities. As a result ofrecent market conditions, the Company holds financial instruments for whichlimited or no observable market data is available.  These fair valuemeasurements are based primarily upon our own estimates and are oftencalculated based on current pricing policy, the current economic andcompetitive environment, the characteristics of the instrument, credit,interest, and other such factors.  Therefore, the results cannot bedetermined with precision, cannot be substantiated by comparison to quotedprices in active markets, and may not be realized in a current sale orimmediate settlement of the asset.  Additionally, there are inherentuncertainties in any fair value measurement technique, and changes in theunderlying assumptions used, including discount rates, liquidity risks, andestimates of future cash flows, could significantly affect the fair valuemeasurement amounts.

 

FASB Staff Position 157-2 Partial Deferral of theEffective Date of Statement 157 (“FSP 157-2”) deferred the effective date ofSFAS 157 for all nonfinancial assets and nonfinancial liabilities to fiscalyears beginning after November 15, 2008 and we adopted FSP 157-2 on January 1,2009.  The adoption of SFAS 157 and SFAS157-2 did not have a material impact on our consolidated financial statements.

** **

In accordance with SFAS 157, the following tablerepresents the Company’s fair value hierarchy for its financial assets (cashequivalents and investments) measured at fair value on a recurring basis as of March 31,2009 (in thousands):

 
| ** **                                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market funds                          |       | $                | 18,888     |             | —     |             | —     |      | $          | 18,888 |   |
| Corporate notes and bonds                   |       | —           |       | 2,230            |       | —           |       | 2,230     |       |
| U.S. Government agency securities           |       | —           |       | 31,892           |       | —           |       | 31,892    |       |
| State and municipal securities              |       | —           |       | 2,395            |       | —           |       | 2,395     |       |
| Auction rate state and municipal securities |       | —           |       | —           |       | 4,581            |       | 4,581     |       |
| Repurchase put option                       |       | —           |       | —           |       | 399              |       | 399       |       |
|                                        |       | $                | 18,888     |             | $          | 36,517           |       | $         | 4,980      |   | $ | 60,385 |   |
|                                             |            |                  |            |                  |            |                  |            |           |            |  |  |  |  |

 

Note: The Company has $32.6 million of cash as of March 31,2009, which was not classified as a Level as prescribed within SFAS 157.

 

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The following table illustrates the activity of “level3” assets from December 31, 2008 to March 31, 2009 (in thousands):

 
| Fair value at December 31, 2008       |   | $    | 4,963  |   |
|--------------------------------------------|--------|------|--------|--------|
| Unrealized gain adjustment—ARS        |   | 356  |   |
| Unrealized loss adjustment—put option |   | (339 | )      |
| Fair value at March 31, 2009          |   | $    | 4,980  |   |

 

As of March 31, 2009, assets characterized as “level3” for fair value purposes consist of approximately $5.0 million in par valueauction rate federally insured student loan bonds with investment grades of AAAor AA.

 

Auction rate securities (“ARS”) are long-term bonds orpreferred stocks that act like short-term debt, where interest rates reset inDutch auctions held daily, weekly, or monthly and have historically providedliquidity for these investments. Despite the long-term contractual maturitiesof the underlying securities, all of these securities were considered availablefor sale and were available to fund the Company’s current operations as of December 31,2007. Since February 2008, uncertainties in the credit markets causedsubstantially all auctions of these securities held by the Company to beunsuccessful. An unsuccessful auction is an event when there are fewer securitiesbid for than are available for sale. Upon an unsuccessful auction, the interestrate is reset at a predetermined rate. Given that substantially all of theauctions have been unsuccessful since February 2008, the Companyclassifies the investments as long-term.

 

During the fourth quarter of 2008, the Companyexecuted a settlement agreement with its broker to redeem the ARS held by it atpar commencing June 2010 through July 2012 (“redemption period”). By accepting the terms of the settlement, the Company (1) received thenon-transferable right (“put option”) to sell its ARS at par value to thebroker commencing June 2010 through July 2012, and (2) gave thebroker the right to purchase the ARS from the Company at any time after theexecuted settlement agreement date as long as the Company receive parvalue.  The Company expects to sell the ARS under the put option. However, if the put option is not exercised during or before July 2012, itwill expire and the broker will have no further rights or obligation to buy theARS.  Redemption of these investments may be subject to brokerage housedefault.  Furthermore, the broker’sobligations under the put option are not secured by its assets and do notrequire the broker to obtain any financing to support its performanceobligations under the put option.  The broker has disclaimed any assurancethat it will have sufficient financial resources to satisfy its obligationsunder the put option. The agreement covers $5.0 million par value (fair valueof $4.6 million) of the ARS held by the Company as of March 31,2009.  The Company considers the put option to be a freestanding financialinstrument and it has been accounted for separately from the ARS.  TheCompany believes the put option does not meet the definition of a derivativeunder SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities,* as the put option isnon-transferable and not considered by the Company to be readily convertibleinto cash.  The Company also believes that, since the put option does notqualify as a derivative, it is not within the scope of SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*(“SFAS 115”).* * During the fourth quarter of2008, the Company elected the fair value option to account for the put optionpursuant to SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities,* and assuch, changes in fair value are recorded through the statement of operationseach reporting period. During the three months ended March 31, 2009, theCompany recorded an unrealized loss on the put option of $339,000, recorded inother expense, net. The fair value of the instrument is recorded as an asset of$399,000 on the Company’s balance sheet in long-term investments as of March 31,2009.

 

Simultaneously, during the fourth quarter of 2008, theCompany made an election under SFAS No. 115 to transfer our ARS fromavailable-for-sale to trading securities.  The transfer to tradingsecurities reflects our intent to exercise the put option during the redemptionperiod.  Prior to entering into the settlement agreement, the Companyintent was to hold the ARS until the market recovered.  At the time of thetransfer, the unrealized loss on the ARS for the first three quarters of 2008of $390,000 included in accumulated other comprehensive income (loss) wasimmediately recognized in earnings, as a component of other income, net. During the fourth quarter of 2008, the Company recognized an additional declinein fair value of $385,000, included in other expense, net for a totalunrealized loss of $775,000 for the year ended December 31, 2008.  As of the first quarter of 2009, the Companyrecognized an increase in fair value for a total unrealized gain of $356,000,included in other expense, for the period ended March 31, 2009.

 

The Company estimated the fair value of our ARS andput option using a discounted cash flow model where it considered assumed riskpremiums and assumed work out periods.  The amount derived through thediscounted cash flow model was generally consistent with the ARS fair valueindicated by the broker statement at March 31, 2009.  The brokerstatement did not provide a fair value assessment of the put option at March 31,2009.

 

To date, the Company has collected all interest paymentson all of the auction rate securities when due.  If the auction ratesecurities continue to experience unsuccessful auctions, if the credit ratingof the auction rate securities deteriorates, or if the brokerage houses declareredemption default, the Company may not recover the par value of itsinvestment.  While the recent auction failures will limit the Company’sability to liquidate the remainder of these investments for some period oftime, the Company does not believe the auction failures will materially impactits ability to fund its working capital needs, capital expenditures, or otherbusiness requirements. The Company will continue to monitor the state of thecredit markets and its potential impact, if any, on the fair value andclassification of its portfolio of auction rate securities.

 

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**(8) Stock-Based Compensation**

 

The Company accounts for its stock-based compensationplans in accordance with the provisions of Statement of Financial AccountingStandards No. 123(R) *Share Based Payment,*(“SFAS123R”).  Under SFAS 123R, stock-basedcompensation costs are recognized based on the estimated fair value at the grantdate for all stock-based awards.  The Company estimates grant date fairvalues using the Black-Scholes-Merton option pricing model, which requiresassumptions of the life of the award and the stock price volatility over theterm of the award.  The Company records compensation cost of stock-basedawards using the straight line method, which is recorded into earnings over thevesting period of the award.

 

The following table illustrates the stock-basedcompensation expense resulting from stock-based awards included in thecondensed consolidated statement of operations (amounts in thousands):

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
| Stock-based compensation expense: |       |                                             |       |   |   |
| Cost of software, hosting and support       |       | $                                                | 77         |   | $ | 96 |   |
| Cost of professional services               |       | 153                                              |       | 133 |   |
| Sales and marketing expenses                |       | 538                                              |       | 622 |   |
| Research and development expenses           |       | 235                                              |       | 262 |   |
| General and administrative expenses         |       | 263                                              |       | 403 |   |
| Total stock-based compensation expense      |       | $                                                | 1,266      |   | $ | 1,516 |   |

 

No stock-based compensation expense was capitalizedduring the three months ended March 31, 2008 or 2009.

 

Unrecognized compensation expense of outstanding stockoptions at March 31, 2009 was approximately $16.3 million, which isexpected to be recognized over a weighted average period of 3 years.

 

Information regarding the fair value of stock optionsgranted, and the weighted-average assumptions used to obtain the fair values,for the respective periods follows:

 
| ** **           | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|
| ** **           | ** ** | **2008**                                               | ** ** | **2009** | ** ** |
| Fair value per share |       | $                                                      | 5.27       |   | $ | 4.47 |   |
| Risk free rate       |       | 2.6                                                    | %          | 1.6 | % |
| Expected term        |       | 4.6 yrs                                                |       | 4.4 yrs |   |
| Volatility           |       | 55                                                     | %          | 67 | % |
| Dividend yield       |       | 0                                                      | %          | 0 | % |
|                 |       |                                                   |       |   |   |
|                      |            |                                                        |            |  |  |  |  |

 

Key assumptions used to estimate the fair value ofstock awards are as follows:

 

*Risk Free Rate:* The risk-free rate is determined byreference to the U.S. Treasury yield curve in effect at or near the time ofgrant for the expected term of the award.

 

*Expected Term* : The expected term represents theperiod that the Company’s stock-based awards are expected to be outstanding andis determined based on historical experience of similar awards, givingconsideration to the contractual term of the awards, vesting schedules andexpectations of employee exercise behavior.

 

*Volatility*: The Company’s estimate of expected volatility is based on the  historical volatility of the Company’s commonstock over the expected life of the options as this represents the Company’sbest estimate of future volatility.

 

*Dividend Yield:* The dividend yield assumption is basedon the Company’s history and expectation of dividend payouts.

 

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Activity under the Company’s stock option plans forthe three months ended March 31, 2009 was as follows (option shares inthousands):

 
| ** **                                        | ** ** | **Shares  available  for grant** | ** ** | **Outstanding  options** | ** ** | **Weighted  average  exercise  price per  share** | ** ** | **Aggregate  intrinsic  value (in  thousands)** | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Balance at December 31, 2008                 |       | 3,610                                 |       | 4,428                    |       | $                                                      | 11.81      |                                                 | $          | 3,978                                                                    |       | 6.8 |   |
| Annual reserve addition (1)                       |       | 1,000                                 |       | —                   |       | —                                                 |       |                                                 |       |                                                                     |       |
| Granted                                           |       | (1,711                                | )          | 1,711                    |       | 8.36                                                   |       |                                                 |       |                                                                     |       |
| Exercised                                         |       | —                                |       | (75                      | )          | 1.03                                                   |       |                                                 |       |                                                                     |       |
| Forfeited, expired, exchanged or canceled (2)     |       | 155                                   |       | (183                     | )          | 13.73                                                  |       |                                                 |       |                                                                     |       |
| Balance at March 31, 2009                    |       | 3,054                                 |       | 5,881                    |       | $                                                      | 10.88      |                                                 | $          | 3,365                                                                    |       | 7.8 |   |
|                                              |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Vested or expected to vest at March 31, 2009 |       |                                  |       | 5,361                    |       | $                                                      | 10.96      |                                                 | $          | 3,354                                                                    |       | 7.6 |   |
|                                              |       |                                  |       |                     |       |                                                   |       |                                                 |       |                                                                     |       |
| Exercisable at March 31, 2009                |       |                                  |       | 2,597                    |       | $                                                      | 11.05      |                                                 | $          | 3,299                                                                    |       | 6.0 |   |

 

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|   | (1)    | The 2004 Equity  Incentive Plan provides for an automatic, annual increase on the first of  each year in an amount equal to the lesser of: a) 1,000,000 shares; b) 4% of  the number of outstanding common shares on the last day of the previous  fiscal year; or c) such lesser amount as determined by the board of  directors. The annual automatic increase has been approved by shareholders  through December 31, 2014. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (2)    | Shares  forfeited, expired, exchanged or canceled under the 1998 Long-Term Equity  Incentive and Stock Option Plan are not available for re-grant under the 2004  Equity Incentive Plan.                                                                                                                                                                                                                                            |

 

The total intrinsic value of options exercised duringthe three months ended March 31, 2008 and 2009 was $2.6 million and$400,000, respectively.

 

**(9) Commitments andContingencies**

 

***Warranties and Indemnification***

 

The Company’s on demand application service istypically warranted to perform in accordance with its user documentation.

 

The Company’s arrangements generally include certain provisionsfor indemnifying customers against liabilities if its products or servicesinfringe a third-party’s intellectual property rights.  To date, theCompany has not incurred any material costs as a result of suchindemnifications and has not accrued any liabilities related to suchobligations in the accompanying consolidated financial statements.

 

The Company has entered into service level agreementswith a number of its customers warranting certain levels of uptime reliabilityand permitting those customers to receive credits or terminate their licenseagreements in the event that the Company fails to meet those levels.  Todate, the Company has not provided any material credits, or cancelled anyagreements related to these service level agreements.

