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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

000-31321
(Commission File No.)

RIGHTNOW TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

40 Enterprise 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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        The number of shares outstanding of the registrant's common stock, $0.001 par value, as of May 4, 2005 was 30,116,719.

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

For the Quarterly Period Ended March 31, 2005

INDEX

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RightNow Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands) (Unaudited)

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Operations

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

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)   Business Description and Basis of Presentation

Business Description

        RightNow Technologies, Inc. (the "Company" or "RightNow") provides on-demand customer relationship management software solutions for companies of all sizes. The Company's on-demand software supports multiple customer interaction points in a business's customer service, marketing and sales operations. Founded in 1997, RightNow is headquartered in Bozeman, Montana, with additional offices in Dallas, Texas; San Mateo, California; Princeton, New Jersey; London, England; Sydney, Australia, Munich, Germany; and a liaison office in Tokyo, Japan. The Company operates in one segment, which is the customer relationship management market.

Basis of Presentation

        The accompanying interim consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

        The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the interim consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in the Annual Report on Form 10-K and include all adjustments necessary for the fair presentation of the Company's financial position at March 31, 2005, and results of operations and cash flows for the three month periods ended March 31, 2004 and 2005. The interim period results are not necessarily indicative of the results to be expected for the full year.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Management evaluates these estimates and assumptions on an on-going basis. Significant estimates and assumptions made by management include estimates and assumptions regarding revenue recognition, valuation allowances for trade receivables and deferred income tax assets, and accounting for equity-based compensation.

(2)   Certain Risks and Concentrations

        The Company's revenue is derived from the license, hosting and support of its software products and provision of related professional services. The market in which the Company operates is highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect the Company's operating results. The Company has historically derived a majority of its revenue from customer service software solutions. These products are expected to continue to account for a significant portion of revenue for the foreseeable future. As a result of this revenue concentration, the Company's business could be harmed by a decline in demand for, or in the prices of, these products or as a result of, among other factors, any change in pricing model, a maturation in the markets for these products, increased price competition or a failure by the Company to keep up with technological change.

        The Company's customers are worldwide with approximately 70% to 75% of sales in the United States. No individual customer accounted for more than 10% of the Company's revenue in 2004 or the first three months of 2005, or represented more than 10% of receivables at December 31, 2004 or March 31, 2005.

        As of December 31, 2004 and March 31, 2005, assets located outside the United States were 7% of total assets. The loss from operations outside of the United States totaled $2.8 million for the year ended December 31, 2004 and $1.6 million for the three months ended March 31, 2005. Revenue by geographical region follows (in thousands):

(3)   Net Income Per Share

        A reconciliation of the denominator used in the calculation of basic and diluted net income per share is as follows (in thousands):

        The following common stock equivalents were excluded from the computation of diluted earnings per share because their impact was anti-dilutive (in thousands):

(4)   Comprehensive Income (Loss)

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

(5)   Equity-Based Compensation

        The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, but applies Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations in accounting for its stock plans. Under APB 25, when the exercise price of an employee stock option equals the estimated market price of the underlying stock on the date of grant, no compensation expense is recognized.

        Pro forma information regarding results of operations has been determined as if the Company had accounted for its stock options under the appropriate minimum value or fair value method. The Company uses the Black-Scholes valuation model to estimate the value of stock options granted under the 2004 Equity Incentive Plan and the Employee Stock Purchase Plan. The estimated weighted average value per share of stock options granted in the three months ended March 31, 2004 and 2005 was $0.53 and $8.01, respectively. The estimated value of shares purchased under the Employee Stock Purchase Plan for the three months ended March 31, 2005 was $5.79. Assumptions used to obtain the estimated values were:

        Had the Company recorded compensation expense in accordance with SFAS No. 123, net income (loss) would have been (in thousands, except per share data):

        From time to time the Company grants to certain of its consultants options to purchase stock. The Company accounts for consultant stock options in accordance with SFAS 123 and Emerging Issues Task Force Consensus Issue No. 96-18 ("EITF 96-18"), Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services. Compensation expense for the grant of stock options to consultants is determined based on the estimated fair value of the stock options at the measurement date as defined in EITF 96-18 and is recognized over the vesting period.

        In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R ("123R"), Share-Based Payment, which replaces SFAS No. 123 and supercedes APB 25. Statement 123R covers a wide range of share-based compensation, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The statement requires the recognition of compensation cost related to share-based payment plans to be recognized in financial statements based on the fair value of the equity or liability instruments issued. The Company expects that this accounting change will materially and adversely affect our reported results of operations because the stock-based compensation expense will be charged directly against earnings. The Company expects to adopt the provisions of 123R beginning January 1, 2006.

(6)   Commitments and Contingencies

Warranties and Indemnification

        The Company's on-demand application service is typically warranted to perform in accordance with its user documentation.

        The Company's arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party's intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

        The Company has entered into service level agreements with a small number of its customers warranting certain levels of uptime reliability and permitting those customers to receive credits or terminate their license agreements in the event that the Company fails to meet those levels. To date, the Company has not provided any material credits, or cancelled any agreements related to these service level agreements.

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

Litigation

        From time to time, the Company is involved in legal proceedings arising in the normal course of business. The Company believes that the resolution of these matters will not have a material effect on the Company's consolidated financial position, results of operations or liquidity.

(7)   Recent Developments

Acquisition of Convergent Voice Assets

        In May 2005, the Company purchased the intellectual property and other assets, and hired certain personnel, of Convergent Voice, Inc. Convergent Voice has developed voice enabled automation technologies that, when combined with the Company's applications, provide for: a) telephone queries of the Company's knowledgebase; b) submission of questions over the phone that can be subsequently answered either electronically or via a return phone call; and c) submission of queries that access back office systems, such as an order processing system, to obtain status of an order. The Company had previously licensed the Convergent Voice technology for approximately two years.

        The purchase price of $1 million was paid in cash on May 5, 2005. The Company expects that the substantial majority of the purchase price will be allocated to identifiable intangible assets, which will then be amortized to earnings over their remaining lives of approximately 5 years.

Commitments

        The Company leases its office facilities and certain office equipment under non-cancelable operating lease agreements with various expiration dates through 2011. In March 2005 the Company extended two office lease agreements, and entered into a new office lease agreement, with Genesis Partners, LLC. Annual minimum payments under operating leases are approximately $1.2 million in 2005 through 2009, approximately $750,000 in 2010, and approximately $150,000 thereafter.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those projected in the forward-looking statements as a result of factors, including those discussed under "Risk Factors" and elsewhere in this report. We assume no obligation to update the forward-looking statements or such risk factors.

Overview

        We are a leading provider of on-demand solutions for the customer relationship management ("CRM") market. We offer a broad suite of solutions to address the customer service, sales and marketing requirements of large, medium and small enterprises.

        We released our initial version of RightNow Service in 1997. This product addressed the new customer service needs resulting from the increasing use of the Internet as a customer service channel. Since then, we have significantly enhanced product features and functionality to address customer service needs across multiple communication channels, including web, interactive voice, e-mail, chat, telephone and proactive outbound e-mail communications. We have also added several products that are complementary to our RightNow Service solution, including RightNow Metrics and RightNow Locator. In 2003, we introduced an e-mail marketing automation solution, RightNow Outbound. In October 2004, we introduced RightNow CRM, which is comprised of three applications built on a common base: RightNow Service, RightNow Sales, and RightNow Marketing. To date, approximately 90% of our revenue has been generated from sales of RightNow Service.

        Our client base currently consists of more than 1,200 active clients. During the three months ended March 31, 2005, our products served more than 166 million customer interactions, or unique sessions hosted by our solutions. Our solutions, whether sold pursuant to term or perpetual licenses, are available either on a hosted basis, where they are deployed in our co-location facilities and accessed on-demand by our clients, or on a non-hosted basis, where our clients deploy them in their own facilities. Approximately 86% of our clients have elected the hosted option as of March 31, 2005. We distribute our solutions primarily through direct sales efforts and to a lesser extent through indirect channels.