 

The Company has also agreed to indemnify its directorsand executive officers for costs associated with any fees, expenses, judgments,fines and settlement amounts incurred by any of these persons in any action orproceeding to which any of those persons is, or is threatened to be, made aparty by reason of the person’s service as a director or officer, including anyaction by the Company, arising out of that person’s services as the Company’sdirector or officer or that person’s services provided to any other company orenterprise at the Company’s request.

 

***Litigation***

 

From time to time, the Company is involved in legalproceedings arising in the normal course of business.  The Companybelieves that the resolution of these matters will not have a material effecton the Company’s consolidated financial position, results of operations orliquidity.

 

**(10) Income Taxes**

 

The provision for income taxes of $153,000 in thethree months ended March 31, 2009, consists primarily of state taxes andforeign taxes withheld.  Our effective tax rate differs from the federalstatutory rate primarily due to the utilization of net operating losscarryforwards, foreign rate differentials, and non-deductible meal andentertainment expenses.  As of December 31, 2008 and March 31, 2009,the Company had an insignificant amount of unrecognized tax benefits, none ofwhich would materially affect its effective tax rate if recognized.  The 

 

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Company does notexpect that the amount of unrecognized tax benefits will significantly increaseor decrease within the next twelve months.  The Company’s policy is torecognize interest and penalties on unrecognized tax benefits as interestexpense and other expense, respectively, in its Consolidated Statements ofOperations.  The amount of interest and penalties for the three monthsended March 31, 2009 was insignificant.  Tax years beginning in 2005are subject to examination by taxing authorities, although net operating lossand credit carry forwards from all years are subject to examinations andadjustments for at least three years following the year in which the attributesare used. The jurisdictions which could be subject to examination include theU.S., Montana, Illinois, California, Massachusetts, New York, United Kingdom,Germany, Australia, Japan, Canada and the Netherlands.

 

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**Item2.**                                   **Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*Inthis report, the terms “RightNow Technologies,” “RightNow,” “Company,” “we,” “us”and “our” refer to RightNow Technologies, Inc. and its subsidiaries.*

 

***Cautionary Statement***

 

*Allstatements included or incorporated by reference in this report, other thanstatements or characterizations of historical fact, are forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. These forward-looking statements are based on our currentexpectations, estimates and projections about our industry, management’sbeliefs, and certain assumptions made by us, all of which are subject tochange. Forward-looking statements can often be identified by words such as “anticipates,”“expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,”“will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similarexpressions, and variations or negatives of these words, and include, but arenot limited to, statements regarding projected results of operations,management’s future strategic plans, market acceptance and performance of ourproducts, our ability to retain and hire key executives, sales and technicalpersonnel and other employees in the numbers, with the capabilities, and at thecompensation levels needed to implement our business and product plans, thecompetitive nature of and anticipated growth in our markets, our accountingestimates, and assumptions and judgments. These forward-looking statements arenot guarantees of future results and are subject to risks, uncertainties andassumptions that are difficult to predict and that could cause our actualresults to differ materially and adversely from those expressed in anyforward-looking statement. The risks and uncertainties referred to aboveinclude, but are not limited to, general economic conditions; fluctuations inforeign currency exchange; our business model; our ability to develop oracquire, introduce, market and gain market acceptance for new products andenhancements to existing products in a cost-effective and timely manner;the gain or loss of key customers; competitive pressures and other similarfactors such as the availability and pricing of competing products andtechnologies and the resulting effects on sales and pricing of our products;our ability to expand or contract operations and grow profitability; the rateat which our present and future customers adopt our existing and futureproducts and services; possible fluctuations in our operating results includingour revenue mix and our rate of growth; interruptions or delays in our hostingoperations; breaches of our security measures;**our ability to protectour intellectual property from infringement, and to avoid infringing on theintellectual property rights of third parties; the credit markets and potentialimpact on the recoverability of our portfolio of auction rate securities; ourability to sell auction rate securities under a put option with our broker, anyunanticipated ambiguities in fair value accounting standards; fluctuations inour operating results from the impact of stock-based compensation expense; ourability to manage and expand our partner relationships; our ability to hire,retain and motivate our employees and manage our growth; the impact ofpotential acquisitions, if any; and various other factors, some of which aredescribed under the section below entitled “Risk Factors,” in Item 1A ofthis report. These forward-looking statements speak only as of the date of thisreport. We undertake no obligation to revise or update publicly anyforward-looking statement for any reason, except as otherwise required by law.*

 

***Overview***

 

RightNowTechnologies (“we”, “us”, “our”, the “Company” or “RightNow”) provides ondemand customer relationship management (“CRM”) software and services that helpconsumer-centric organizations improve customer experiences, while reducingcosts. In today’s competitive business environment, we believe providingsuperior customer experiences can be a powerful way for companies to drivesustainable differentiation. RightNow’s technology enables an organization’sservice, marketing and sales personnel to leverage a common applicationplatform to deliver service, to market and to sell through phone, email, weband chat. Additionally, through our on demand delivery approach, orsoftware-as-a-service (“SaaS”), we are able to eliminate much of the complexityassociated with traditional on premise solutions, to implement rapidly, and toprice our solutions at a level that results in a lower cost of ownershipcompared to on premise solutions. Our value-added services, including businessprocess optimization and lifetime product tune-ups, are directed towardimproving our customers’ efficiency, increasing user adoption and assisting ourcustomers to maximize the return on their investment. Approximately 1,900corporations and government agencies worldwide depend on RightNow to achievetheir strategic objectives and better meet the needs of those they serve.

 

We released ourinitial version of RightNow Service TM in 1997.  This product addressed thenew customer service needs resulting from the increasing use of the Internet asa customer service channel.  Since then, we have significantly enhancedproduct features and functionality to address customer service needs acrossmultiple communication channels, including web, interactive voice, email, chat,telephone and proactive outbound email communications. We have also addedseveral products that are complementary to our RightNow Service solution,including RightNow Marketing TM, RightNow Sales TM and RightNow Feedback TM whichautomate aspects of marketing campaigns, sales operations, and customermonitoring.  In February 2007, we initiated a quarterly release cyclewhich allows us to deliver new product capabilities to customers every threemonths.  The latest of our quarterlyreleases is RightNow February ’09, which includes new functionality tohelp companies with product registrations and to facilitate crosssell/upsell.  To date, approximately 80%to 90% of our software, hosting and support revenue has been generated by theRightNow Service suite.

 

Our productsserved more than 606 million customer interactions, or unique sessions hostedby our solutions, during the three months ended March 31, 2009. Wedistribute our solutions primarily through direct sales efforts and to a lesserextent through indirect channels.

 

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***Sources of Revenue***

 

Our revenue iscomprised of fees for software, hosting and support, and fees for professionalservices.

 

Software, hostingand support revenue includes fees earned under subscriptions and softwarelicense arrangements. Subscription arrangements include a bundled fee to accessthe software and data through our hosting services, and support services.Subscription revenue is recorded ratably over the length of the agreement. Ourhosting services provide remote management and maintenance of our software andcustomers’ data which is physically located in third party facilities.Customers’ access “hosted” software and data through a secure Internetconnection. Support services include technical assistance for our softwareproducts and unspecified product upgrades and enhancements on a when and ifavailable basis.

 

Licensearrangements can be over time (a “term” license) or perpetual. For termlicenses, software, hosting and support revenue is recognized ratably over thelength of the agreement. Perpetual license revenue is generally recorded infull upon delivery of the license, and the hosting and support elements arerecognized ratably over the contractual period.

 

Our salesarrangements generally provide customers with the right to use our software upto a maximum number of users or transactions. A number of our arrangementsprovide for additional fees for usage above the maximum, which are billed andrecognized into revenue when determinable and earned.

 

Professionalservices revenue is comprised of revenue from consulting, education,development services, and reimbursement of related travel costs. Consulting andeducation services include implementation and best practices consulting.Development services include customizations and integrations for a client’sspecific business application.  Professional services revenue increasedfrom 25% of total revenue in the three months ended March 31, 2008 to 28%of total revenue in the three months ended March 31, 2009.

 

Professionalservices are typically sold with initial sales arrangements and thenperiodically over the client engagement. Our typical education courses arebilled on a per person, per class basis.

 

Depending on thesize and complexity of the client project, our consulting or developmentservices contracts are either fixed price/fixed scope or, more frequently, billedon a time and materials basis. We have determined that the professionalservices element of our software and subscription arrangements is not essentialto the functionality of the software.

 

***Cost of Revenue and Operating Expenses***

 

*Costof Revenue.*  Cost of revenue consists primarily of salaries and related expenses(such as employee benefits and payroll taxes) for our hosting, support andprofessional services organizations, third-party costs and equipmentdepreciation relating to our hosting services, third-party costs for voiceenabled CRM applications, travel expenses related to providing professionalservices to our clients, amortization of acquired intangible assets andallocated overhead. We allocate most overhead expenses, such as office supplies,computer supplies, utilities, rent, and depreciation for furniture andequipment, based on headcount. As a result, overhead expenses are reflected ineach cost of revenue and operating expense category.

 

*Salesand Marketing Expenses. * Sales and marketing expenses consist primarily ofsalaries and related expenses for employees in sales and marketing, includingcommissions and bonuses, advertising, marketing events, corporatecommunications, product management expenses, travel costs and allocated overhead.For subscription arrangements, we expense the related sales commission inproportion to the revenue recognized.  We expense our sales commissions onlicense and professional service arrangements when earned, which is typicallyat the time the related sale is invoiced to the client.

 

*Researchand Development Expenses. * Research and development expenses consist primarilyof salary and related expenses for development personnel and costs related tothe development of new products, enhancement of existing products, translationfees, quality assurance, testing and allocated overhead. To date, we have notcapitalized any software development costs because the timing of the commercialreleases of our products has substantially coincided with the attainment of technologicalfeasibility. As a result, research and development costs have been expensed asincurred.

 

*Generaland Administrative Expenses*.  General and administrative expenses consistprimarily of salary and related expenses for management, finance and accounting,legal, information systems and human resources personnel, professional fees,other corporate expenses and allocated overhead.

 

***Critical Accounting Policies and Estimates***

 

Our financialstatements and accompanying notes are prepared in accordance with accountingprinciples generally accepted in the United States.  Preparing financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses and disclosures of contingentassets and liabilities.  Managementevaluates these estimates on an on-going basis using historical experience andother factors, including the current economic environment, and managementbelieves these estimates to be reasonable under the circumstances.  Estimates and assumptions are adjusted whenfacts and circumstances dictate. Illiquid credit markets, volatile equity markets, foreign currencyfluctuations, and declines in consumer spending have combined to increase theuncertainty inherent in such estimates and assumptions.  These assumptions are affected by management’sapplication of accounting policies. Our critical accounting policies includerevenue recognition, valuation of receivables and deferred tax assets, andaccounting for share-based compensation. 

 

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Significant items subjectto such estimates and assumptions include: elements comprising our software,hosting and support sales arrangements and whether the elements havestand-alone and/or fair value; whether the fees charged for our products andservices are fixed or determinable, the carrying amount of property andequipment and intangible assets; estimates regarding the recoverability andrespective fair value of auction-rate securities and all other investments;valuation allowances for receivables and deferred income tax assets; andestimates of expected term and volatility in determining stock-basedcompensation expense.   As future eventsand their effects cannot be determined with precision, actual results coulddiffer significantly from those estimates.

 

***Revenue Recognition***

 

We sell themajority of products under subscription arrangements (“subscriptions”). For abundled fee, subscriptions provide the customer with access to the software anddata over the Internet, or on demand, and provide technical support servicesand software upgrades when and if available. Under subscriptions, customers donot have the right to take possession of the software and, in accordance withEITF 00-03, such arrangements are considered service contracts which areoutside the scope of SOP 97-2. Accordingly, we account for sales ofsubscriptions under SAB 104 and EITF 00-21. We recognize subscriptionrevenue ratably over the length of the agreement and professional services arerecognized as incurred based on their relative fair values, in accordance withEITF 00-21.

 

To a lesserextent, we sell products under software license arrangements (“licenses”) andaccount for them in accordance with SOP 97-2 and SOP 98-9. Licensesgenerally include multiple elements that are delivered up front or over time.For example, under a term license, we deliver the software up front and providehosting and support services over time. Fair value for each element in alicense does not exist since none are sold separately, and consequently, thebundled revenue is recognized ratably over the length of the agreement. Under aperpetual license, vendor specific objective evidence of fair value of thehosting and support elements is based on the price charged at renewal when soldseparately, and therefore the license element is recognized immediately intorevenue upon delivery using the residual method, and the hosting and supportelements are recognized ratably over the contractual term.

 

The application ofthese rules requires judgment, including the identification of individualelements in multiple element arrangements, whether there is objective andreliable evidence of fair value, including vendor specific objective evidence (“VSOE”)of fair value, for some or all elements. Changes to the elements in our salesarrangements, or our ability to establish VSOE or fair value for those elementsmay result in a material change to the amount of revenue recorded in a givenperiod.

 

Fees charged forprofessional services are recognized when delivered. We believe the fees forprofessional services qualify for separate accounting because: a) theservices have value to the customer on a stand-alone basis; b) objectiveand reliable evidence of fair value exists for these services; andc) performance of the services is considered probable and does not involveunique customer acceptance criteria.