Sources of Revenue

        Our revenue is comprised of fees for term and perpetual licenses of our software, fees for hosting and support related to our licenses, and fees for professional services. Our term license agreements, which are generally two years in length but can range from six months to four years, include our software and related upgrades, hosting and support for the term of the agreement. The majority of our revenue in each of our last three years and the three months ended March 31, 2005 was derived from two-year term license agreements. We also offer monthly term license agreements that contain a minimum commitment period of at least 12 months and include our software and related upgrades, hosting and support. Perpetual licenses are typically sold with annual maintenance contracts that include upgrades, hosting and support.

        Hosting and support agreements provide maintenance and management of our software at a third party facility, technical support for our software products, and unspecified product upgrades on a when and if available basis.

        Professional services revenue is comprised of revenue from consulting, education and development services, and reimbursement of related travel costs. Consulting and education services include implementation and best practices services consulting. Development services include customizations and integrations for a client's specific business application.

        Our software license agreements generally include capacity-based fees, which are measured primarily by web pages served, user seats, outgoing email transactions, or minutes used, and certain fixed fees. A number of our agreements provide for additional fees for usage above established levels, which are billed and recognized into revenue when earned.

        Professional services, consisting of consulting, education and development services, are sold with initial license agreements and periodically over the client engagement. The average deployment time for our clients is approximately 50 days. We typically invoice clients for the entire amount at the beginning of the agreement with payment generally due within 30 days for our term and perpetual license agreements, or due monthly for our monthly agreements. Our typical education courses are billed on a per person, per class basis.

        Depending on the size and complexity of the client project, our consulting or development services contracts are either fixed price/fixed scope or, less frequently, billed on a time and materials basis. We have determined that the professional services element of our software arrangements is not essential to the functionality of the software. We have also determined that our professional services: a) are available from other vendors; b) do not involve a significant degree of risk or unique acceptance criteria; and c) qualify for separate accounting as we have sufficient experience in providing such services.

Cost of Revenue and Operating Expenses

        Cost of Revenue.    Cost of revenue consists primarily of salaries and related expenses for our hosting, support and professional services organizations, third-party costs and equipment depreciation relating to our hosting services, third-party costs for interactive voice self-service applications, travel expenses related to providing professional services to our clients, amortization of acquired intangible assets and allocated overhead. We allocate most overhead expenses, such as office supplies, computer supplies, utilities, rent, depreciation for furniture and equipment, payroll taxes and employee benefits, based on headcount. As a result, overhead expenses are reflected in each cost of revenue and operating expense category.

        Our hosting costs are affected by the percentage of clients who license our products on a hosted basis and the number of times our clients and their customers use our solutions, which we refer to as customer interactions. As a result of economies of scale in our hosting infrastructure and declines in computer hardware and telecommunications costs, we were able to reduce hosting costs as a percentage of total revenue in 2003, and 2004, despite significant increases in the number of hosted clients and the level of customer interactions. Software, hosting and support costs as a percent of total revenue increased slightly in the first three months of 2005 due to additions of technical support personnel.

        As our client base and solutions usage grows, we intend to continue to invest additional resources in our hosting services, technical support and professional services. We expect our professional services costs to increase in absolute dollars as we increase our professional services as a percentage of total revenue. Because cost as a percentage of revenue is higher for professional services revenue than for software, hosting and support revenue, an increase in professional services as a percentage of total revenue reduces gross profit as a percentage of total revenue. During the first three months of 2005, gross profit as a percentage of total revenue declined to 74% from 78% in 2004 primarily due to an increase in professional services as a percentage of total revenue.

        Sales and Marketing Expenses.    Sales and marketing expenses consist primarily of salaries and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, product management expenses, travel costs and allocated overhead. We expense our sales commissions at the time the related sale is invoiced to the client and we recognize the majority of our revenue from our agreements ratably over the terms of the licenses. Accordingly, we generally experience a delay between increasing sales and marketing expenses and the recognition of corresponding revenue. We expect significant additional increases in sales and marketing expenses in absolute dollars as we continue to hire additional sales and marketing personnel and increase the level of marketing activities.