 

Our standardpayment terms are net 30, although payment within 90 days is considerednormal. We periodically provide extended payment terms and we consider any feesdue beyond 90 days to not be fixed or determinable.  In such cases, judgment is required indetermining the appropriate timing of revenue recognition. Changes to ourpractice of providing extended payment terms or providing concessions followinga sale, may result in a material change to the amount of revenue recorded in agiven period.

 

***Allowance for doubtful accounts***

 

We regularlyassess the collectability of outstanding customer invoices and, in so doing wemaintain an allowance for estimated losses resulting from the non-collection ofcustomer receivables. In estimating this allowance, we consider factors suchas: historical collection experience; a customer’s current creditworthiness;customer concentration; age of the receivable balance; and general economicconditions that may affect a customer’s ability to pay. Actual customercollections could differ from our estimates and exceed our related lossallowance.

 

***Income Taxes***

 

We record incometaxes under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. Deferred tax assets and liabilitiesare measured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect of a change in tax rates on deferred tax assets andliabilities is recognized in income in the period that includes the enactmentdate. When applicable, a valuation allowance is established to reduce anydeferred tax asset when it is determined that it is more likely than not thatsome portion of the deferred tax asset will not be realized.

 

We haveestablished a valuation allowance equal to our net deferred tax assets due touncertainties regarding the realization of our net operating losscarryforwards, tax credits, and deductible timing differences. The uncertaintyof realizing these benefits is based primarily on our lack of taxable earnings.

 

Effective January 1,2007, the Company adopted Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting forUncertainties in Income Taxes, an Interpretation of FASB Statement No. 109*(“FIN 48”) and it did not have a significant impact on our financialposition or results of operations. FIN 48 requires judgment whenevaluating tax positions. Our judgment includes, but is not limited to, anevaluation of our material positions taken on tax provisions and tax returnfilings.  The ultimate resolution of tax issues may result in a significantchange to our recorded tax assets and liabilities.

 

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***Share-Based Compensation***

 

We recordshare-based payment arrangements in accordance with Statement of FinancialAccounting Standards No. 123(R), *ShareBased Payment*, (“SFAS 123R”). SFAS 123R requires the cost of share-based payment arrangements to berecorded in the statement of operations.  Prior to 2006, the estimatedcost of share-based payment arrangements was disclosed in a footnote to thefinancial statements.  Share-based compensation amounts are affected byour stock price as well as our assumptions regarding the expected volatility ofour stock, our employee stock option exercise forfeitures, and the relatedincome tax effects.  Our assumptions are based primarily on our historicalinformation, some of which was developed when we were a private company.

 

***Recently Issued Accounting Standards***

 

In April 2009,the Financial Accounting Standards Board (“FASB”) issued FASB Staff PositionFAS 157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly* (“FSP FAS 157-4”). FSPFAS 157-4 amends SFAS 157 and provides additional guidance for estimating fairvalue in accordance with SFAS 157 when the volume and level of activity for theasset or liability have significantly decreased and also includes guidance onidentifying circumstances that indicate a transaction is not orderly for fairvalue measurements. This FSP shall be applied prospectively with retrospectiveapplication not permitted. This FSP shall be effective for interim and annualperiods ending after June 15, 2009, with early adoption permitted forperiods ending after March 15, 2009. An entity early adopting this FSPmust also early adopt FSP FAS 115-2 and FAS 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments* (“FSP FAS 115-2”and “FAS 124-2”). Additionally, if an entity elects to early adopt either FSPFAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments* (“FSP FAS 107-1” and “APB 28-1”)or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this FSP. Weare currently evaluating this new FSP but do not believe that it will have asignificant impact on the determination or reporting of our financial results.

 

In April 2009,the Financial Accounting Standards Board (“FASB”) issued FASB Staff PositionFAS 115-2 and FAS 124-2. This FSP amends SFAS 115, *Accountingfor Certain Investments in Debt and Equity Securities*,  SFAS 124, *Accounting for CertainInvestments Held by Not-for-Profit Organizations*, and EITF Issue No. 99-20,*Recognition of Interest Income and Impairment onPurchased Beneficial Interests and Beneficial Interests That Continue to BeHeld by a Transferor in Securitized Financial Assets*, to make theother-than-temporary impairments guidance more operational and to improve thepresentation of other-than-temporary impairments in the financial statements.This FSP will replace the existing requirement that the entity’s managementassert it has both the intent and ability to hold an impaired debt securityuntil recovery with a requirement that management assert it does not have theintent to sell the security, and it is more likely than not it will not have tosell the security before recovery of its cost basis. This FSP providesincreased disclosure about the credit and noncredit components of impaired debtsecurities that are not expected to be sold and also requires increased andmore frequent disclosures regarding expected cash flows, credit losses, and anaging of securities with unrealized losses. Although this FSP does not resultin a change in the carrying amount of debt securities, it does require that theportion of an other-than-temporary impairment not related to a credit loss fora held-to-maturity security be recognized in a new category of othercomprehensive income and be amortized over the remaining life of the debtsecurity as an increase in the carrying value of the security. This FSP shallbe effective for interim and annual periods ending after June 15, 2009,with early adoption permitted for periods ending after March 15, 2009. Anentity may early adopt this FSP only if it also elects to early adopt FSP FAS157-4. Also, if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS107-1 and APB 28-1, the entity also is required to early adopt this FSP. We arecurrently evaluating this new FSP but do not believe that it will have asignificant impact on the determination or reporting of our financial results.

 

In April 2009,the Financial Accounting Standards Board (“FASB”) issued FASB Staff PositionFAS 107-1 and APB 28-1. This FSP amends SFAS No. 107, *Disclosuresabout Fair Value of Financial Instruments*, to require disclosuresabout fair value of financial instruments not measured on the balance sheet atfair value in interim financial statements as well as in annual financialstatements. Prior to this FSP, fair values for these assets and liabilitieswere only disclosed annually. This FSP applies to all financial instrumentswithin the scope of SFAS 107 and requires all entities to disclose the method(s) andsignificant assumptions used to estimate the fair value of financialinstruments. This FSP shall be effective for interim periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009. An entity may early adopt this FSP only if it also elects to early adoptFSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not requiredisclosures for earlier periods presented for comparative purposes at initialadoption. In periods after initial adoption, this FSP requires comparativedisclosures only for periods ending after initial adoption. We are currentlyevaluating the disclosure requirements of this new FSP.

 

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**Resultsof Operations**

 

The followingtable sets forth certain consolidated statements of operations data for each ofthe periods indicated, expressed as a percentage of total revenue:

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|                              |       |                                             |       |   |   |
| Revenue:                          |       |                                             |       |   |   |
| Software, hosting and support     |       | 75                                               | %          | 72 | % |
| Professional services             |       | 25                                               |       | 28 |   |
| Total revenue                     |       | 100                                              |       | 100 |   |
| Cost of revenue:                  |       |                                             |       |   |   |
| Software, hosting and support     |       | 15                                               |       | 14 |   |
| Professional services             |       | 22                                               |       | 19 |   |
| Total cost of revenue             |       | 37                                               |       | 33 |   |
| Gross profit                      |       | 63                                               |       | 67 |   |
| Operating expenses:               |       |                                             |       |   |   |
| Sales and marketing               |       | 51                                               |       | 41 |   |
| Research and development          |       | 14                                               |       | 13 |   |
| General and administrative        |       | 11                                               |       | 10 |   |
| Total operating expenses          |       | 76                                               |       | 64 |   |
| Income (loss) from operations     |       | (13                                              | )          | 3 |   |
| Interest and other income, net    |       | 3                                                |       | 1 |   |
| Income (loss) before income taxes |       | (10                                              | )          | 4 |   |
| Provision for income taxes        |       | —                                           |       | — |   |
| Net income (loss)                 |       | (10                                              | )%         | 4 | % |

 

The followingtable sets forth the number of our on demand customer interactions and also ourrevenue by type and geography expressed as a percentage of total revenue foreach of the periods indicated.

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                         | ** ** | **2009** | ** ** |
|                                                           |       |                                             |       |   |   |
| Customer interactions (in millions)                            |       | 463                                              |       | 606 |   |
| Revenue by type:                                               |       |                                             |       |   |   |
| Recurring (subscriptions, term licenses, hosting  and support) |       | 75                                               | %          | 72 | % |
| Professional services                                          |       | 25                                               |       | 28 |   |
| Revenue by geography in:                                       |       |                                             |       |   |   |
| North America                                                  |       | 67                                               | %          | 75 | % |
| Europe                                                         |       | 25                                               |       | 18 |   |
| Asia Pacific                                                   |       | 8                                                |       | 7 |   |

 

*QuarterOverview*

 

Total revenue forthe first quarter of 2009 increased 10% over the first quarter of 2008. Software, hosting and support revenue, during the first quarter of 2009increased 6% compared to the first quarter of 2008, due to expansion within thecurrent customer base, and new customer acquisitions.  Professional services revenue increased 20%over the first quarter of 2008, due to capacity growth and improved billableutilizations.

 

During 2008, wecontinued to invest in our operations by adding professional service personneland partners to support our solution offerings, and added capacity to ourhosting and technical support organizations to broaden and enhance our solutionofferings.  The increase in expenses from these investments was offset by aforeign currency exchange rate benefit, and expense management.  These factors decreased total expenses inabsolute dollars and as a percentage of revenue during the quarter ended March 31,2009 compared to the quarter ended March 31, 2008. Consequently, ouroperating income (loss) as a percentage of revenue improved to 3% during thequarter ended March 31, 2009 compared to (13) % during the quarter ended March 31,2008.

 

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Our results wereimpacted by the strength of the U.S. dollar in the first quarter of 2009relative to the British pound, Australian dollar, and Euro when compared to thefirst quarter of 2008. Although we report our actual results in U.S. Dollars,we conduct a significant number of transactions in currencies other thanU.S. Dollars. Therefore, we discuss constant currency information toprovide a framework for assessing how our underlying business performedexcluding the effect of foreign currency rate fluctuations.  Constant currency discussions herein are based on comparison to currencyexchange rates during the prior year.  For example, total revenue in thefirst quarter of 2009 increased by $3.1 million, or 10% over total revenuereported in the first quarter of 2008.  If currency exchange rates in thefirst quarter of 2009 had remained constant with the first quarter 2008,revenue as of March 31, 2009 would have increased by approximately anadditional $2.2 million, or a further 6%. In other words, the change inexchange rates between the first quarter of 2008 and 2009 had unfavourableimpact to revenue of approximately $2.2 million or 6%.  Using thesame methodology, the change in exchange rates between the first quarter of2008 and 2009 had unfavorable impact on deferred revenue of $6.7 million or0.5%.  Expenses associated with international revenue are primarily paidin local currency, which generally provides a natural hedge to offset therevenue impact.  These expenses as of March 31, 2009 decreased $1.9million on a constant currency basis as compared to the respective weightedaverage exchange rates during the quarter ended March 31, 2008.  The expenses most significantly exposed tocurrency exchange fluctuations are within sales and marketing and professionalservices cost of revenue. 

 

For the quarterended March 31, 2009, we generated $4.9 million of cash from operationscompared to $3.7 million of cash from operations in the quarter ended March 31,2008.  Our cash and investment balances increased to $93.0 million at March 31,2009 from $90.8 million at December 31, 2008, partially due to $4.9million of cash generated from operations, offset by the use of $1.8 million torepurchase 231,000 shares of our common stock, thus completing our $15 millionboard approved stock buyback program.

 

As of March 31,2009, we had an accumulated deficit of $63.0 million.  This deficit andour historical operating losses were primarily the result of costs incurred inthe development, sales and marketing of our products and for general andadministrative purposes.

 

***Three Months Ended March 31, 2008 and 2009***

 

***Revenue***

 
| ** **                           | ** ** | **Three Months Ended March  31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Software, hosting and support        |       | $                                                | 24,556     |   | $ | 26,045 |   | 6 | % |
| Professional services                |       | 8,342                                            |       | 9,992 |   | 20 |   |
| Total revenue                        |       | $                                                | 32,898     |   | $ | 36,037 |   | 10 | % |

 

Total revenue forthe three months ended March 31, 2009 was $36.0 million, an increase of$3.1 million, or 10%, over total revenue of $32.9 million for the three monthsended March 31, 2008.  If currency exchange rates in the firstquarter of 2009 had remained constant with the first quarter 2008 rates,revenue as of March 31, 2009 would have increased by approximately anadditional $2.2 million or a further 6% with the majority of the currency rateimpact within software, hosting and support revenue.

 

Software, hostingand support revenue comprised of subscriptions, term licenses, hosting, supportand perpetual license revenue, for the three month period ended March 31,2009 increased 6% over the comparable 2008 three month period, primarily due toexpansion within the current customer base, and new customer acquisitions overthe comparable period.  We believe our latest product, RightNow 8, appealsto large customers because of its robust performance characteristics, which inturn has driven larger average purchase volumes and higher average sellingprices per customer on a trailing twelve month basis.  Average revenuewithin the existing customer base increased as a result of sales of capacityadditions, contract renewals and new products.  Customer interactions, ameasure of unique customer sessions hosted in our data centers and customerusage, exceeded 606 million in the quarter ended March 31, 2009 ascompared to 463 million in the quarter ended March 31, 2008.   If currency exchange rates in the firstquarter of 2009 had remained constant with the first quarter 2008 rates,software, hosting and support revenue as of March 31, 2009 would haveincreased by approximately an additional $1.6 million, or a further 7%.

 

Professionalservices revenue increased $1.7 million, or 20%, in the quarter ended March 31,2009 over the comparable 2008 quarter. We believe the growth in professional services revenue is primarily dueto larger project implementations, as a result of the release of RightNow 8.0,which has created expanded opportunities within the contact center space.  Customers generally purchase professionalservices with initial subscription or license arrangements, and periodicallyover the life of the contract.  Weincreased capacity to deliver professional services by growing headcount inthat organization to 171 at March 31, 2009 from 153 at March 31,2008.

 

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The mix ofprofessional services revenue affects our profitability from period-to-perioddue to the lower gross profit earned on professional services as compared tothe gross profit earned on software, hosting and support revenue. Professional services revenue represented 28% and 25% of total revenue in thethree months ended March 31, 2009 and 2008, respectively.

 

Revenue fromEuropean customers decreased to 18% of total revenue in the quarter ended March 31,2009 from 25% of total revenue in the quarter ended March 31, 2008, whilerevenue from Asia Pacific clients was 7% of total revenue in the quarter ended March 31,2009 compared to 8% of total revenue in the quarter ended March 31,2008.  Total revenue outside North America decreased to 25% of revenue inthe three months ended March 31, 2009, as compared to 33% for thecomparative three month period ended March 31, 2008, due primarily to anegative currency impact in the first quarter of 2009 and growth in NorthAmerican revenue as compared to the comparable period one year earlier.

 

***Cost of Revenue***

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Software, hosting and support        |       | $                                                | 5,035      |   | $ | 4,949 |   | (2 | )% |
| Professional services                |       | 7,285                                            |       | 7,008 |   | (4 | ) |
| Total cost of revenue                |       | 12,320                                           |       | 11,957 |   | (3 | )% |
|                                      |            |                                                  |            |  |  |  |  |  |  |

 

Total cost ofrevenue for the quarter ended March 31, 2009 was $12.0 million, a decreaseof $363,000, or 3%, over total cost of revenue of $12.3 million for the quarterended March 31, 2008.

 

Cost of software,hosting and support decreased $86,000, or 2%, in the first quarter of 2009 overthe first quarter of 2008 due to expense management during 2009, includingimproved voice hosting costs.  Thesedecreases were offset somewhat by increased headcount to assist with voice andnon-voicehostingvolume in the quarter ended March 31, 2009 compared to the quarter ended March 31,2008.    Average employee count in our hosting and technicalsupport operations was 93 during the first quarter of 2009 as compared to 84during the first quarter of 2008, which increased salaries and related expenses(i.e. salaries, bonuses, and stock-based compensation) by $131,000 and increasedcommon expense allocation (such as payroll taxes, benefits, office rent,supplies and other overhead expenses) by $48,000 during the first quarter of2009.  These costs were more than offset by improved voice hostingbandwidth service costs, which decreased $173,000 during the first quarter of2009, and a decrease of approximately $106,000 in depreciation expenseassociated with hosting operations.  As apercent of the associated revenue, software, hosting and support costs were 19%in the three months ended March 31, 2009 as compared to 21% of associatedrevenue in the three months ended March 31, 2008.  The reduction in the software, hosting andsupport costs as a percentage of revenue was due to improved leverage in ourbusiness model, combined with expense management and favorable currency impactin the first quarter of 2009 as compared to the first quarter of 2008.

 

Cost ofprofessional services decreased $277,000, or 4%, in the quarter ended March 31,2009 over the quarter ended March 31, 2008. The expense reduction wasattributable to a favorable foreign currency exchange rate impact of $641,000 anda reduction in travel related expenses, offset by expense increases due toincreased headcount and higher utilization of third-party partners that assistedin the deployment of professional services. Average employee count in ourprofessional service operations was 171 during the first quarter of 2009compared to 153 during the first quarter of 2008.  As a percent of the associated revenue,professional services costs were 70% in the three months ended March 31,2009, as compared to 87% in the three months ended March 31, 2008,respectively.  The reduction in the professional service costs as apercentage of revenue was due to favorable currency impact and expensemanagement in the first quarter of 2009 as compared to the comparable periodone year earlier.  Employee training,customer scheduling requirements, and use of third-party resources cancause fluctuation in professional service costs as a percentage of revenue.

 

***Operating Expenses***

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                                             |       |   |   |   |   |
| Sales and marketing                  |       | $                                                | 16,818     |   | $ | 14,863 |   | (12 | )% |
| Research and development             |       | 4,486                                            |       | 4,756 |   | 6 |   |
| General and administrative           |       | 3,516                                            |       | 3,446 |   | (2 | ) |
| Total operating expenses             |       | $                                                | 24,820     |   | $ | 23,065 |   | (7 | )% |

 

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*Salesand Marketing Expenses*

 

Sales andmarketing expenses were $14.9 million in the first quarter of 2009, a decreaseof $1.9 million, or 12%, over sales and marketing expenses of $16.8 million inthe first quarter of 2008. The decrease was due primarily to a $1.0 million favorableforeign currency exchange rate impact, and reduced headcount.  Average employee count in our sales andmarketing organization decreased to 253 during the first quarter of 2009 from264 during the first quarter of 2008, stemming from an expense reduction effortin the fourth quarter of 2008.  Commissionsand bonus expense decreased due to headcount reduction and decreased salescompared to the first quarter of 2008.  Travelrelated costs decreased due to improved expense management.

 

Under licensearrangements, we expense sales incentives when earned, which is typically uponcontract signing.  Under subscription arrangements, we defer the relatedsales incentive costs and expense them in proportion to the revenuerecognized.    Net sales incentive expense was $2.8 million and$3.2 million in the quarter ended March 31, 2009 and 2008,respectively.  Our deferred commissions were$8.2 million and $7.7 million at December 31, 2008 and March 31, 2009,respectively.

 

*Researchand Development Expenses*

 

Research and developmentexpenses were $4.8 million in the three months ended March 31, 2009, anincrease of $270,000, or 6%, over research and development expenses of $4.5million in the three months ended March 31, 2008, primarily due to growthin headcount and expenditures pertaining to quality assurance software researchand development.  Average employee count in our research and developmentorganization was 144 during the first quarter of 2009 compared to 132 duringthe first quarter of 2008.

 

*Generaland Administrative Expenses*

 

General andadministrative expenses remained relatively constant at $3.4 million, in thefirst quarter of 2009 over the first quarter of 2008 mostly as a result ofexpense management.  Average employees in our general and administrativeorganization were 80 during the first quarter of 2009 compared to 71 during thefirst quarter of 2008.  The growth in headcount attributed to an increaseof $278,000 of personnel related expenses, which include salaries, bonuses,stock-based compensation, and common expense allocation.  These costs wereprimarily offset by a $282,000 reduction in legal fees and third-partyconsulting fees.

 

*Stock-BasedCompensation Expense*

 

Total stock-basedcompensation expense for the three months ended March 31, 2009 was $1.5million as compared to $1.3 million in the three months ended March 31,2008.   Stock-based compensation expense varies from period-to-periodbecause of the number of option shares that are expected to vest, forfeiturerates, and changes in our underlying stock price and valuation assumptions.

 

***Interest and Other Income (Expense), Net***

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)**       | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
|                                       |       |                                             |       |   |   |   |   |
| Interest income                            |       | $                                                | 924        |   | $ | 320 |   | (65 | )% |
| Interest expense                           |       | (4                                               | )          | (3 | ) | n/m |   |
| Other income                               |       | 18                                               |       | 84 |   | 367 |   |
| Total interest and other income,  net |       | $                                                | 938        |   | $ | 401 |   | (57 | )% |

 

Interest incomedecreased 65% in the first quarter of 2009 from the first quarter of 2008 dueto declining investment yields driven by the periodic decreases in the federalfunds rate.  Our investment portfolio consists primarily ofinvestment-grade government agency securities, corporate debt instruments, andauction-rate securities.

 

Other incomeconsists primarily of a gain on our auction-rate securities (“ARS”), which wereoffset by a loss on a put option settlement right associated with theauction-rate securities and losses on transactions denominated in foreigncurrencies.  See Note 3 to our CondensedConsolidated Financial Statement for further discussion on ARS investments andthe related put option.

 

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* *

*Provision for Income Taxes*

 

The provision for income taxes of $153,000 in thethree months ended March 31, 2009 consists primarily of state taxes andforeign taxes withheld.  Our effective tax rate differs from the federalstatutory rate primarily due to the utilization of net operating losscarryforwards, foreign rate differentials, and non-deductible meal andentertainment expenses.  Our effective tax rate in 2009 will depend on anumber of factors, such as the amount and mix of stock-based compensationexpense to be recorded under SFAS 123R, the level of business in state andforeign tax jurisdictions, management’s expectation of the realization ofdeferred tax assets and the associated valuation allowance, and other factors.

 

**Liquidity and Capital Resources**

 
| ** **                                        | ** ** | **Three Months Ended March  31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)**              | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
|                                              |       |                                             |       |   |   |   |   |
| Cash, cash equivalents and short-term investments |       | $                                                | 81,176     |   | $ | 87,979 |   | 8 | % |
| Long-term investments                             |       | 17,810                                           |       | 4,980 |   | (72 | )% |
| Cash provided by operating activities             |       | 3,670                                            |       | 4,886 |   | 33 | % |
|                                                   |            |                                                  |            |  |  |  |  |  |  |

 

At March 31, 2009, cash, cash equivalents, andshort-term investments totaled $88.0 million.  Long-term investmentstotaled approximately $5.0 million.  Inaddition to our cash and short-term investments, other sources of liquidity at March 31,2009 included a $3.0 million bank line of credit facility, under which therehave been no borrowings.

 

Operating activities provided $4.9 million of cashduring the three months ended March 31, 2009, as compared to providing$3.7 million of cash during the three months ended March 31, 2008. Cash flow from operations can vary significantly from quarter-to-quarter formany reasons, including the timing of business in a given period, and customerpayment preferences and patterns.  Strong cash collections from sales inthe fourth quarter of 2008 was the primary driver in the cash provided inoperating activities during the quarter ended March 31, 2009.  Historically, the percentage of businesssigned with monthly or periodic billing terms has ranged from approximately 15to 20%, but during the third and fourth quarters of 2008 it increased toapproximately 25% and remained at approximately 25% as of March 31,2009.  Deferred revenue is not recordedfor subscriptions with monthly or periodic billing terms until the invoices areissued.  A change in the billing practiceresulting in delayed payment or billing terms could have a material adverseeffect on cash provided from operating activities and growth in deferredrevenue.

 

The allowance for uncollectible accounts receivablerepresented approximately 6.5% and 5% of current accounts and term receivablesat March 31, 2009 and at December 31, 2008, respectively. The decline in current accounts receivable and term receivables at March 31,2009 as compared to December 31, 2008 primarily accounted for the increasein the allowance percentage.  Accountsreceivable written off in the first quarter of 2008 were relatively consistentwith the fourth quarter of 2008.  Weregularly assess the adequacy of the allowance for doubtful accounts. Actual write-offs could exceed our estimates and adversely affect operating cashflows in the future.

 

Investing activities used $2.9 million in the threemonths ended March 31, 2009. First quarter 2009 investing activitiesconsisted of net purchases of short-term investments of $2.3 million andapproximately $700,000 of purchased capital expenditures. Capital assetadditions consisted primarily of equipment acquisitions for our hostingoperations and employee growth.

 

Financing activities used $1.6 million in the threemonths ended March 31, 2009, which was primarily due to a 231,000 sharerepurchase of our common stock for $1.8 million, thus completing our $15million board approved stock buyback program.

 

As of March 31, 2009, we held approximately $5.0million in par value auction rate securities (“ARS”) that are subject togeneral credit, liquidity, market, and interest rate risks, which may beexacerbated by U.S. sub-prime mortgage defaults that have affected varioussectors of the financial markets and caused credit and liquidity issues. The ARS are comprised of federally insured student loan bonds.

 

During the fourth quarter of 2008 we executed asettlement agreement with our broker to redeem the ARS held by us at par  commencing June 2010 through July 2012.By accepting the terms of the settlement, we (1) received thenon-transferable right (“put option”) to sell our ARS at par value to thebroker commencing June 2010 through July 2012, and (2) gave thebroker the right to purchase the ARS from us at any time after the executedsettlement agreement date as long as we receive par value. We expect to sellthe ARS under the put option.  However,if we do not exercise the put option during or before July 2012, it willexpire and the broker will have no further rights or obligation to buy theARS.  Redemption of these investments maybe subject to brokerage house default.  Asa result of this settlement, we reclassified the ARS from available for salesecurities to trading securities.  Duringthe first quarter of 2009 we marked to market the investment in accordance withSFAS 115, which resulted in an increase in fair value for a total unrealizedgain of $356,000, included in other expense, net.  Partially offsetting this gain within otherexpense, net was a $339,000 unrealized loss related to the change in fair valueof the put option we obtained pursuant to the settlement agreement. We electedthe fair value option on the put option in accordance with SFAS 159, and assuch, changes in fair value are recorded during each reporting period.  Our 

 

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inability todispose of our ARS prior to June 2010 could negatively impact ourliquidity and cash on hand, which, in turn, could cause us to foregopotentially beneficial operational and strategic transactions or to incuradditional indebtedness.  Additionally,we could be adversely impacted if the broker is unable to meet its obligationsunder the settlement agreement as the broker’s obligations under the put optionare not secured by its assets and do not require the broker to obtain anyfinancing to support its performance obligations under the put option.  As a result, the agreement covers $5.0million par value (fair value $4.6 million) of the ARS held by us as of March 31,2009.  We believe our existing cash andshort-term investments, together with funds generated from operations, shouldbe sufficient to fund operating and investment requirements for at least thenext twelve months. Our future capital requirements will depend on many factors,including our rate of revenue growth and expansion of our sales and marketingactivities, the possible acquisition of complementary products or businesses,the timing and extent of spending required for research and developmentefforts, and the continuing market acceptance of our products. To the extentthat available funds are insufficient to fund our future activities, we mayneed to raise additional funds through public or private equity or debtfinancings. Additional equity or debt financing may not be available on termsfavorable to us or at all.

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2009, we did not have anysignificant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K promulgated by the SEC.

 

**ContractualObligations and Commitments**

 

There have been no material changes to our contractualobligations or commitments since December 31, 2008.

 

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**Item 3.  Quantitative andQualitative Disclosures about Market Risk**

 

*ForeignCurrency Exchange Risk*

 

Our results of operations and cash flows are subjectto fluctuation due to changes in foreign currency exchange rates, particularlychanges in the British pound, Australian dollar, and Euro, because ourcontracts are frequently denominated in local currency. In the future, we mayutilize foreign currency forward and option contracts to manage currencyexposures. We do not currently have any such contracts in place, nor did weenter into any such contracts during the quarters ended March 31, 2009 or March 31,2008.

 

Our results were impacted by the strength of the U.S.dollar in the first quarter of 2009 relative to the British pound, Australiandollar, and Euro when compared to the first quarter of 2008.  Foreign currency fluctuations during thefirst quarter of 2009 decreased revenue by approximately $2.2 million on aconstant currency basis as compared to the weighted average exchange ratesduring the quarter ended March 31, 2008. Additionally, deferred revenue decreased by approximately $6.7 millionon a constant currency basis as compared to the period end rates as of March 31,2008.  Expenses associated withinternational revenue are generally paid in local currency, which generallyprovides a natural hedge to offset the revenue impact.  These expenses in the first quarter of 2009decreased $1.9 million on a constant currency basis as compared to the weightedaverage exchange rates during the quarter ended March 31, 2008.  Continued changes in the dollar relative toother currencies may cause us to experience further impact.

 

*Interest Rate Sensitivity*

 

Our investments consist of short-term and long-term,interest-bearing securities, which are subject to credit and interest raterisk. Our portfolio is investment-grade and diversified among issuers andsecurity types to reduce credit risk.  We manage our interest rate risk bymaintaining a large portion of our investment portfolio in instruments withshort maturities or frequent interest rate resets.  We also manageinterest rate risk by maintaining sufficient cash and cash equivalents suchthat we are able to hold investments until maturity.  If market interestrates were to increase by 100 basis points from the level at March 31,2009, the fair value of our portfolio would decline by approximately $314,000.

 

*Liquidation and Valuation Risk*

 

Our long-term investments consist of approximately$5 million in par value auction rate securities with investment grades ofAAA or AA, as of March 31, 2009. Despite the long-term contractualmaturities of the auction rate securities, all of these securities areconsidered trading securities. Since February 2008, uncertainties in thecredit markets caused all auctions of the Company’s securities to beunsuccessful. During the fourth quarter of 2008 we executed a settlementagreement with our broker to redeem the ARS held by us at par commencing June 2010through July 2012. By accepting the terms of the settlement, we (1) receivedthe non-transferable right (“put option”) to sell our ARS at par value to thebroker commencing June 2010 through July 2012, and (2) gave thebroker the right to purchase the ARS from us at any time after the executedsettlement agreement date as long as we receive par value. We expect to sellthe ARS under the put option. However, if we do not exercise the put optionduring or before July 2012, it will expire and the broker will have nofurther rights or obligation to buy the ARS. Redemption of these investmentsmay be subject to brokerage house default. As a result of this settlement, we reclassified the ARS from availablefor sale securities to trading securities. During the first quarter of 2009, we marked to market the investment inaccordance with SFAS 115, which resulted in an increase in fair value for atotal unrealized gain of $356,000, included in other expense, net.  Partially offsetting this gain within otherexpense, net was a $339,000 unrealized loss related to the put option weobtained pursuant to the settlement agreement. Our inability to dispose of our ARS prior to June 2010 couldnegatively impact our liquidity and cash on hand, which, in turn, could causeus to forego potentially beneficial operational and strategic transactions orto incur additional indebtedness. Additionally, we could be adversely impacted if the broker is unable tomeet its obligations under the settlement agreement as the broker’s obligationsunder the put option are not secured by its assets and do not require thebroker to obtain any financing to support its performance obligations under theput option.  As a result, the agreementcovers $5.0 million par value (fair value $4.6 million) of the ARS held by usas of March 31, 2009.  Based on theCompany’s expected operating cash flows, and other sources and uses of cash,the Company does not anticipate that the lack of liquidity on these investmentswill affect its ability to execute its current business plan. The Company willcontinue to monitor the state of the credit markets and its potential impact,if any, on the fair value and classification of our portfolio of auction ratesecurities.

 

**Item 4.  Controls and Procedures**

 

***(a)******                                ******Evaluationof Disclosure Controls and Procedures***

 

Our management, under the supervision and with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934) as of the end of the period covered by this report. Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective in ensuring that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is (i) recorded, processed, summarized andreported, within the time periods specified in the rules and forms of theSecurities and Exchange 

 

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Commission and (ii) accumulatedand communicated to our management, including our principal executive andprincipal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

 

***(b)******                                ******Changesto Internal Control over Financial Reporting***

 

During the most recent completed fiscal quartercovered by this report, there has been no change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934) that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**Part II.  Other Information**

 

***Item 1.  Legal Proceedings***

*** ***

From time to time, we are involved in legalproceedings in the ordinary course of business.  We believe that theresolution of these matters will not have a material effect on our consolidatedfinancial position, results of operations or liquidity.

 

**Item 1A.  Risk Factors**

** **

A restated description of the risk factors associatedwith our business is set forth below.  This description includes any andall changes (whether or not material) to, and supersedes, the description ofthe risk factors associated with our business previously disclosed in Part 1,Item 1A of our Annual Report on Form 10-K for the year ended December 31,2008.

 

*Before deciding to purchase, hold orsell our common stock, you should carefully consider the risks described below,in addition to the other cautionary statements and risks described elsewhereand the other information contained in this Report and in our other filingswith the SEC, including our reports on Forms 10-Q and 8-K. The risks and uncertaintiesdescribed below are not the only ones we face. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business. If any of these known or unknown risks oruncertainties actually occurs with material adverse effects on RightNow, ourbusiness, financial condition and results of operations could be seriouslyharmed. In that event, the market price for our common stock could decline andyou may lose all or part of your investment.*

 

***General economic conditions could adversely affect ourclients’ ability or willingness to purchase our products, which couldmaterially and adversely affect our results of operations.***

 

Our clients consist of large and small companies innearly all industry sectors and geographies. Potential new clients or existingclients could defer purchases of our products because of unfavorablemacroeconomic conditions, such as fluctuations in currency exchange rates,industry purchasing patterns, industry or national economic downturns, risinginterest rates, and other factors. Our ability to grow revenue may be adverselyaffected by unfavorable economic conditions.

 

During 2008 and in recent months, there has beendeterioration in global economic conditions due to many factors, including thecredit market crisis, reduced credit availability, bank failures, slowereconomic activity, significant expense reductions, bankruptcies, concerns aboutinflation, current recession, and general adverse business conditions. Theseconditions could lead to fewer sales of our products, longer sales cycles,customers requesting longer payment terms, customers failing to pay amountsdue, and slower collections of accounts receivable. All of these factors couldadversely impact our results of operations, cash flow from operations, and ourfinancial position. In addition, we may be forced to respond to an economicdownturn by contracting operations, which we may have difficulties managing ina timely fashion.

 

***We have significant international sales and are subject torisks associated with operating in international markets including the risk offoreign currency exchange rate fluctuations.***

 

International sales comprised 33% and 25% of ourrevenue for the quarters ended March 31, 2008 and 2009, respectively. Weintend to continue to pursue and expand our international business activities.Adverse economic and political conditions could make it difficult for us toincrease our international sales or to operate abroad. International operationsare subject to many inherent risks, including:

 

·                                          fluctuations in foreign currency exchangerates;

 

·                                          political, social and economicinstability, including conflicts in the Middle East and elsewhere abroad,terrorist attacks and security concerns in general;

 

·                                          adverse changes in tariffs and otherprotectionist laws and business practices that favor local competitors;

 

·                                          longer collection periods anddifficulties in collecting receivables from foreign entities;

 

·                                          exposure to different legal standards andburdens of complying with a variety of foreign laws, including employment, tax,privacy and data protection laws and regulations;

 

·                                          reduced protection for our intellectualproperty in some countries;

 

·                                          expenses associated with localizingproducts for foreign countries, including translation into foreign languages;and

 

·                                          import and export license requirementsand restrictions of the United States and each other country in which weoperate.

 

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We believe that international sales will continue torepresent a significant portion of our revenue for the foreseeable future, andthat continued growth will require further expansion of our internationaloperations. A substantial percentage of our international sales are denominatedin the local currency. As a result, an increase in the relative value of thedollar could make our products more expensive and potentially less pricecompetitive in international markets.

 

Margins on sales of our products and services inforeign countries, and on sales of products and services that include costsfrom foreign based employees or foreign suppliers, could be materiallyadversely affected by foreign currency exchange rate fluctuations.  Duringthe quarter ended March 31, 2009, the U.S. dollar fluctuated significantlycompared to the British pound, Australian dollar, and Euro.  Foreigncurrency fluctuations during the first quarter of 2009 decreased revenue byapproximately $2.2 million on a constant currency basis as compared to theweighted average exchange rates during the quarters ended March 31,2008.   Additionally, deferred revenue decreased by approximately$6.7 million on a constant currency basis as compared to the period end ratesas of March 31, 2008.  Expenses associated with international revenueare generally paid in local currency, which generally provides a natural hedgeto offset the revenue impact.  These expenses in the first quarter of 2009decreased $1.9 million on a constant currency basis as compared to the weightedaverage exchange rates during the quarters ended March 31, 2008.  TheCompany’s primary exposure to movements in foreign currency exchange ratesrelate to non-U.S. dollar denominated sales in EMEA, and Asia-Pacific andnon-U.S. dollar denominated operating expenses incurred in these respectiveregions.   These foreign currency exposures may make it difficult tocompare our financial statements for the current period with financialstatements from earlier periods.

 

***We may not be able to sustain or increase profitability inthe future.***

 

We had an accumulated deficit of $63.0 million.We expect to continue to incur significant professional services, sales andmarketing, research and development and general and administrative expenses aswe expand our operations and, as a result, we will need to generate significantrevenue to sustain or increase profitability. We may not be able to continue to improve our operating results at therate that has occurred in the past. Even though we returned to profitabilityeight quarters subsequent to substantially eliminating perpetual license sales,we may not be able to sustain or increase profitability on a quarterly orannual basis in the future, which may cause the price of our stock to decline.

 

***We face intensecompetition, and our failure to compete successfully could make it difficultfor us to add and retain clients and could reduce or impede the growth of ourbusiness.***

 

The market for CRM solutions is highly competitive andfragmented, and is subject to rapidly changing technology, shifting clientrequirements, frequent introductions of new products and services, andincreased marketing activities of other industry participants.  Increasedcompetition could result in commoditization, pricing pressure, reduced sales,lower margins or the failure of our solutions to achieve or maintain broadmarket acceptance.  If we are unable to compete effectively, it will bedifficult for us to add and retain clients, and our business, financialcondition and results of operations will be seriously harmed.

 

We face competition from:

 

·                              Companies currently providing customerservice solutions, some of whom offer hosted services, including BMC SoftwareCorporation, Inc., eGain Communications Corporation, Inquira Software, Inc.,Kana Software, Inc., Microsoft Corporation, Netsuite, Oracle Corporation,Parature, SAP AG, salesforce.com, and Talisma;

 

·                              CRM systems that are developed andmaintained internally by businesses;

 

·                              CRM products or services that aredeveloped, or bundled with other products or services, and installed on aclient’s premises by software vendors;

 

·                              Outsourced contact center providers thatbundle solutions and agent labor in their service offerings;

 

·                              New companies entering the CRM softwaremarket, the on demand applications market and the on demand CRM market, orexpanding from any one of these markets to the others; and

 

·                              Voice system integrators andvoice-enabled IVR technology providers, such as Microsoft, TuVox, and Voxify.

 

Many of our current and potential competitors havelonger operating histories and larger presence in the general CRM market,greater name recognition, access to larger customer bases and substantiallygreater financial, technical, sales and marketing, management, service, supportand other resources than we have. As a result, such competitors may be able torespond more quickly than we can to new or changing opportunities,technologies, standards or client requirements or devote greater resources tothe promotion and sale of their products andservices than we can. To the extent our competitorshave an existing relationship with a potential client, that client may beunwilling to switch vendors due to the time and financial commitments alreadymade with our competitors.

 

In addition, many of our current and potentialcompetitors have established or may establish business, financial or strategicrelationships among themselves or with existing or potential clients, alliancepartners or other third parties, or may combine and consolidate to become moreformidable competitors with better resources. We also expect that newcompetitors, such as enterprise software vendors and 

 

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online serviceproviders that have traditionally focused on enterprise resource planning orback office applications, will continue to enter the on demand CRM market withcompeting products as the on demand CRM market develops and matures.

 

***Our quarterlyresults of operations may fluctuate in the future.***

 

Our quarterly revenue and results of operations mayfluctuate as a result of a variety of factors, many of which are outside of ourcontrol. If our quarterly revenue or results of operations fall below theexpectations of investors or securities analysts, the price of our common stockcould decline substantially. Fluctuations in our results of operations may be due to a number offactors, including, but not limited to, those listed below and identifiedthroughout this “Risk Factors” section:

 

·                                          our ability to retain and increase salesto existing clients, attract new clients and satisfy our clients’ requirements;

 

·                                          general economic, industry and marketconditions;

 

·                                          the mix of revenue between licensearrangements, professional services and subscription arrangements as salescommissions are generally expensed ratably over the term of an agreement forsubscription services, and expensed when invoiced for license arrangements andprofessional services;

 

·                                          changes in the mix of revenue betweenprofessional services and software, hosting and support, because the grossmargin on professional services is typically lower than the gross margin on software,hosting and support;

 

·                                          changes in the mix of voice self serviceapplications sold and/or usage volume, because the gross margin on voice selfservice applications is typically lower than the gross margin on our sales,marketing, feedback and service applications;

 

·                                          the timing and success of new productintroductions or upgrades by us or our competitors;

 

·                                          the timing of professional service salesand our ability to appropriately staff and train professional service resourceswithout negatively impacting professional service margins;

 

·                                          changes in our pricing policies or thoseof our competitors;

 

·                                          the amount and timing of expendituresrelated to expanding our operations;

 

·                                          changes in our assumptions of stock pricevolatility, employee exercise behaviors, and option forfeiture rates, orchanges in the number of  stock options granted and vesting requirementsin any particular period, which effects the amount of stock-based compensationexpense;

 

·                                          changes in the payment terms for ourproducts and services, including changes in the mix of payment options chosenby our customers;

 

·                                          the purchasing and budgeting cycles ofour clients;

 

·                                          changes in the mix of subscription andperpetual licenses sold in a particular quarter, because perpetual license revenueis recorded into revenue upon delivery whereas subscriptions are recorded intorevenue ratably over the contractual period; and

 

·                                          changes in credit market conditionsassociated with auction rate securities, which could permanently impair therecoverability of these investments.

 

Because the sales cycle for the evaluation andimplementation of our solutions typically ranges from 60 to 180 days, wemay also experience a delay between increasing operating expenses and thegeneration of corresponding revenue, if any. Moreover, because most of therevenue from new sales agreements is recognized over time, downturns or upturnsin sales may not be immediately reflected in our operating results.Additionally, our professional service margins may be negatively impacted bytraining requirements for new professional service resources and/or customerscheduling issues.  Most of our expenses, such as salaries and third-partyhosting co-location costs, are relatively fixed in the short-term, and ourexpense levels are based in part on our expectations regarding future revenuelevels. As a result, if revenue for a particular quarter is below ourexpectations, we may not be able to proportionally reduce operating expensesfor that quarter, causing a disproportionate effect on our expected results ofoperations for that quarter.

 

Due to the foregoing factors, and the other risksdiscussed in this report, you should not rely on quarter-to-quarter comparisonsof our results of operations as an indication of our future performance.

 

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***Failure to effectively develop and expand our sales andmarketing capabilities could harm our ability to increase our client base andachieve broader market acceptance of our solutions.***

 

Increasing our client base and achieving broadermarket acceptance of our solutions may depend to a significant extent on theeffectiveness of our sales and marketing programs/operations.   Ourbusiness will be seriously harmed if our efforts do not maximize revenue persales and marketing headcount.  We also may not achieve anticipatedrevenue growth from our third-party channel partners if we are unable toattract and retain additional motivated channel partners, if any existing orfuture channel partners fail to successfully market, resell, implement orsupport our solutions for their customers, or if they represent multipleproviders and devote greater resources to market, resell, implement and supportcompeting products and services.

 

***The majority of our solutions are sold pursuant totime-based agreements, and if our existing clients elect not to renew or torenew on terms less favorable to us, our business, financial condition andresults of operations will be adversely affected.***

 

Our solutions are generally sold pursuant totime-based agreements that are typically subject to renewal every two years orless and our clients have no obligation to renew. Because our clients may electnot to renew, we may not be able to consistently and accurately predict futurerenewal rates. Our clients’ renewal rates may decline or fluctuate as a resultof a number of factors, including their level of satisfaction with oursolutions, their ability to continue their operations or invest in customerservice, their acceptance of a change from term license agreements tosubscription service agreements, or the availability and pricing of competingproducts. If large numbers of existing clients do not renew, or renew on termsless favorable to us, and if we cannot replace or supplement those non-renewalswith new agreements generating the same or greater level of revenue, ourbusiness, financial condition and results of operations will be adverselyaffected.

 

***We have experienced growth in recent periods. If we fail tomanage our growth effectively, we may be unable to execute our business plan,maintain high levels of service or adequately address competitive challenges.***

 

To achieve our business objectives, we will need tocontinue to expand our business at an appropriate pace. This expansion hasplaced, and is expected to continue to place, a significant strain on ourmanagerial, administrative, operational, financial and other resources. We anticipatethat this expansion will require substantial management effort and significantadditional investment in our infrastructure. If we are unable to successfullymanage our growth, our business, financial condition and results of operationswill be adversely affected.

 

Part of the challenge that we expect to face inthe course of our expansion is to maintain the high level of customer serviceto which our clients have become accustomed. To date, we have focused onproviding personalized account management and customer service on a frequentbasis to ensure our clients are effectively leveraging the capabilities of oursolution. We believe that much of our success to date has been the result ofhigh client satisfaction, attributable in part to this focus on client service.To the extent our client base grows, we will need to expand our accountmanagement, client service and other personnel, and third-party channelpartners, in order to enable us to continue to maintain high levels of clientservice and satisfaction. If we are not able to continue to provide high levelsof client service, our reputation, as well as our business, financial conditionand results of operations, could be harmed.

 

***If there are interruptions or delays in our hosting servicesthrough third-party error, our own error or the occurrence of unforeseeableevents, delivery of our solutions could become impaired, which could harm ourrelationships with clients and subject us to liability.***

 

As of March 31, 2009, approximately 90% of ourclients were using our hosting services for deployment of our softwareapplications. We generally provide our hosting services for our applicationsthrough computer hardware that we own and that is currently located inthird-party web hosting co-location facilities maintained and operated inCalifornia, Illinois, Massachusetts, New Jersey and London, England. Our voiceapplications for several international customers are hosted by third partieswho also own and operate the hardware on which our applications reside. We do not maintain long-term supply contracts with any of our hostingproviders, and providers do not guarantee that our clients’ access to hostedsolutions will be uninterrupted, error-free or secure. Our operations depend onour providers’ ability to protect their and our systems in their facilitiesagainst damage or interruption from natural disasters, power ortelecommunications failures, criminal acts and similar events. Our back-upcomputer hardware and systems have not been tested under actual disasterconditions and may not have sufficient capacity to recover all data andservices in the event of an outage occurring simultaneously at all hostingfacilities. In the event that our hosting facility arrangements wereterminated, or there was a lapse of service or accidental or willful damage tosuch facilities, we could experience lengthy interruptions in our hostingservice as well as delays and/or additional expense in arranging new facilitiesand services. Any or all of these events could cause our clients to lose accessto their important data. In addition, the failure by our third-party hostingfacilities to meet our capacity requirements could result in interruptions inour service or impede our ability to scale our operations.

 

Design and mechanical errors, spikes in usage volumeand failure to follow system protocols and procedures could cause our systemsto fail, resulting in interruptions in our clients’ service to their customers.Any interruptions or delays in our hosting services, whether as a result ofthird-party error, our own error, natural disasters or security breaches,whether accidental or willful, could harm our relationships with clients andour reputation. This in turn could reduce our revenue, subject us to liability,and cause us to issue credits or pay penalties or cause clients to fail torenew their licenses, any of which could adversely affect our business,financial condition and results of operations. In the event of damage orinterruption, our insurance policies may not adequately compensate us for anylosses that we may incur.  Additionally,during the first quarter of 2009, we announced a SaaS service level creditprogram, which provides for a partial rebate if we fall short of our systemavailability objective.  If we fail tomeet this objective for one or all of our customers, we may have to pay asubstantial amount of money, which may impact cash reserves, revenuerecognition, and our reputation.

 

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***If the security of our clients’ confidential informationcontained in our systems or stored by use of our software is breached orotherwise subjected to unauthorized access, our hosting service or our softwaremay be perceived as not being secure and clients may curtail or stop using ourhosting service and our solutions.***

 

Our hosting systems and our software store andtransmit proprietary information and critical data belonging to our clients andtheir customers. Any accidental or willful security breaches or otherunauthorized access could expose us to a risk of information loss, litigationand other possible liabilities. If security measures are breached because ofthird-party action, employee error, malfeasance or otherwise, or if designflaws in our software are exposed and exploited, and, as a result, a thirdparty obtains unauthorized access to any of our clients’ data, ourrelationships with clients and our reputation will be damaged, our business maysuffer and we could incur significant liability. Because techniques used toobtain unauthorized access or to sabotage systems change frequently andgenerally are not recognized until launched against a target, we and ourthird-party hosting co-location facilities may be unable to anticipate thesetechniques or to implement adequate preventative measures.

 

***If we fail to respond effectively to rapidly changingtechnology and evolving industry standards, particularly in the on demand CRMindustry, our solutions may become less competitive or obsolete.***

 

The CRM industry is characterized by rapidtechnological advances, changes in client requirements, frequent new productand service introductions and enhancements, changes in protocols and evolvingindustry standards. Our hosted business model and the on demand CRM market arerelatively new and may evolve even more rapidly than the rest of the CRMmarket. Competing products and services based on new technologies or new industrystandards may perform better or cost less than our solutions and could renderour solutions less competitive or obsolete. In addition, because our solutionsare designed to operate on a variety of network hardware and software platformsusing a standard Internet web browser, we will need to continuously modify andenhance our solutions to keep pace with changes in Internet-related hardware,software, communication, browser and database technologies and to integratewith our clients’ systems as they change and evolve. Furthermore, uncertaintiesabout the timing and nature of new network platforms or technologies, ormodifications to existing platforms or technologies, could increase ourresearch and development expenses.

 

Our software incorporates use of Microsoft’s .NETFramework, and its Smart Client methodology. The .NET Framework is corefunctionality that Microsoft incorporates into operating systems, while theSmart Client methodology enables development and deployment of softwareapplications using the .NET Framework. We believe that the .NET Framework andSmart Client enable us to provide users with a richer experience and betterfunctionality than would be possible using a pure Web-based application.However, the .NET Framework has not been universally adopted. If software usersdo not adopt the .NET Framework or if the .NET Framework is superseded, thepotential market for our solutions will be reduced and we may need to developan alternative architecture.

 

If we are unable to successfully develop and marketnew and enhanced solutions that respond in a timely manner to changingtechnology and evolving industry standards, and if we are unable to satisfy thediverse and evolving technology needs of our clients, our business, financialcondition and results of operations will suffer.

 

***Our failure to attract and retain qualified or key personnelmay prevent us from effectively developing, marketing, selling, integrating andsupporting our products.***

 

Our success and future growth depends to a significantdegree upon the skills, experience, performance and continued service of oursenior management, engineering, sales, marketing, service, support and otherkey personnel. Specifically, we believe that our future success is highlydependent on Greg Gianforte, our founder, Chairman and Chief Executive Officer.In addition, we do not have employment agreements with any of our seniormanagement or key personnel that require them to remain our employees and,therefore, they could terminate their employment with us at any time withoutpenalty. If we lose the services of Mr. Gianforte or any of our other keypersonnel, our business will be severely disrupted and we may be unable tooperate effectively. We do not maintain “key person” life insurance policies onany of our key employees except Mr. Gianforte. This life insurance policywould not be sufficient to compensate us for the loss of his services. Ourfuture success also depends in large part upon our ability to attract, train,integrate, motivate and retain highly skilled employees, particularly sales,marketing and professional services personnel, software engineers, producttrainers, and senior personnel.

 

***Our failure to attract, manage, support and retain qualifiedpartners may prevent us from effectively deploying product and professionalservices.***

 

Our success and future growth depends in part upon theskills, experience, performance and continued service of our partners. Weengage with partners in a number of ways, including assisting us to identifyprospective customers, to distribute our solutions, to develop complementarysolutions, and to help us to fulfill professional services engagements. Webelieve that our future success depends in part upon our ability to developstrategic, long term and profitable partnerships. If we do not acquire andretain the right partners, our products might become uncompetitive, we may beunable to take full advantage of the potential demand for our solutions, or ourability to rapidly deliver our solutions may be impaired. The use of partnersto fulfill customer requirements may impact our normal margins, and affect theprofitability of customer transactions.

 

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***If our solutions fail to perform properly or if they containtechnical defects, our reputation will be harmed, our market share woulddecline and we could be subject to product liability claims.***

 

Our software products may contain undetected errors ordefects that may result in product failures, slow response times, or otherwisecause our products to fail to perform in accordance with client expectations.Because our clients use our products for important aspects of their business,any errors or defects in, or other performance problems with, our productscould hurt our reputation and may damage our clients’ businesses. If thatoccurs, we could lose future sales, or our existing clients could elect to notrenew or to delay or withhold payment to us, which could result in an increasein our provision for doubtful accounts and an increase in collection cycles foraccounts receivable. Clients also may make warranty or other claims against us,which could result in the expense and risk of litigation. Product performanceproblems could result in loss of market share, failure to achieve marketacceptance and the diversion of development resources. If one or more of ourproducts fails to perform or contains a technical defect, a client may assert aclaim against us for substantial damages, whether or not we are responsible forthe product failure or defect. We do not currently maintain any warrantyreserves.

 

Product liability claims could require us to spendsignificant time and money in litigation or to pay significant settlements ordamages. Although we maintain general liability insurance, including coveragefor errors and omissions, this coverage may not be sufficient to coverliabilities resulting from such product liability claims. Also, our insurer maydisclaim coverage. Our liability insurance also may not continue to beavailable to us on reasonable terms, in sufficient amounts, or at all. Anyproduct liability claims successfully brought against us would cause ourbusiness to suffer.

 

***If we are unable to protect our intellectual propertyrights, our competitive position could be harmed or we could be required toincur significant expenses to enforce our rights.***

 

Our success depends to a significant degree upon theprotection of our software and other proprietary technology rights. We rely ontrade secret, copyright and trademark laws, patents and confidentialityagreements with employees and third parties, all of which offer only limitedprotection. The steps we have taken to protect our intellectual property maynot prevent misappropriation of our proprietary rights or the reverseengineering of our solutions. We may not be able to obtain any further patentsor trademarks, and our pending applications may not result in the issuance ofpatents or trademarks. Any of our issued patents may not be broad enough toprotect our proprietary rights or could be successfully challenged by one ormore third parties, which could result in our loss of the right to preventothers from exploiting the inventions claimed in those patents. Furthermore,legal standards relating to the validity, enforceability and scope ofprotection of intellectual property rights in other countries are uncertain andmay afford little or no effective protection of our proprietary technology.Consequently, we may be unable to prevent our proprietary technology from beingexploited abroad, which could diminish international sales or require costlyefforts to protect our technology. Policing the unauthorized use of ourproducts, trademarks and other proprietary rights is expensive, difficult and,in some cases, impossible. Litigation may be necessary in the future to enforceor defend our intellectual property rights, to protect our trade secrets or todetermine the validity and scope of the proprietary rights of others. Suchlitigation could result in substantial costs and diversion of managementresources, either of which could harm our business. Accordingly, despite ourefforts, we may not be able to prevent third parties from infringing upon ormisappropriating our intellectual property.

 

***Our product development efforts may be constrained by theintellectual property of others, and we may become subject to claims ofintellectual property infringement, which could be costly and time-consuming.***

 

The software and Internet industries are characterizedby the existence of a large number of patents, trademarks and copyrights, andby frequent litigation based upon allegations of infringement or otherviolations of intellectual property rights. As we seek to extend our CRMproduct and service offerings, we may be constrained by the intellectualproperty rights of others. We have in the past been named as a defendant in alawsuit alleging intellectual property infringement, and we may again in thefuture have to defend against intellectual property lawsuits. We may notprevail in any future intellectual property infringement litigation given thecomplex technical issues and inherent uncertainties in litigation. Any claims,regardless of their merit, could be time-consuming and distracting tomanagement, result in costly litigation or settlement, cause productdevelopment delays, or require us to enter into royalty or licensingagreements. If any of our products violate third-party proprietary rights, wemay be required to re-engineer our products or seek to obtain licenses fromthird parties, which may not be available on reasonable terms or at all.Because our sales agreements typically require us to indemnify our clients fromany claim or finding of intellectual property infringement, any such litigationor successful infringement claims could adversely affect our business,financial condition and results of operations. Any efforts to re-engineer ourproducts, obtain licenses from third parties on favorable terms or license asubstitute technology may not be successful and, in any case, may substantiallyincrease our costs and harm our business, financial condition and results ofoperations.

 

Further, our software products contain open sourcesoftware components that are licensed to us under various public domainlicenses. While we believe we have complied with our obligations under thevarious applicable licenses for open source software that we use, there islittle or no legal precedent governing the interpretation of many of the termsof certain of these licenses and therefore the potential impact of such termson our business is somewhat unknown. Use of open source standards also may makeus more vulnerable to competition because the public availability of opensource software could make it easier for new market entrants and existingcompetitors to introduce similar competing products quickly and cheaply.

 

***The market for our on demand application services is at arelatively early stage of development, and if it does not develop or developsmore slowly than we expect, our business will be harmed.***

 

The market for on demand application services is at arelatively early stage of development, and it is uncertain whether theseapplication services will achieve and sustain high levels of demand and marketacceptance. Our success will depend to a substantial extent on the willingnessof companies to increase their use of on demand application services in generaland for on demand customer relationship management applications in particular.The willingness of companies to increase their use of any on demand applicationservices is in part 

 

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dependent on theactual and perceived reliability of hosted solutions. In addition, manycompanies have invested substantial personnel and financial resources tointegrate traditional enterprise software into their businesses, and thereforemay be reluctant or unwilling to migrate to on demand application services.While we have supported traditional on site deployment of our softwareapplications, widespread market acceptance of our on demand software solutionsis critical to the success of our business. Other factors that may affect themarket acceptance of our solutions include:

 

·                                          on demand security capabilities and reliability;

 

·                                          concerns with entrusting a third party to store andmanage critical customer data;

 

·                                          our ability to meet the needs of broader segments ofthe CRM market or other on demand markets;

 

·                                          the level of customization we offer;

 

·                                          our ability to continue to achieve and maintain highlevels of client satisfaction;

 

·                                          concerns with purchasing critical CRM solutions from acompany with a history of operating losses;

 

·                                          customer acceptance of our subscription salesarrangements; and

 

·                                          the price, performance and availability of competingproducts and services.

 

If businesses do not perceive the benefits of ondemand solutions in general, or our on demand solutions in particular, then themarket for these solutions may not develop further, or it may develop moreslowly than we expect, either of which would adversely affect our business,financial condition and results of operations.

 

***If our efforts to enhance existing solutions, introduce newsolutions or expand the applications for our products and solutions to broaderCRM markets do not succeed, our ability to grow our business will be adverselyaffected.***

 

Approximately 85% of our revenue is derived fromRightNow Service, a suite of solutions used to optimize customer serviceoperations. If we are unable to successfully develop and sell new and enhancedversions of RightNow Service, or introduce new products and solutions for thecustomer service market, our financial performance will suffer. Although todate the majority of business has been focused on providing solutions forcustomer service operations, we provide sales, marketing, feedback and voice-enabledapplications to expand our solution offerings. Additionally, we have focused oneService solutions to call centers.  Our efforts to expand beyond thecustomer service market may not be successful in part because certain of ourcompetitors have far greater experience and brand recognition in the broadersegments of the CRM market. In addition, our efforts to expand our on demandsoftware solutions beyond the customer service market may divert managementresources from our existing operations and require us to commit significantfinancial resources to a market where we are less proven, which may harm ourbusiness, financial condition and results of operations.

 

***Future acquisitionscould disrupt our business and harm our financial condition and results ofoperations.***

 

In order to expand our addressable market, we maydecide to acquire additional businesses, products and technologies. In May 2005,we acquired the assets of Convergent Voice and in May 2006, we acquiredSalesnet, Inc. Acquisitions could require significant capital infusionsinto the acquired business and could involve many risks, including, but notlimited to, the following:

 

·                                          an acquisition may negatively impact our results ofoperations because it may require incurring large one-time charges, substantialdebt or liabilities; it may require the amortization or write down of amountsrelated to deferred compensation, goodwill and other intangible assets; or itmay cause adverse tax consequences, substantial depreciation or deferred compensationcharges;

 

·                                          we may encounter difficulties in assimilating andintegrating the business, technologies, products, personnel or operations ofcompanies that we acquire, particularly if key personnel of the acquiredcompany decide not to work for us;

 

·                                          our existing and potential clients and the customersof the acquired company may delay purchases due to uncertainty related to anacquisition;

 

·                                          an acquisition may disrupt our ongoing business,divert resources, increase our expenses and distract our management;

 

·                                          the acquired businesses, products or technologies maynot generate sufficient revenue to offset acquisition costs and could result inmaterial asset impairment charges;

 

·                                          we may issue equity securities to complete anacquisition, which would dilute our stockholders and could adversely affect themarket price of our common stock; and

 

·                                          acquisitions may involve the entry into a geographicor business market in which we have little or no prior experience.

 

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We cannot assure you that we will be able to identifyor consummate any future acquisitions on favorable terms, or at all. If we dopursue any future acquisitions, it is possible that we may not realize theanticipated benefits from the acquisitions or that the financial markets orinvestors will negatively view the acquisitions. Even if we successfullycomplete an acquisition, it could adversely affect our business, financialcondition and results of operations.

 

***Changes tofinancial accounting standards may affect our results of operations andfinancial condition.***

 

Generally accepted accounting principles andaccompanying accounting pronouncements, implementation guidelines andinterpretations for many aspects of our business, such as software revenuerecognition, accounting for stock-based compensation, unanticipated ambiguitiesin fair value accounting standards  and income tax uncertainties, arecomplex and involve subjective judgments by management. Changes to generallyaccepted accounting principles, their interpretation, or changes in ourproducts or business could significantly change our reported earnings andfinancial condition and could add significant volatility to those measures.

 

***The required adoption of SFAS 123R makes stock options aless attractive form of employee compensation, and our use of alternative formsof employee compensation in response to SFAS 123R could adversely affect ourability to attract and retain personnel.***

 

We have historically used stock options as a keycomponent of our employee compensation because we believe it aligns employees’interests with our stockholders’ interest, encourages employee retention, andprovides a competitive component of our overall compensation program. Due tothe required adoption of SFAS 123R, and the recording of stock option expenseon our operating statements, we may determine that it is in our best interestto reduce the number or size of our stock-based awards, or change the type ofawards granted. In doing so, we may not be able to attract, retain and motivateour employees.

 

***With the recent volatility in the capital markets, there isa risk that we could suffer a loss of principal in our cash and cashequivalents and short term investments and suffer a reduction in our interestincome or in our return on investments. Additionally funds associated withauction rate securities may be inaccessible in excess of 12 months, which mayresult in market value declines, which could have a material impact on ouroperating results in the period it is recognized.***

 

We invest our cash and cash equivalents and short-terminvestments pursuant to our investment policy in cash, money market funds,commercial paper, corporate bonds and government agency securities, which areof investment grade quality. Prior to March 3, 2008 our investment policyallowed us to invest cash in auction-rate securities (“ARS”). At March 31,2009 we held approximately $5.0 million par value ARS that are subject togeneral credit, liquidity, market, and interest rate risks, which may beexacerbated by U.S. sub-prime mortgage defaults that have affected varioussectors of the financial markets and caused credit and liquidity issues. Duringthe fourth quarter of 2008 we executed a settlement agreement with our brokerto redeem the ARS held by us at par commencing June 2010 through July 2012.By accepting the terms of the settlement, we (1) received thenon-transferable right (“put option”) to sell our ARS at par value to thebroker commencing June 2010 through July 2012, and (2) gave thebroker the right to purchase the ARS from us at any time after the executedsettlement agreement date as long as we receive par value.  However, if we do not exercise the put optionduring or before July 2012, it will expire and the broker will have nofurther rights or obligation to buy the ARS. Redemption of these investments may be subject to brokerage housedefault.  As a result of this settlement,we reclassified the $5.0 million par value ARS from available for salesecurities to trading securities.  During the first quarter of 2009 wemarked to market the investment in accordance with SFAS 115, which resulted inan increase in fair value for a total unrealized gain of $356,000 included inother expense, net.  Partially, offsetting this gain within other expense,net was a $339,000 unrealized loss as of March 31, 2009  related to the put option we obtainedpursuant to the settlement agreement.  Our inability to dispose of our ARSprior to June 2010 could negatively impact our liquidity and cash on hand,which, in turn, could cause us to forego potentially beneficial operational andstrategic transactions or to incur additional indebtedness.  Additionally,we could be adversely impacted if the broker is unable to meet its obligationsunder the settlement agreement as the broker’s obligations under the put optionare not secured by its assets and do not require the broker to obtain anyfinancing to support its performance obligations under the put option.

 

***We may not be ableto secure additional financing on favorable terms, or at all, to meet ourfuture capital needs.***

 

We may require additional capital to respond tobusiness challenges, including the need to develop new solutions or enhance ourexisting solutions, enhance our operating infrastructure, fund expansion,respond to competitive pressures and acquire complementary businesses, productsand technologies. Absent sufficient cash flow from operations, we may need toengage in equity or debt financings to secure additional funds to meet ouroperating and capital needs. In addition, even though we may not needadditional funds, we may still elect to sell additional equity or debtsecurities or obtain credit facilities for other reasons. We may not be able tosecure additional debt or equity financing on favorable terms, or at all, atthe time when we need such funding. If we raise additional funds throughfurther issuances of equity or convertible debt securities, our existingstockholders could suffer significant dilution in their percentage ownership ofour company, and any new equity securities we issue could have rights,preferences and privileges senior to those of holders of our common stock. Any debtfinancing secured by us in the future could involve restrictive covenantsrelating to our capital raising activities and other financial and operationalmatters, which may make it more difficult for us to obtain additional capital,to pay dividends and to pursue business opportunities, including potentialacquisitions. In addition, if we decide to raise funds through debt orconvertible debt financings, we may be unable to meet our interest or principalpayments.

 

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***The success of our products and our hosted business dependson the continued growth and acceptance of the Internet as a business andcommunications tool, and the related expansion of the Internet infrastructure.***

 

The future success of our products and our hostedbusiness depends upon the continued and widespread adoption of the Internet asa primary medium for commerce, communication and business applications. Ourbusiness growth would be impeded if the performance or perception of theInternet, or companies providing hosted solutions, was harmed by securityproblems such as “viruses,” “worms” and other malicious programs, reliabilityissues arising from outages and damage to Internet infrastructure, delays indevelopment or adoption of new standards and protocols to handle increaseddemands of Internet activity, increased costs, decreased accessibility andquality of service, or increased government regulation and taxation of Internetactivity.

 

Federal, state or foreign government bodies oragencies have in the past adopted, and may in the future adopt, laws orregulations affecting data privacy, the solicitation, collection, processing oruse of personal or consumer information, the use of the Internet as acommercial medium and the use of email for marketing or other consumercommunications. In addition, government agencies or private organizations maybegin to impose taxes, fees or other charges for accessing the Internet or forsending commercial email. These laws or charges could limit the growth ofInternet-related commerce or communications generally, result in a decline inthe use of the Internet and the viability of Internet-based services such as oursand reduce the demand for our products, particularly our RightNow Marketingsolution.

 

The Internet has experienced, and is expected tocontinue to experience, significant user and traffic growth, which has, attimes, caused user frustration with slow access and download times. If Internetactivity grows faster than Internet infrastructure or if the Internetinfrastructure is otherwise unable to support the demands placed on it, or ifhosting capacity becomes scarce, our business growth may be adversely affected.

 

***Privacy concerns and laws or other domestic or foreignregulations may adversely affect our business or reduce sales of our solutions.***

 

Businesses using our solutions collect personalinformation regarding their customers when those customers contact them withcustomer service inquiries. A valuable component of our solutions is theirability to allow our clients to use and analyze their customers’ information toincrease sales, marketing and up-sell or cross-sell opportunities. Federal,state and foreign government bodies and agencies, however, have adopted and areconsidering adopting laws and regulations regarding the collection, use anddisclosure of personal information obtained from consumers. The costs ofcompliance with, and other burdens imposed by, such laws and regulations thatare applicable to the businesses of our clients may limit the use and adoptionof this component of our solutions and reduce overall demand for our solutions.Furthermore, even where a client desires to make full use of these features inour solutions, privacy concerns may cause our clients’ customers to resistproviding the personal data necessary to allow our clients to use our solutionsmost effectively. Even the perception of privacy concerns, whether or not valid,may inhibit market acceptance of our products.

 

European Union members have imposed restrictions onthe collection and use of personal data that are far more stringent, and imposemore significant burdens on subject businesses, than current privacy standardsin the United States. All of these domestic and international legislative andregulatory initiatives may adversely affect our clients’ ability to collectand/or use demographic and personal information from their customers, whichcould reduce demand for our solutions.

 

In addition to government activity, privacy advocacygroups and the technology and direct marketing industries are consideringvarious new, additional or different self-regulatory standards that may placeadditional burdens on us. If the gathering of profiling information were to becurtailed in this manner, customer service CRM solutions would be lesseffective, which would reduce demand for our solutions and harm our business.

 

***Non-solicitation concerns, laws or regulations may adverselyaffect our clients’ ability to perform outbound marketing and other emailcommunications, which could reduce sales of our solutions.***

 

In January 2004, the federal Controlling theAssault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAMAct, became effective. The CAN-SPAM Act regulates the transmission and contentof commercial emails and, among other things, obligates the sender of suchemails to provide recipients with the ability to opt-out of receiving futureemails from the sender, and establishes penalties for the transmission of emailmessages which are intended to deceive the recipient as to source or content.Many state legislatures also have adopted laws that impact the delivery ofcommercial email, and laws that regulate commercial email practices have beenenacted in many oftheinternationaljurisdictions in which we do business, including Europe, Australia, Japan, andCanada. In addition, Internet service providers and licensors of softwareproducts have introduced a variety of systems and products to filter outcertain types of commercial email, without any common protocol to determinewhether the recipient desired to receive the email being blocked. As a result,it is difficult for us to determine in advance whether or not emails generatedby our clients using our solutions will be permitted by spam filters to reachthe intended recipients.

 

Our RightNow Marketing solution specifically servesthe market for mass distribution marketing and other email communications. Theincreasing regulation of email delivery, both domestically and internationally,and the spam filtering practices of Internet service providers and email usersgenerally, will place significant additional burdens on our clients who haveoutbound communication programs, and may cause those clients to substantiallychange their outbound communications programs or abandon them altogether. Thesefactors may lead to a reduction in sales of our RightNow Marketing solution,may make it necessary to redesign our RightNow Marketing solution to make iteasier 

 

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for our clients toconform to the requirements of such laws and standards, which would increaseour expenses, or may make it necessary for us to redefine the market for anduse of our RightNow Marketing solution, which could reduce our revenue.

 

***The significant influence over stockholder voting mattersand our office leases that may be exercised by our founder and Chief ExecutiveOfficer will limit your ability to influence corporate actions and may requireus to find alternative office space to lease or buy in the future.***

 

At March 31, 2009, Greg Gianforte, our founder andChief Executive Officer, and his spouse, Susan Gianforte, have voting powerover approximately 25.2% of our outstanding common stock and, together withother officers and directors, have voting power over approximately 30.4% of ouroutstanding common stock. In addition, none of the shares of common stock overwhich Mr. Gianforte and Mrs. Gianforte have voting power are subjectto vesting restrictions. As a result, Mr. Gianforte and Mrs. Gianforte,acting together with some of our other officers and directors, may be able toinfluence matters requiring stockholder approval, including the election ofdirectors, management changes and approval of significant corporatetransactions. This concentration of voting power may have the effect ofdelaying, preventing or deterring a change in control of RightNow, coulddeprive our stockholders of an opportunity to receive a premium for theircommon stock as part of a sale of RightNow and might reduce the market price ofour common stock.

 

In addition, Mr. Gianforte beneficially owns,directly or indirectly, a 50% membership interest in GenesisPartners, LLC, our landlord from whom we lease our principal offices inBozeman, Montana. Consequently, Mr. Gianforte has significant influenceover any decisions by Genesis Partners regarding renewal, modification ortermination of our Bozeman, Montana leases. In the event that our currentleases with Genesis Partners were terminated or otherwise could not be renewed,or came up for renewal on commercially unreasonable terms, we would be requiredto find alternative office space to lease or buy.

 

***Anti-takeover provisions in our charter documents andDelaware law could discourage, delay or prevent a change in control of ourcompany and may affect the trading price of our common stock.***

 

Provisions of our certificate of incorporation andbylaws and Delaware law may discourage, delay or prevent a merger oracquisition that a stockholder may consider favorable and may limit the marketprice of our common stock. These provisions include the following:

 

·                                          establishing a classified board in which only aportion of the total board members will be elected at each annual meeting;

 

·                                          authorizing the board to issue preferred stock;

 

·                                          providing the board with sole authority to set thenumber of authorized directors and to fill vacancies on the board;

 

·                                          limiting the persons who may call special meetings ofstockholders;

 

·                                          prohibiting certain transactions under certaincircumstances with interested stockholders;

 

·                                          requiring supermajority approval to amend certainprovisions of the certificate of incorporation; and

 

·                                          prohibiting stockholder action by written consent.

 

It is possible that the provisions contained in ourcertificate of incorporation and bylaws, the voting rights held by insiders andthe ability of our board of directors to issue preferred stock withoutstockholder action may have the effect of delaying, deferring or preventing achange in control of our Company without further action by the stockholders,may discourage bids for our common stock at a premium over the market price ofour common stock and may adversely affect the market price of our common stockand the voting and other rights of the holders of our common stock.

 

***Item 2.Unregistered Sales of Equity Securities and Use of Proceeds***

*** ***

**(a)****                                                         ****Sales of UnregisteredSecurities**

 

Not applicable.

 

**(b)****                                                         ****Use of Proceeds fromSales of Registered Securities**

 

On August 5, 2004, the Securities and ExchangeCommission declared effective our Registration Statement on From S-1 (Reg. FileNo. 333-115331) under the Securities Act of 1933, as amended, inconnection with the initial public offering of our common stock, par value$.0001 per share. We sold 6.4 million shares, including shares sold uponexercise of the underwriters’ over-allotment option, for an aggregate offeringprice of $44.9 million, and 321,945 shares, including shares sold upon exerciseof the underwriters’ over-allotment option, were sold by a selling stockholderfor an aggregate offering price of $2.3 million. After deducting $3.3 millionin underwriting discounts and commissions and $1.8 million in other offeringcosts, we received net proceeds from the offering of approximately $40 million.None of the expenses and none of our net proceeds from the offering were paiddirectly or indirectly to any director, officer, general partner of RightNow ortheir associates, persons owning 10% or more of any class of equity securitiesof RightNow, or an affiliate of RightNow.

 

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In May 2005, we spent $1 million of the offeringproceeds for the acquisition of the assets of Convergent Voice. In May 2006,we spent $8.7 million of the offering proceeds to acquire Salesnet, Inc.We currently intend to use the remaining proceeds for general corporatepurposes as described in the prospectus for the offering.  Pending these uses, the net proceeds from theoffering are invested in short and long-term, interest-bearing,investment-grade securities.

 

**(c)           Purchases of Equity Securities.**

 

On October 20, 2008, we announced a sharerepurchase program under which the board of directors authorized the repurchaseof up to $15.0 million of our common stock over the next two years.  The Company was permitted to purchase sharesfrom time to time at prevailing prices in the open market, in blocktransactions, in privately negotiated transactions, and/or in accelerated sharerepurchase programs, in accordance with Rule 10b-18 of the Securities andExchange Commission.  As of December 31,2008, we repurchased 1,881,877 shares of common stock under this program at atotal price of $13.2 million.  During thefirst quarter of 2009, we repurchased 231,115 shares of common stock under thisprogram at a total price of $1.8 million. There can be no further repurchases made under this program as theremainder of the authorized $15.0 million was utilized during the first quarterof 2009.

 

The table belowsummarizes the first quarter of 2009 repurchase history under the sharerepurchase program:

 
| ** **                     | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                                | ** ** | **Approximate dollar**             | ** ** |
|--------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                     | ** ** | ** **                    | ** ** | ** **                    | ** ** | **Total number of shares** | ** ** | **value of shares that** | ** ** |
| ** **                     | ** ** | ** **                    | ** ** | ** **                    | ** ** | **purchased as part of**   | ** ** | **may yet be purchased** | ** ** |
| ** **                     | ** ** | **Total number of** | ** ** | **Avg. price paid** | ** ** | **authorized repurchase**            | ** ** | **under the repurchase**      | ** ** |
| **Fiscal Year 2009** | ** ** | **shares purchased**     | ** ** | **per share**            | ** ** | **program**                               | ** ** | **program**                             | ** ** |
| Feb 25-27                      |       | 107,490                       |       | $                             | 7.86       |                                      | 107,490    |                                    | $          | 952,486 |   |
| Mar. 2-4                  |       | 123,625                       |       | 7.70                          |       | 123,625                                   |       | 117                                     |       |
| **Total Fiscal Year 2009**     |       | 231,115                       |       | $                             | 7.75       |                                      | 231,115    |                                    | $          | 117 |   |

 

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***Item 3. DefaultsUpon Senior Securities.***

*** ***

None.

 

***Item 4. Submissionof Matters to a Vote of Security Holders.***

*** ***

None

 

***Item 5. OtherInformation.***

*** ***

None.

 

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Item 6. Exhibits

 

***Exhibits***

 

The exhibits listed below are part of this Form 10-Q,unless otherwise indicated.

 
| Exhibit 3.1  |   | Amended and  Restated Certificate of Incorporation of the Registrant. (1)                                                                                                                                         |
|-------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                                              |
| Exhibit 3.2  |   | Amended and  Restated Bylaws of the Registrant. (2)                                                                                                                                                               |
|              |   |                                                                                                                                                                                                              |
| Exhibit 31.1 |   | Certification of  Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or  15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                          |
|              |   |                                                                                                                                                                                                              |
| Exhibit 31.2 |   | Certification of  Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or  15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                          |
|              |   |                                                                                                                                                                                                              |
| Exhibit 32.1 |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (furnished herewith). |

 

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| (1)    |   | Incorporated by  reference to Exhibit 4.2 to the Company’s registration statement on  Form S-8 (File No. 333-118515) filed with the Securities and  Exchange Commission on August 24, 2004. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                 |
| (2)    |   | Incorporated by  reference to Exhibit 3.1 of the Company’s Current Report on  Form 8-K (File No. 000-31321) filed with the Securities and  Exchange Commission on January 25, 2006.         |

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

Dated:  May 8, 2009

 

**RightNow Technologies, Inc.**

(Registrant)

 
| By:    | /s/ Jeffrey C.  Davison                       |   |
|--------|-----------------------------------------------|--------|
|   | Jeffrey C.  Davison                           |   |
|   | Chief Financial  Officer, Vice President and, |   |
|   | Treasurer                                     |   |
|   | (Principal  Financial and Accounting Officer) |   |

 

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