        Research and Development Expenses.    Research and development expenses consist primarily of salary and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, translation fees, quality assurance, testing and allocated overhead. To date, we have not capitalized any software development costs because the timing of the commercial releases of our products has substantially coincided with the attainment of technological feasibility. As a result, research and development costs have been expensed as incurred. We intend to continue to expand and enhance our product offerings. To accomplish this, we plan to hire additional personnel and, from time to time, contract with third parties. We expect that research and development expenses will increase in absolute dollars as we seek to expand our technology and product offerings.

        General and Administrative Expenses.    General and administrative expenses consist primarily 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. We anticipate that we will incur additional employee salaries and related expenses, professional service fees and insurance costs related to the growth of our business and operations.

Critical Accounting Policies and Estimates

        Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These assumptions are affected by management's application of accounting policies. Our critical accounting policies include: revenue recognition; valuation of receivables and deferred tax assets; and accounting for equity-based compensation.

        We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue Recognition

        Software, hosting and support revenue is comprised of fees from term and perpetual licenses of the Company's software, hosting and support. To date we have not entered into an arrangement solely for the license of products and, therefore we have not demonstrated vendor specific objective evidence (VSOE) of fair value for the license element. Consequently, we recognize revenue for the fees associated with the term license and the related hosting and support ratably over the term of the agreement, which is generally two years, but can range between six months and four years. We have established VSOE for the annual hosting and support elements sold with each perpetual license based on the price paid when sold separately. Accordingly, we recognize revenue for each perpetual license using the residual method in accordance with Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions.

        We begin to recognize revenue from the licensing, hosting and support of our products when all the following criteria are met: a) we have entered into a legally binding agreement with the client; b) our products and services have been delivered or made available to the client; c) our fee for providing the products and services is determinable; and d) we believe collection of our fee is reasonably probable.

        Amounts that have been invoiced to clients are recorded to accounts or term receivables and deferred revenue. Deferred revenue is then recognized into revenue when earned.

Allowance for doubtful accounts

        We regularly assess the collectibility of outstanding customer invoices and, in so doing, we maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as: historical collection experience; a customer's current creditworthiness; customer concentration; age of the receivable balance; and general economic conditions that may affect a customer's ability to pay. Actual customer collections could differ from our estimates and exceed our related loss allowance.

Income Taxes

        We record income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. When applicable, a valuation allowance is established to reduce any deferred tax asset when it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

        We have established a valuation allowance equal to our net deferred tax assets due to uncertainties regarding the realization of our net operating loss carryforwards, tax credits, and deductible timing differences. The uncertainty of realizing these benefits is based primarily on our lack of historical earnings.

Equity-Based Compensation

        We account for our employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Option ("APB") No. 25, Accounting for Stock Issued to Employees. We make disclosure regarding employee stock-based compensation using the fair value method in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. We have calculated the fair value of options granted and have determined the pro forma impact on net income (loss). We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.

        In measuring the cost of equity-based compensation, we make assumptions regarding our stock price volatility and the average expected life of our outstanding stock options. Our assumptions are based on our historical information, some of which was developed when we were a private company, which are then compared with other like companies for reasonableness. Actual results could differ from our estimates.

Recently Issued Accounting Standards

        In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R ("SFAS 123R"), Share-Based Payment, which replaces SFAS 123 and supercedes APB No. 25. The statement's effective date was amended in April 2005 to apply to certain public companies beginning with their first fiscal year beginning after June 15, 2005. SFAS 123R covers a wide range of share-based compensation, including share options, restricted share plans, performance- based awards, share appreciation rights, and employee share purchase plans. The statement requires the recognition of compensation cost related to share-based payment plans to be recognized in financial statements based on the fair value of the equity or liability instruments issued. We expect that adoption of the provisions of SFAS 123R in our 2006 fiscal year beginning January 1, 2006 will materially and adversely affect our reported results of operations because the stock-based compensation expense will be charged directly against reported earnings. We do not expect the accounting change to materially affect our liquidity because stock-based compensation is a non-cash expense.

Results of Operations

        The following table sets forth certain consolidated statement of operations data expressed as a percentage of total revenue for the periods indicated: