UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

000-31321
(Commission File No.)

RIGHTNOW TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

136 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 þ No o

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

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

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 31, 2009 was 31,792,356.

 

 

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

For the Quarterly Period Ended September 30, 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			15
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			28
Part II.		OTHER INFORMATION			28
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3.		Defaults Upon Senior Securities			40
Item 4.		Submission of Matters to a Vote of Security Holders			40
Item 5.		Other Information			40
Item 6.		Exhibits			41
SIGNATURES					42
EX-31.1
EX-31.2
EX-32.1

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RightNow Technologies, Inc.
Condensed Consolidated Balance Sheets
(In thousands) (Unaudited)

		December 31,				September 30,
		2008				2009
Assets
Cash and cash equivalents		$	51,405			$	32,388
Short-term investments			34,412				60,634
Accounts receivable			36,770				31,034
Term receivables, current			5,752				3,011
Allowance for doubtful accounts			(2,277	)			(1,701	)
Receivables, net			40,245				32,344
Deferred commissions			5,381				5,822
Prepaid and other current assets			2,150				2,867
Total current assets			133,593				134,055
Long-term investments			4,963				—
Property and equipment, net			10,141				9,781
Term receivables, non-current			3,547				1,447
Intangible assets, net			6,399				11,222
Deferred commissions, non-current			2,840				2,828
Other			854				941
Total Assets		$	162,337			$	160,274
Liabilities and Stockholders’ Equity
Accounts payable		$	5,058			$	4,593
Commissions and bonuses payable			5,665				4,838
Other accrued liabilities			11,165				12,008
Current portion of long-term debt			46				34
Current portion of deferred revenue			77,584				75,643
Total current liabilities			99,518				97,116
Long-term debt, less current portion			22				—
Deferred revenue, net of current portion			35,614				28,298
Stockholders’ equity:
Common stock			34				34
Additional paid-in capital			102,662				109,394
Treasury stock			(13,209	)			(15,007	)
Accumulated other comprehensive income			1,916				1,395
Accumulated deficit			(64,220	)			(60,956	)
Total stockholders’ equity			27,183				34,860
Total Liabilities and Stockholders’ Equity		$	162,337			$	160,274

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts) (Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Revenue:
Software, hosting and support		$	25,956			$	29,754			$	76,085			$	83,223
Professional services			10,281				8,977				28,271				27,885
Total revenue			36,237				38,731				104,356				111,108
Cost of revenue:
Software, hosting and support			5,305				5,232				15,383				15,135
Professional services			8,133				6,365				23,228				19,719
Total cost of revenue			13,438				11,597				38,611				34,854
Gross profit			22,799				27,134				65,745				76,254
Operating expenses:
Sales and marketing			16,889				16,175				51,334				47,046
Research and development			4,671				5,100				13,664				14,907
General and administrative			3,215				4,018				10,621				11,671
Total operating expenses			24,775				25,293				75,619				73,624
Income (loss) from operations			(1,976	)			1,841				(9,874	)			2,630
Interest and other income, net			552				342				2,009				1,094
Income (loss) before income taxes			(1,424	)			2,183				(7,865	)			3,724
Provision for income taxes			(23	)			(218	)			(110	)			(460	)
Net income (loss)		$	(1,447	)		$	1,965			$	(7,975	)		$	3,264
Net income (loss) per share:
Basic		$	(0.04	)		$	0.06			$	(0.24	)		$	0.10
Diluted		$	(0.04	)		$	0.06			$	(0.24	)		$	0.10
Shares used in the computation:
Basic			33,640				31,733				33,585				31,731
Diluted			33,640				32,424				33,585				32,249

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)

		Nine Months Ended
		September 30,
		2008				2009
Operating activities:
Net income (loss)		$	(7,975	)		$	3,264
Non-cash adjustments, net of assets acquired:
Depreciation and amortization			5,866				5,410
Provisions for uncollectible accounts receivable			179				117
Stock-based compensation			4,695				6,104
Changes in operating accounts, net of assets acquired:
Receivables			12,652				10,731
Prepaid expenses and other current assets			(654	)			(735	)
Deferred commissions			(2,170	)			(142	)
Accounts payable			1,061				(567	)
Commissions and bonuses payable			(615	)			(941	)
Other accrued liabilities			1,016				415
Deferred revenue			(2,999	)			(12,036	)
Other			(142	)			255
Cash provided by operating activities			10,914				11,875
Investing activities:
Net change in investments			996				(21,391	)
Acquisition of property and equipment			(4,344	)			(3,673	)
Intangible asset additions			—				(244	)
Business acquisition			—				(5,906	)
Other			(25	)			8
Cash used in investing activities			(3,373	)			(31,206	)
Financing activities:
Proceeds from issuance of common stock under employee benefit plans			1,266				396
Excess tax benefits of stock options exercised			—				232
Common stock repurchased			—				(1,798	)
Payments on long-term debt			(33	)			(34	)
Cash provided (used) by financing activities			1,233				(1,204	)
Effect of foreign exchange rates on cash and cash equivalents			(1,310	)			1,518
Increase (decrease) in cash and cash equivalents			7,464				(19,017	)
Cash and cash equivalents at beginning of period			43,681				51,405
Cash and cash equivalents at end of period		$	51,145			$	32,388

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 (“CRM”) software and services that help consumer-centric organizations improve customer experiences, while reducing costs. RightNow’s solutions go beyond traditional customer relationship management solutions to support a business’ external customer-facing channels as well as sales, marketing and customer service operations. Approximately 1,900 corporations and government agencies worldwide depend on RightNow to help achieve their strategic objectives and better meet the needs of those they serve. Founded in 1997, RightNow is headquartered in Bozeman, Montana, with additional offices in North America, Europe, Asia, and Australia. The Company operates in one segment, which is the customer relationship management market.

Basis of Presentation

     The accompanying condensed 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, 2008.

     The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the interim condensed 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. These financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of the Company’s financial position. The interim period results are not necessarily indicative of the results to be expected for the full year.

     The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make a number of 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 on an on-going basis using historical experience and other factors, including the current economic environment, and management believes these estimates to be reasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, foreign currency fluctuations, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Significant items subject to such estimates and assumptions include: elements comprising our software, hosting and support sales arrangements and whether the elements have stand-alone and/or fair value; whether the fees charged for our products and services are fixed or determinable; the carrying amount of property and equipment and intangible assets; estimates regarding the recoverability and respective fair value of auction-rate securities and all other investments; valuation allowances for receivables and deferred income tax assets; and estimates of expected term and volatility in determining stock-based compensation expense. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates.

(2) Certain Risks and Concentrations

     The Company’s revenue is derived from the subscription, license, hosting and support of its software products and provision of related professional services. The markets in which the Company competes are 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.

     Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and short-term investments, and accounts and term receivables. The Company maintains cash, cash equivalents, and short-term investments with various domestic and foreign financial institutions. The Company’s cash balances with its financial institutions may exceed deposit insurance limits. Short-term investments are investment grade, interest-earning securities, and are diversified by type and industry. Approximately $4.4 million of short-term investments consists of auction rate securities (“ARS”) and a repurchase put option associated with the ARS as further described in Note 7.

     With customers that span the globe the Company’s historical revenue ranges have been approximately 70% to 75% in North America, 18% to 22% in Europe and 7% to 9% in Asia Pacific. No individual customer accounted for more than 10% of the Company’s revenue in 2008 or the three and nine months ended September 30, 2009. No individual customer accounted for more than 10% of the Company’s accounts receivable or total net receivables at December 31, 2008 and one customer represented approximately 22% of the Company’s accounts receivable and total net receivables, respectively at September 30, 2009. Beginning in 2007, our change to subscriptions from license arrangements requires that we no longer record additions to term receivables. As a result, the customer concentration as a percentage of term licenses has increased since the change. One customer represented 22% of term receivables at December 31, 2008, and the same one customer represented 35% of term receivables at September 30, 2009.

     As of December 31, 2008 and September 30, 2009, assets located outside North America were 12% and 16% of total assets, respectively. The loss from operations outside of North America totaled $1.1 million and $688,000 for the nine months ended September 30, 2008 and 2009, respectively. Revenue by geographical region follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
North America		$	25,187			$	27,737			$	70,928			$	81,120
Europe			8,082				7,441				25,024				20,713
Asia Pacific			2,968				3,553				8,404				9,275
		$	36,237			$	38,731			$	104,356			$	111,108

(3) Revenue Recognition

     The Company earns its revenues from the delivery of software, hosting, and support services, and from the delivery of professional services. Software, hosting and support services are sold under subscription arrangements and, to a lesser extent, license arrangements. Hosting and support services involve the remote management of the software, technical assistance, and unspecified product upgrades and enhancements on a when and if available basis. Professional services include consulting, training and development services.

     The Company recognizes revenue for subscriptions and licenses when all of the following criteria are met: a) the Company has entered into a legally binding agreement with the customer; b) the software has been made available or delivered to the customer; c) the Company’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 software through its hosting services, technical support, and product upgrades when and if available, all for a bundled fee. The Company accounts for subscriptions in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification, Topic 605-25, Multiple-Element Arrangements. Under Topic 605-25, value is allocated to each deliverable of an arrangement using prices established when the elements are sold stand-alone. Stand-alone sales are evidenced by subscription renewals and by rates charged for consulting, education, and development services in stand-alone transactions. The arrangement fee is then allocated to the individual elements based on their relative fair values. Revenue for subscriptions are recognized ratably over the contractual period and professional services are recognized as performed provided the above criteria have been met.

     Under the Company’s subscription contracts, the Company applies Topic 605-25 to its subscriptions rather than Industry Topic 985, Software because the customer does not have the right to take possession of the software without incurring a significant incremental penalty. As such, these arrangements are considered service contracts and are not within the scope of Industry Topic 985.

     The Company’s revenue also is, to a lesser extent, earned under license arrangements. Revenue under these arrangements is recognized pursuant to the requirements of Industry Topic 985. Licenses generally include the same elements as subscriptions, plus the right to take possession of 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 cover a 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 and support services as a single element for purposes of allocating revenue. The Company has established vendor specific objective evidence of fair value for the term license bundle based on stand-alone sales of the bundled items. When sold with professional services, revenue is allocated between the software license, hosting and support element and the professional services element using the relative fair value method. Revenue for the term license element is recognized ratably over the period of the arrangement and revenue for professional services in these arrangements is recognized as performed.

     Sales of perpetual software licenses include hosting and support services for a period of time, typically one year. The Company has established vendor specific objective evidence for the combined element of hosting and support elements of perpetual license sales, based on the prices charged when sold separately. Accordingly, revenue for the perpetual software license element is determined using the residual method and is recognized upon delivery. Revenue for the hosting and support elements is recognized ratably over the contractual time period.

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

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

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

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

     Professional services revenue is recognized as performed, based on hours incurred, unless sold in conjunction with a term license or subscription where objective and reliable evidence (including vendor specific objective evidence) for the term or subscription element does not exist, in which case professional services revenue is recognized ratably over the contractual period. The Company has determined that the professional service elements of its software arrangements are not essential to the functionality of the software. The Company has also determined that its professional services (a) are available from other vendors, (b) do not involve a significant degree of risk or unique acceptance criteria, and (c) are not required for the customer to use the software.

(4) Sales Commissions

     Sales incentives paid for subscriptions are deferred and charged to expense in proportion to the revenue recognized. Sales incentives paid for licenses and professional services are expensed when earned, which is typically at the time the related sale is invoiced. Sales incentive expense was $2.8 million and $4.0 million for the three months ended September 30, 2008 and 2009, respectively. Sales incentive expense was $9.8 million and $10.2 million for the nine months ended September 30, 2008 and 2009, respectively. Deferred commissions were $8.2 million and $8.7 million at December 31, 2008 and September 30, 2009, respectively.

(5) Net Income (Loss) Per Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Weighted average common shares outstanding for basic net income (loss) per share			33,640				31,733				33,585				31,731
Effect of dilutive securities:
Employee stock options			—				691				—				518
Weighted average shares outstanding for dilutive net income (loss) per share			33,640				32,424				33,585				32,249

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Employee stock options			4,559				5,393				4,559				5,566

(6) Comprehensive Income (Loss)

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Net income (loss)		$	(1,447	)		$	1,965			$	(7,975	)		$	3,264
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investments			(227	)			(36	)			(201	)			158
Unrealized gain (loss) on long-term investments			35				—				(390	)			—
Foreign currency translation adjustments			785				171				690				(679	)
Comprehensive income (loss)		$	(854	)		$	2,100			$	(7,876	)		$	2,743

(7) Fair Value

     Effective January 1, 2008, the Company adopted the provisions of FASB Accounting Standards Codification, Topic 820, Fair Value Measurements and Disclosures. Topic 820 establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. Fair value is defined under Topic 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under Topic 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.
	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As a result of recent market conditions, the Company holds financial instruments for which limited or no observable market data is available. These fair value measurements are based primarily upon our own estimates and

are often calculated based on current pricing policy, the current economic and competitive environment, the characteristics of the instrument, credit, interest, and other such factors. Therefore, the results cannot be determined with precision, cannot be substantiated by comparison to quoted prices in active markets, and may not be realized in a current sale or immediate settlement of the asset. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.

     The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

		Level 1				Level 2				Level 3				Total
Cash		$	22,449			$	—			$	—			$	22,449
Money Market funds			9,443				—				—				9,443
Commercial paper			—				5,598				—				5,598
Certificates of deposit			1,234				—				—				1,234
Corporate notes and bonds			—				2,046				—				2,046
U.S. Government agency securities			—				45,462				—				45,462
State and Municipal securities			—				2,394				—				2,394
Auction rate federally insured student loan bonds			—				—				4,055				4,055
Auction rate security put option			—				—				341				341
Total		$	33,126			$	55,500			$	4,396			$	93,022

     The following table illustrates the activity of “level 3” assets from December 31, 2008 to September 30, 2009 (in thousands):

		Sept. 30, 2009
Fair value at December 31, 2008		$	4,963
Unrealized gain adjustment—ARS			428
Unrealized loss adjustment—put option			(397	)
Redemption of auction rate preferred stocks			(598	)
Fair value at September 30, 2009		$	4,396

     As of September 30, 2009, assets characterized as “level 3” for fair value purposes consisted of approximately $4.4 million in par value auction rate federally insured student loan bonds with investment grades of AAA or AA.

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

     During the fourth quarter of 2008, the Company executed a settlement agreement with its broker to redeem the ARS held by it at par commencing June 2010 through July 2012 (“redemption period”). By accepting the terms of the settlement, the Company (1) received the non-transferable right (“put option”) to sell its ARS at par value to the broker commencing June 2010 through July 2012, and (2) gave the broker the right to purchase the ARS from the Company at any time after the executed settlement agreement date as long as the Company receive par value. The Company expects to sell the ARS under the put option, and as the put option is available within the next twelve months, the Company has reclassified the investment from long-term at December 31, 2008 to short-term at September 30, 2009. However, if the put option is not exercised during or before July 2012, it will expire and the broker will have no further rights or obligation to buy the ARS. Redemption of these investments may be subject to brokerage house default. Furthermore, the broker’s obligations under the put option are not secured by its assets and do not require the broker to obtain any financing to support its performance obligations under the put option. The broker has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the put option. The agreement covers $4.4 million par value (fair value of $4.1 million) of the ARS held by the Company as of September 30, 2009. The Company considers the put option to be a freestanding financial instrument and it has been accounted for separately from the ARS. The Company believes the put option does not meet the definition of a

derivative under Topic 815, Derivatives and Hedging, as the put option is non-transferable and not considered by the Company to be readily convertible into cash. The Company also believes that, since the put option does not qualify as a derivative, it is not within the scope of Topic 320, Investments-Debt and Equity Securities. During the fourth quarter of 2008, the Company elected the fair value option to account for the put option pursuant to Topic 825, Financial Instruments, and as such, changes in fair value are recorded through the statement of operations each reporting period. During the nine months ended September 30, 2009, the Company recorded an unrealized loss on the put option of $397,000, recorded in other income, net. The fair value of the instrument is recorded as an asset of $341,000 on the Company’s balance sheet in short-term investments as of September 30, 2009.

     Simultaneously, during the fourth quarter of 2008, the Company made an election under Topic 320, Investments-Debt and Equity Securities, to transfer its ARS from available-for-sale to trading securities. The transfer to trading securities reflects the Company’s intent to exercise the put option during the redemption period. Prior to entering into the settlement agreement, the Company’s intent was to hold the ARS until the market recovered. At the time of the transfer, the unrealized loss on the ARS for the first three quarters of 2008 of $390,000 included in accumulated other comprehensive income (loss) was immediately recognized in earnings, as a component of other income, net. During the fourth quarter of 2008, the Company recognized an additional decline in fair value of $385,000, included in other expense, net for a total unrealized loss of $775,000 for the year ended December 31, 2008. During the nine months ended September 30, 2009, the Company recognized an increase in fair value for a total unrealized gain of $428,000, included in other income, net.

     The Company estimated the fair value of our ARS and put option using a discounted cash flow model where it considered assumed risk premiums and assumed work out periods. The amount derived through the discounted cash flow model was generally consistent with the ARS fair value indicated by the broker statement at September 30, 2009. The broker statement did not provide a fair value assessment of the put option at September 30, 2009.

     To date, the Company has collected all interest payments on all of the auction rate securities when due. If the auction rate securities continue to experience unsuccessful auctions, if the credit rating of the auction rate securities deteriorates, or if the brokerage houses declare redemption default, the Company may not recover the par value of its investment. While the recent auction failures will limit the Company’s ability to liquidate the remainder of these investments for some period of time, the Company does not believe the auction failures will materially impact its ability to fund its working capital needs, capital expenditures, or other business requirements. The Company will continue to monitor the state of the credit markets and its potential impact, if any, on the fair value and classification of its portfolio of auction rate securities.

(8) Stock-Based Compensation

     The Company accounts for its stock-based compensation plans in accordance with FASB Accounting Standards Codification, Topic 718, Compensation-Stock Compensation. Under Topic 718, stock-based compensation costs are recognized based on the estimated fair value at the grant date for all stock-based awards. The Company estimates grant date fair values using the Black-Scholes-Merton option pricing model, which requires assumptions of the life of the award and the stock price volatility over the term of the award. The Company records compensation cost of stock-based awards using the straight line method, which is recorded into earnings over the vesting period of the award.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Stock-based compensation expense:		2008				2009				2008				2009
Cost of software, hosting and support		$	87			$	120			$	243			$	358
Cost of professional services			158				138				476				480
Sales and marketing expenses			738				761				1,871				2,335
Research and development expenses			252				285				729				924
General and administrative expenses			297				548				1,376				2,007
Stock-based compensation expense		$	1,532			$	1,852			$	4,695			$	6,104

     No stock-based compensation was capitalized during the nine months ended September 30, 2008 and an insignificant amount was capitalized during the nine months ended September 30, 2009.

     Unrecognized compensation expense of outstanding stock options at September 30, 2009 was approximately $12.8 million, which is expected to be recognized over a weighted average period of 2.8 years.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Fair value per share		$	6.57			$	6.60			$	5.62			$	4.66
Risk free rate			2.78	%			2.21	%			2.69	%			1.71	%
Expected term		4.3 yrs				4.4 yrs				4.5 yrs				4.4 yrs
Volatility			54	%			66	%			55	%			67	%
Dividend yield			0	%			0	%			0	%			0	%

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

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

     Expected Term : The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual term of the awards, vesting schedules and expectations of employee exercise behavior.

     Volatility: The Company’s estimate of expected volatility is based on the historical volatility of the Company’s common stock over the expected life of the options as this represents the Company’s best estimate of future volatility.

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

     Activity under the Company’s stock option plans for the nine months ended September 30, 2009 was as follows (option shares in thousands):

										Weighted								Weighted
										average				Aggregate				average
		Shares								exercise				intrinsic				remaining
		available				Outstanding				price per				value (in				contractual
		for grant				options				share				thousands)				life (in years)
Balance at December 31, 2008			3,610				4,428			$	11.81								6.8
Annual reserve addition (1)			1,000				—				—
Granted (2)			(2,052	)			2,028				8.74
Exercised			—				(132	)			1.98
Forfeited, expired, exchanged or canceled (3)			211				(240	)			13.82
Balance at September 30, 2009			2,769				6,084			$	10.92			$	24,687				7.4
Vested or expected to vest at September 30, 2009							5,742			$	10.99			$	23,051				7.3
Exercisable at September 30, 2009							3,208			$	11.16			$	12,933				6.2

     The total intrinsic value of options exercised during the nine months ended September 30, 2008 and 2009 was $1.6 million and $888,000, respectively.

(9) 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 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.

(10) Income Taxes

     The provision for income taxes of $218,000, and $460,000 in the three and nine months ended September 30, 2009, respectively, consists primarily of state taxes and foreign taxes withheld. Our effective tax rate differs from the federal statutory rate primarily due to the utilization of net operating loss carryforwards, foreign rate differentials, and non-deductible meal and entertainment expenses. As of December 31, 2008 and September 30, 2009, the Company had an insignificant amount of unrecognized tax benefits, none of which would materially affect its effective tax rate if recognized. The Company does not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits as interest expense and other expense, respectively, in its Consolidated Statements of Operations. The amount of interest and penalties for the nine months ended September 30, 2009 was insignificant. Tax years beginning in 2005 are subject to examination by taxing authorities, although net operating loss and credit carry forwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. The jurisdictions which could be subject to examination include the U.S., Montana, Illinois, California, Massachusetts, New York, United Kingdom, Germany, Australia, Japan, Canada and the Netherlands.

(11) Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents, accounts receivable, term receivables, accounts payable, and debt approximated their fair values at September 30, 2009 and at December 31, 2008. The reason these financial instruments approximated fair values are as follows:

     Account receivable and term receivables—current: The carrying amount approximated fair value at the respective dates due to the relative short maturities of these items.

     Accounts payable—current: The carrying amount approximated fair value at the respective dates due to the short duration the accounts payable is outstanding.

     Term receivables—noncurrent: The carrying amount approximated fair value at the respective dates due to the low rate of interest for the period of time the items are expected to be outstanding.

     Debt: The carrying amount approximated fair value at the respective dates due to the low rate of interest for the period of time the items are expected to be outstanding.

(12) Acquisition

     On September 15, 2009, the Company acquired the outstanding common and preferred stock of HiveLive, Inc. (“HiveLive”), for $5.9 million in net cash paid at closing. HiveLive is an enterprise-class social platform provider with an innovative platform for customer support, engagement and loyalty, and ideation communities to help organizations maximize opportunities to deliver great customer experiences. The acquisition is being accounted for under the purchase method of accounting and, accordingly, the results of HiveLive are included in the condensed consolidated financial statements since the acquisition date.

     The Company has allocated the purchase price to the HiveLive assets acquired and liabilities assumed at estimated fair values, after considering a number of factors. The purchase price, and purchase price allocation are as follows (amounts in thousands):

Cash consideration		$	5,906
Total purchase price		$	5,906
Purchase price allocation:
Net assets assumed		$	189
Intangible assets			5,717
Total purchase price		$	5,906

     The purchase price and allocation are subject to revision; subsequent revisions, if any, are not expected to be material. Potential revisions may arise from the finalization of accrued liabilities.

     The components of the intangible assets listed in the above table as of the acquisition date are as follows (amounts in thousands):

Goodwill		$	3,617
Developed technology			1,800
Customer relationships			200
Trade name and trademarks			100
Intangible assets		$	5,717

     The excess of the purchase price over the estimated fair value of the net assets acquired of $3.6 million has been recorded as goodwill, which is deemed to have an indefinite useful life and, accordingly, will not be amortized, but will be subject to periodic impairment testing in future periods. The acquisition is expected to allow RightNow to offer the broadest social CRM solution in the marketplace, which resulted in the recorded goodwill. The developed technology and customer relationships intangible assets will be amortized over a period of four years, using the straight-line method. The trade name and trademarks will be amortized over a period of two years using the straight-line method. None of the goodwill is expected to be deductible for tax purposes.

     Pro forma results of operations, assuming the above acquisition occurred as of January 1, 2008, were as follows (in thousands, except per share amounts):

		Three months ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Total Revenues		$	36,309			$	38,915			$	104,624			$	111,858
Net income (loss)			(2,812	)			1,072				(10,876	)			97

     The amounts of revenue and earnings of HiveLive since the acquisition date are included in the consolidated statement of operations for the three and nine month period ended September 30, 2009. The Company recognized revenue from HiveLive of $28,000 and incurred a net loss of $191,000 since the date of the acquisition through September 30, 2009.

(13) Subsequent Events

     The Company accounts for its subsequent events in accordance with FASB Accounting Standards Codification, Topic 855, Subsequent Events. Under Topic 855, an entity must disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The Company evaluated subsequent events through November 6, 2009, which was commensurate with the date the financial statements were issued.

     On October 16, 2009, RightNow entered into a General Release and Settlement Agreement with Kana Software, Inc. (“KANA”) and four former employees of RightNow to settle a lawsuit that was filed by RightNow alleging violations by KANA and the four former employees of RightNow of certain provisions of employment agreements, misappropriation of trade secrets, as well as other claims. In the General Release and Settlement Agreement, KANA agreed that it will pay a total of $1,000,000 to RightNow with $100,000 due within ten days of executing the General Release and Settlement Agreement and the remainder due over nine consecutive quarters beginning with the quarter commencing January 1, 2010. KANA provided RightNow with a subordinated security interest in its assets to secure the amounts payable to RightNow. There is an acceleration clause requiring the entire $1,000,000 to be due and payable immediately upon certain changes of control of KANA. Under the General Release and Settlement Agreement, the parties dismissed the lawsuit with prejudice, and all parties received executed mutual releases. RightNow will record the gain on settlement of this litigation in other income as the cash payments are received due to concerns surrounding the collectability of such amounts.

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

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

Cautionary Statement

All statements included or incorporated by reference in this report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. 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,” similar expressions, and variations or negatives of these words, and include, but are not limited to, statements regarding projected results of operations, management’s future strategic plans, market acceptance and performance of our products, our ability to retain and hire key executives, sales and technical personnel and other employees in the numbers, with the capabilities, and at the compensation levels needed to implement our business and product plans, the competitive nature of and anticipated growth in our markets, our accounting estimates, and assumptions and judgments. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that are difficult to predict and that could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. The risks and uncertainties referred to above include, but are not limited to, general economic conditions; fluctuations in foreign currency

exchange; our business model; our ability to develop or acquire and gain market acceptance for new products and enhancements to existing products in a cost-effective and timely manner; the success of our efforts to integrate HiveLive’s people and processes, following our recent acquisition of that Company; the risk of asset impairment associated with the acquisition of HiveLive; the gain or loss of key customers; competitive pressures and other similar factors such as the availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; our ability to expand operations, manage expenses and grow profitability; the rate at which our present and future customers adopt our existing and future products and services; fluctuations in our operating results including our revenue mix and our rate of growth; interruptions or delays in our hosting operations; breaches of our security measures; our ability to protect our intellectual property from infringement, and to avoid infringing on the intellectual property rights of third parties; the credit markets and potential impact on the recoverability of our portfolio of auction rate securities; our ability to sell auction rate securities under a put option with our broker, any unanticipated ambiguities in fair value accounting standards; fluctuations in our operating results from the impact of stock-based compensation expense; our ability to manage and expand our partner relationships; our ability to hire, retain and motivate our employees and manage our growth; the impact of potential acquisitions, if any; and various other factors, some of which are described under the section below entitled “Risk Factors,” in Item 1A of this report. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

Overview

     RightNow Technologies (“we”, “us”, “our”, the “Company” or “RightNow”) provides on demand customer relationship management (“CRM”) software and services that help consumer-centric organizations improve customer experiences, while reducing costs. In today’s competitive business environment, we believe providing superior customer experiences can be a powerful way for companies to drive sustainable differentiation. RightNow’s technology enables an organization’s service, marketing and sales personnel to leverage a common application platform to deliver service, to market and to sell through phone, email, web, chat, and social interactions. Additionally, through our on demand delivery approach, or software-as-a-service (“SaaS”), we are able to eliminate much of the complexity associated with traditional on premise solutions, to implement rapidly, and to price our solutions at a level that results in a lower cost of ownership compared to on premise solutions. Our value-added services, including business process optimization and lifetime product tune-ups, are directed toward improving our customers’ efficiency, increasing user adoption and assisting our customers to maximize the return on their investment. Approximately 1,900 corporations and government agencies worldwide depend on RightNow to help achieve their strategic objectives and better meet the needs of those they serve.

     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, email, chat, telephone, proactive outbound email communications, and social interactions. We have also added several products that are complementary to our RightNow Service solution, including RightNow Marketing ™, RightNow Sales ™, RightNow Feedback ™ and RightNow Cloud Monitor™, which automate aspects of marketing campaigns, sales operations, and customer monitoring. In February 2007, we initiated a quarterly release cycle which allows us to deliver new product capabilities to customers every three months. The latest of our quarterly releases, RightNow August ‘09, includes such capabilities as Section 508 compliant customer portal, contextual workspaces, agent scripting, guided assistance, and desktop workflow. Additionally, during the third quarter of 2009, we acquired HiveLive, Inc., an enterprise-class social platform provider with an innovative platform for customer support, engagement and loyalty, and ideation communities to help organizations maximize opportunities to deliver great customer experiences. The acquisition is expected to allow us to offer the broadest social CRM solution in the market place. To date, approximately 87% to 90% of our software, hosting and support sales has been generated by the RightNow Service suite. Our products served more than 1.8 billion customer interactions, or unique sessions hosted by our solutions, during the nine months ended September 30, 2009. 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 software, hosting and support, and fees for professional services.

     Software, hosting and support revenue includes fees earned under subscriptions and software license arrangements. Subscription arrangements include a bundled fee to access the software and data through our hosting services, and support services. Subscription revenue is recorded ratably over the length of the agreement. Our hosting services provide remote management and maintenance of our software and customers’ data which is physically located in third party facilities. Customers’ access “hosted” software and data through a secure Internet connection. Support services include technical assistance for our software products and unspecified product upgrades and enhancements on a when and if available basis.

     License arrangements can be over time (a “term” license) or perpetual. For term licenses, software, hosting and support revenue is recognized ratably over the length of the agreement. Perpetual license revenue is generally recorded in full upon delivery of the license, and the hosting and support elements are recognized ratably over the contractual period.

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

     Professional services revenue is comprised of revenue from consulting, education, development services, and reimbursement of related travel costs. Consulting and education services include implementation and best practices consulting. Development services include customizations and integrations for a client’s specific business application. Professional services revenue decreased from 28% of total revenue in the quarter ended September 30, 2008 to 23% of total revenue in the quarter ended September 30, 2009.

     Professional services are typically sold with initial sales arrangements and then periodically over the client engagement. 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, more frequently, billed on a time and materials basis. We have determined that the professional services element of our software and subscription arrangements is not essential to the functionality of the software.

Cost of Revenue and Operating Expenses

     Cost of Revenue. Cost of revenue consists primarily of salaries and related expenses (such as employee benefits and payroll taxes) for our hosting, support and professional services organizations, third-party costs and equipment depreciation relating to our hosting services, third-party costs for voice enabled CRM 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, and depreciation for furniture and equipment, based on headcount. As a result, overhead expenses are reflected in each cost of revenue and operating expense category.

     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. For subscription arrangements, we expense the related sales commission in proportion to the revenue recognized. We expense our sales commissions on license and professional service arrangements when earned, which is typically at the time the related sale is invoiced to the client.

     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 to be sold, leased, or otherwise marketed, because the timing of the commercial releases of our products has substantially coincided with the attainment of technological feasibility. During the third quarter, we capitalized approximately $150,000 of cost of internally developed computer software to be sold as a service, which were incurred during the application development stage. As a result, the majority of research and development costs have been expensed as incurred.

     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.

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 and disclosures of contingent assets and liabilities. Management evaluates these estimates on an on-going basis using historical experience and other factors, including the current economic environment, and management believes these estimates to be reasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, foreign currency fluctuations, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. 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 share-based compensation. Significant items subject to such estimates and assumptions include: elements comprising our software, hosting and support sales arrangements and whether the elements have stand-alone and/or fair value; whether the fees charged for our products and services are fixed or determinable; the carrying amount of property and equipment and intangible assets; estimates regarding the recoverability and respective fair value of auction-rate securities and all other investments; valuation allowances for receivables and deferred income tax assets; and estimates of expected term and volatility in determining stock-based compensation expense. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates.

Revenue Recognition

     We sell substantially all products under subscription arrangements (“subscriptions”). For a bundled fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and these arrangements are considered service contracts which are outside the scope of Industry Topic 985, Software. Accordingly, we account for sales of subscriptions under Topic 605, Revenue Recognition. We recognize subscription revenue ratably over the length of the agreement and professional services are recognized as incurred based on their relative fair values, in accordance with Topic 605-25.

     To a lesser extent, we sell products under software license arrangements (“licenses”) and account for them in accordance with Industry Topic 985, Software. Licenses generally include multiple elements that are delivered up front or over time. For example, under a term license, we deliver the software up front and provide hosting and support services over time. Fair value for each element in a license does not exist since none are sold separately, and consequently, the bundled revenue is recognized ratably over the length of the agreement. Under a perpetual license, vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and therefore the license element is recognized immediately into revenue upon delivery using the residual method, and the hosting and support elements are recognized ratably over the contractual term.

     The application of these rules requires judgment, including the identification of individual elements in multiple element arrangements, whether there is objective and reliable evidence of fair value, including vendor specific objective evidence (“VSOE”) of fair value, for some or all elements. Changes to the elements in our sales arrangements, or our ability to establish VSOE or fair value for those elements may result in a material change to the amount of revenue recorded in a given period.

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

     Our standard payment terms are net 30, although payment within 90 days is considered normal. We periodically provide extended payment terms and we consider any fees due beyond 90 days to not be fixed or determinable. In such cases, judgment is required in determining the appropriate timing of revenue recognition. Changes to our practice of providing extended payment terms or providing concessions following a sale, may result in a material change to the amount of revenue recorded in a given period.

Allowance for doubtful accounts

     We regularly assess the collectability 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 taxable earnings.

Share-Based Compensation

     We record share-based payment arrangements in accordance with Topic 718, Compensation-Stock Compensation. Topic 718 requires the cost of share-based payment arrangements to be recorded in the statement of operations. Prior to 2006, the estimated cost of share-based payment arrangements was disclosed in a footnote to the financial statements. Share-based compensation amounts are affected by our stock price as well as our assumptions regarding the expected volatility of our stock, our employee stock option exercise forfeitures, and the related income tax effects. Our assumptions are based primarily on our historical information, some of which was developed when we were a private company.

Recently Issued Accounting Standards

     In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13, Revenue Arrangements with Multiple Deliverables. ASU 2009-13 addresses the criteria for separating consideration in multiple-element arrangements. The consensus will require companies allocating the overall consideration to each deliverable to use an estimated selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price for the deliverables. The ASU will be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. We are currently in process of evaluating the impact of the ASU and plan to adopt the standard January 1, 2009.

Results of Operations

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Revenue:
Software, hosting and support			72	%			77	%			73	%			75	%
Professional services			28				23				27				25
Total revenue			100				100				100				100
Cost of revenue:
Software, hosting and support			15				14				15				14
Professional services			22				16				22				18
Total cost of revenue			37				30				37				32
Gross profit			63				70				63				68
Operating expenses:
Sales and marketing			47				42				49				42
Research and development			13				13				13				13
General and administrative			9				10				10				11
Total operating expenses			69				65				72				66
Income (loss) from operations			(6	)			5				(9	)			2
Interest and other income, net			2				1				2				1
Income (loss) before income taxes			(4	)			6				(7	)			3
(Provision) benefit for income taxes			—				(1	)			—				(—	)
Net income (loss)			(4	)%			5	%			(7	)%			3	%

     The following table sets forth our on demand customer interactions and our revenue by type and geography expressed as a percentage of total revenue for each of the periods indicated.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Customer interactions (in millions)			576				620				1,516				1,790
Revenue by type:
Recurring (subscriptions, term licenses, hosting and support)			72	%			77	%			73	%			75	%
Professional services			28				23				27				25
Revenue by geography in:
United States			70	%			72	%			68	%			73	%
Europe			22				19				24				19
Asia Pacific			8				9				8				8

Quarter Overview

     Total revenue for the third quarter of 2009 increased 7% over the third quarter of 2008. Software, hosting and support revenue during the third quarter of 2009 increased 15% compared to the third quarter of 2008 due to expansion within the current customer base and new customer acquisitions. Professional services revenue during the third quarter of 2009 decreased 13% from the third quarter of 2008, due to reduced billable hours associated with the timing of implementation services, and currency exchange rate impact. The decrease in billable hours was partially due to a reduction of sub-contractor hours, which were used during the three months ended September 30, 2008 to assist with completing delivery of professional services backlog.

     During the third quarter of 2009, we continued to invest in our operations by adding personnel and capacity to our hosting and technical support organizations to broaden and enhance our solution offerings, including adding personnel to support both research and development, and general and administration efforts. The increase in expenses from these investments was offset by a foreign currency exchange rate benefit as compared to the third quarter of 2008, and continued expense management. These factors reduced total expenses in absolute dollars and as a percentage of revenue during the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008. Consequently, our operating income (loss) as a percentage of revenue improved to 5% during the quarter ended September 30, 2009 compared to (6) % during the quarter ended September 30, 2008.

     When compared to the third quarter of 2008, our results were impacted by the strength of the U.S. dollar in the third quarter of 2009 relative to the British pound, Australian dollar, and Euro. Although we report our actual results in U.S. dollars, we conduct a significant number of transactions in currencies other than U.S. dollars. Therefore, we discuss constant currency information to provide a framework for assessing how our underlying business performed excluding the effect of foreign currency rate fluctuations. Constant currency discussions herein are based on comparison to currency exchange rates during the prior year. For example, total revenue in the third quarter of 2009 increased by $2.5 million, or 7% over total revenue reported in the third quarter of 2008. If currency exchange rates in the third quarter of 2009 had remained constant with the third quarter 2008, revenue as of September 30, 2009 would have increased by approximately $3.6 million, which is an additional $1.1 million, or a further 3%. In other words, the change in exchange rates between the third quarter of 2008 and 2009 had an unfavorable impact to revenue of approximately $1.1 million or 3%. Using the same methodology, the change in exchange rates between the third quarter of 2008 and 2009 had an unfavorable impact on deferred revenue of $983,000. Expenses associated with international revenue are primarily paid in local currency, which generally provides a natural hedge to offset the revenue impact. Total cost of revenue and operating expenses in the third quarter of 2009 decreased by $1.3 million, or 3% over total cost of revenue and operating expenses reported in the third quarter of 2008. If currency exchange rates in the third quarter of 2009 had remained constant with the third quarter 2008, these total expenses as of September 30, 2009 would have decreased by approximately $500,000, which is an additional $783,000, or a further 3%. In other words, the change in exchange rates between the third quarter of 2008 and 2009 had a favorable impact to these total expenses of approximately $783,000 or 3%. The expenses most significantly exposed to currency exchange fluctuations are within sales and marketing and professional services cost of revenue.

     For the quarter ended September 30, 2009, we generated $4.9 million of cash from operations compared to ($1.3) million cash used in operations in the quarter ended September 30, 2008 primarily due to improved collections, timing of new sales collected in quarter, and increased profitability during the third quarter of 2009 as compared to the third quarter of 2008. Our cash and investment balances increased to $93.0 million at September 30, 2009 from $90.8 million at December 31, 2008, primarily due to strong cash collections.

     As of September 30, 2009, we had an accumulated deficit of $61.0 million. This deficit and our historical operating losses were primarily the result of costs incurred in the development, sales and marketing of our products and for general and administrative purposes.

Three and Nine months ended September 30, 2009 and 2008

Revenue

		Three Months Ended September 30,												Nine months ended September 30,
										Percent												Percent
(Amounts in thousands)		2008				2009				Change				2008				2009				Change
Software, hosting and support:			25,956				29,754				15	%			76,085				83,223				9	%
Professional services			10,281				8,977				(13	)			28,271				27,885				(1	)
Total revenue		$	36,237			$	38,731				7	%		$	104,356				111,108				6	%

     Total revenue for the three months ended September 30, 2009 was $38.7 million, an increase of $2.5 million, or 7%, over total revenue of $36.2 million for the three months ended September 30, 2008. If currency exchange rates in the third quarter of 2009 had remained constant with the currency exchange rates in the third quarter of 2008, revenue as of September 30, 2009 would have increased by approximately $3.6 million, which is an additional $1.1 million, or a further 3%, with the majority of the currency rate impact within software, hosting and support revenue. Total revenue for the nine months ended September 30, 2009 was $111.1 million, an increase of $6.8 million, or 6%, over total revenue of $104.4 million for the nine months ended September 30, 2008. If currency exchange rates in the nine months ended September 30, 2009 had remained constant with the currency exchange rates in the nine months ended September 30, 2008, revenue during the first nine months in 2009 would have increased by approximately $12 million, which is an additional $5.2 million, or a further 5%, with the majority of the currency rate impact within software, hosting and support revenue.

     Software, hosting and support revenue comprised of subscriptions, term licenses, hosting, support and perpetual license revenue for the three months ended September 30, 2009 increased $3.7 million, or 15%, over the comparable 2008 three month period, primarily due to expansion within the current customer base and new customer acquisitions over the comparable period. We believe our latest product, RightNow 8, appeals to large customers because of its robust performance characteristics, which in turn has driven larger average purchase volumes and higher average selling prices per customer on a trailing twelve month basis. Average revenue within the existing customer base increased as a result of sales of capacity additions, contract renewals, and new products. Customer interactions, a measure of unique customer sessions hosted in our data centers and customer usage, exceeded 620 million in the quarter ended September 30, 2009 as compared to 576 million in the quarter ended September 30, 2008.

     If currency exchange rates in the third quarter of 2009 had remained constant with the currency exchange rates in the third quarter of 2008, software, hosting and support revenue in the third quarter of 2009 would have increased by approximately an additional $778,000, or a further 3%. For the nine months ended September 30, 2009, software, hosting and support revenue increased $7.1 million, or 9%, from the comparable 2008 period. If currency exchange rates in the nine months ended September 30, 2009 had remained constant with the currency exchange rates in the nine months ended September 30, 2008, revenue during the first nine months in 2009 would have increased by approximately an additional $3.7 million, or a further 5%, within software, hosting and support revenue.

     Professional services revenue decreased $1.3 million, or (13)%, in the quarter ended September 30, 2009 over the comparable 2008 quarter, due to reduced billable hours associated with the timing of implementation services, and currency exchange rate impact. The decrease in billable hours was partially due to a reduction of sub-contractor hours, which were used during the three months ended September 30, 2008 to assist with completing delivery of professional services backlog. Professional services revenue for the nine months ended September 30, 2009 decreased $386,000, or 1%, over the nine months ended September 30, 2008. Customers generally purchase professional services with initial subscription or license arrangements, and periodically over the life of the contract.

     The mix of professional services revenue affects our profitability from period-to-period due to the lower gross profit earned on professional services as compared to the higher gross profit earned on software, hosting and support revenue. Professional services revenue represented 23% and 28% of total revenue in the three months ended September 30, 2009 and 2008, respectively.

     Revenue from European customers decreased to 19% of total revenue in the quarter ended September 30, 2009 from 22% of total revenue in the quarter ended September 30, 2008, while revenue from Asia Pacific clients was 9% of total revenue in the quarter ended September 30, 2009 compared to 8% of total revenue in the quarter ended September 30, 2008. Total revenue outside North America decreased to represent 28% and 27% of revenue in the three and nine months ended September 30, 2009, respectively, as compared to 30% and 32% for the comparative three month and nine month periods ended September 30, 2008, respectively, due primarily to a negative currency impact in the first half of 2009 and growth in North American revenue as compared to the comparable period one year earlier.

Cost of Revenue

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
										Percent												Percent
(Amounts in thousands)		2008				2009				Change				2008				2009				Change
Software, hosting and support		$	5,305				5,232				(1	)%		$	15,383				15,135				(2	)%
Professional services			8,133				6,365				(22	)			23,228				19,719				(15	)
Total cost of revenue			13,438				11,597				(14	)%		$	38,611				34,854				(10	)%

     Total cost of revenue for the quarter ended September 30, 2009 was $11.6 million, a decrease of $1.8 million, or (14) %, from total cost of revenue of $13.4 million for the quarter ended September 30, 2008. Total cost of revenue for the nine months ended September 30, 2009 was $34.9 million, a decrease of $3.8 million, or (10)%, over total cost of revenue of $38.6 million for the nine months ended September 30, 2008.

     Cost of software, hosting and support decreased $73,000, or (1)%, in the third quarter of 2009 from the third quarter of 2008 due to a decrease of approximately $197,000 in depreciation expense associated with hosting operations, and improved voice hosting bandwidth service costs, which decreased $154,000 during the third quarter of 2009. These decreases were partially offset by increased headcount to assist with voice and non-voice hosting volume in the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008. Average employee count in our hosting and technical support operations was 102 during the third quarter of 2009 as compared to 96 during the third quarter of 2008, which increased salaries and related expenses (such as bonuses and stock-based compensation) by $194,000 and increased common expense allocation (such as payroll taxes, benefits, office rent, supplies and other overhead expenses) by $39,000 during the third quarter of 2009. For the nine months ended September 30, 2009, cost of software, hosting and support decreased $248,000, or (2)%, from the comparable 2008 period. As a percent of the associated revenue, cost of software, hosting and support was 18% in the three and nine months ended September 30, 2009, as compared to 20% in both the three and nine months ended September 30, 2008. The reduction in the cost of software, hosting and support as a percentage of revenue was due to improved leverage in our business model, combined with expense management in the third quarter of 2009 as compared to the third quarter of 2008.

     Cost of professional services decreased $1.8 million, or (22)%, in the quarter ended September 30, 2009 from the quarter ended September 30, 2008. The expense reduction was attributable to a favorable foreign currency exchange rate impact of $237,000, a reduction in utilization of third-party partners that assisted in the deployment of professional services, a reassignment of professional service employees, and a reduction in travel-related costs. For the nine months ended September 30, 2009, cost of professional services decreased $3.5 million, or (15) %, from the comparable 2008 period, of which $1.4 million was attributable to a favorable foreign currency exchange rate impact. Average employee count in our professional services organization decreased to 164 during the third quarter of 2009 from 180 during the third quarter of 2008. As a percent of the associated revenue, cost of professional services decreased to 71% in the three and nine months ended September 30, 2009, respectively, from 79% and 82% in the three and nine months ended September 30, 2008, respectively. The reduction in the cost of professional services as a percentage of revenue was due to favorable currency impact and focused expense management during the three and nine months ended September 30, 2009 as compared to the comparable periods one year earlier. Employee training, customer scheduling requirements and use of third-party resources can cause fluctuation in cost of professional services as a percentage of revenue.

Operating Expenses

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
										Percent												Percent
(Amounts in thousands)		2008				2009				Change				2008				2009				Change
Sales and marketing		$	16,889			$	16,175				(4	)%			51,334			$	47,046				(8	)%
Research and development			4,671				5,100				9				13,664				14,907				9
General and administrative			3,215				4,018				25				10,621				11,671				10
Total operating expenses		$	24,775			$	25,293				2	%		$	75,619			$	73,624				(3	)%

Sales and Marketing Expenses

     Sales and marketing expenses were $16.2 million in the third quarter of 2009, a decrease of $714,000, or (4)%, from sales and marketing expenses of $16.9 million in the third quarter of 2008. The decrease was due primarily to $459,000 in favorable foreign currency exchange rate impact and reduced headcount. Average employee count in our sales and marketing organization decreased to 261 during the third quarter of 2009 from 277 during the third quarter of 2008, stemming from an expense reduction effort in the fourth quarter of 2008. Commissions and bonus expense increased due to improved sales performance. Travel-related costs and advertising decreased due to improved expense management.

     Sales and marketing expenses were $47.0 million for the nine months ended September 30, 2009, a decrease of $4.3 million, or (8)%, over sales and marketing expense of $51.3 million for the nine months ended September 30, 2008. The reduction in expense was primarily due to $2.4 million in favorable foreign currency exchange impact and reduced headcount.

     Under license arrangements, we expense sales incentives when earned, which is typically upon contract signing. Under subscription arrangements, we defer the related sales incentive costs and expense them in proportion to the revenue recognized. Net sales incentive expense was $4.0 million and $2.8 million for the three months ended September 30, 2009 and 2008, respectively. Net sales incentive expense was $10.2 million and $9.8 million for the nine month periods ended September 30, 2009 and 2008, respectively. Our deferred commissions were $8.2 million and $8.7 million at December 31, 2008 and September 30, 2009, respectively.

Research and Development Expenses

     Research and development expenses were $5.1 million in the three months ended September 30, 2009, an increase of $429,000, or 9%, over research and development expenses of $4.7 million in the three months ended September 30, 2008, primarily due to growth in headcount and expenditures pertaining to projects to automate quality assurance testing procedures. Average employee count in our research and development organization was 158 during the third quarter of 2009 compared to 146 during the third quarter of 2008. The majority of the research and development headcount growth came from our acquisition of HiveLive during the third quarter of 2009. Research and development expenses for the nine months ended September 30, 2009 increased $1.2 million, or 9%, over the comparable 2008 period primarily due to growth in headcount and expenditures pertaining to projects to automate quality assurance testing procedures.

General and Administrative Expenses

     General and administrative expenses were $4.0 million in the third quarter of 2009, an increase of $803,000, or 25%, over general and administrative expenses of $3.2 million in the third quarter of 2008. The increase in expense was primarily due to staff additions, and direct costs of the acquisition of HiveLive during the third quarter of 2009. Average employee count in our general and administrative organization was 86 during the third quarter of 2009 compared to 79 during the third quarter of 2008. General and administrative expenses for the nine months ended September 30, 2009 increased $1.1 million, or 10% over the comparable 2008 period primarily due to employee growth.

Stock-Based Compensation Expense

     Total stock-based compensation expense for the three months ended September 30, 2009 was $1.9 million as compared to $1.5 million for the three months ended September 30, 2008. Stock-based compensation was $6.1 million for the nine months ended September 30, 2009 as compared to $4.7 million for the nine months ended September 30, 2008. Stock-based compensation increased during the first nine months of 2009, primarily due to a change in estimated forfeiture rates during the second quarter of 2009, combined with a non-recurring director’s stock option grant during the first quarter of 2009. Stock-based compensation expense varies from period-to-period because of the number of option shares that are expected to vest, forfeiture rates, and changes in our underlying stock price and valuation assumptions.

Interest and Other Income, Net

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
										Percent												Percent
(Amounts in thousands)		2008				2009				Change				2008				2009				Change
Interest income		$	714			$	248				(65	)%		$	2,366			$	866				(63	)%
Interest expense			(3	)			(1	)			n/m				(8	)			(7	)			n/m
Other income (expense)			(159	)			95				n/m				(349	)			234				n/m
Total interest and other income , net		$	552			$	342				(38	)%		$	2,009			$	1,094				(46	)%

     Interest income decreased 65% in the third quarter of 2009 from the third quarter of 2008 due to lower cash balances available for investment combined with declining investment yields driven by the periodic decreases in the federal funds rate. For the nine months ended September 30, 2009, interest income decreased 63% from the comparable 2008 period. Our investment portfolio consists primarily of investment-grade government agency securities, corporate debt instruments, and auction-rate securities.

     Other income consists primarily of a gain on our auction-rate securities (“ARS”), which was offset by a loss on a put option settlement right associated with the auction-rate securities and losses on transactions denominated in foreign currencies. See Note 7 to our Condensed Consolidated Financial Statement for further discussion on ARS investments and the related put option.

Provision for Income Taxes

     The provision for income taxes of $460,000 in the nine months ended September 30, 2009, consists primarily of state taxes and foreign taxes withheld. Our effective tax rate differs from the federal statutory rate primarily due to the utilization of net operating loss carryforwards, foreign rate differentials, and non-deductible meal and entertainment expenses. Our effective tax rate in 2009 will depend on a number of factors, such as the amount and mix of stock-based compensation expense to be recorded under Topic 718, Compensation-Stock Compensation, the level of business in state and foreign tax jurisdictions, management’s expectation of the realization of deferred tax assets and the associated valuation allowance, and other factors.

Liquidity and Capital Resources

		Three Months Ended September 30,												Nine months ended September 30,
										Percent												Percent
(Amounts in thousands)		2008				2009				Change				2008				2009				Change
Cash, cash equivalents and short-term investments		$	97,589			$	93,022				(5	)%		$	97,589			$	93,022				(5	)%
Long-term investments			4,612				—				(100	)%			4,612				—				(100	)%
Cash provided by (used in) operating activities			(1,330	)			4,909				469	%			10,914				11,876				9	%

     At September 30, 2009, cash, cash equivalents, and investments totaled $93.0 million. In addition to our cash and short-term investments, other sources of liquidity at September 30, 2009 included a $3.0 million bank line of credit facility, under which there have been no borrowings.

     Operating activities provided $4.9 million and $11.9 million of cash during the three and nine months ended September 30, 2009, respectively, as compared to $1.3 cash used in operations and $10.9 million cash provided from operations during the three and nine months ended September 30, 2008, respectively. Cash flow from operations can vary significantly from quarter-to-quarter for many reasons, including the timing of business in a given period and customer payment preferences and patterns. Strong cash collections from prior quarter sales was the primary driver of the cash provided in operating activities during the quarter ended September 30, 2009. Historically, the percentage of business signed with monthly, quarterly, or annual billing terms has ranged from approximately 15 to 25%, but during the third quarter of 2009 increased to 39%. The increased rate in the third quarter of 2009 was partially due to the signings of large multi-year contact center deals. We also believe the increase is a result of several factors, including SaaS maturing, internal sales incentive plans, and the economy. Deferred revenue is not recorded for subscriptions with monthly, quarterly, or annual billing terms until the invoices are issued. A change in the billing practice resulting in delayed billing terms could have a material adverse effect on cash provided from operating activities and growth in deferred revenue.

     The allowance for uncollectible accounts receivable represented approximately 5% of current accounts and term receivables at September 30, 2009 and at December 31, 2008, respectively. Accounts receivable written off in the third quarter of 2009 were relatively consistent with the fourth quarter of 2008. We regularly assess the adequacy of the allowance for doubtful accounts. Actual write-offs could exceed our estimates and adversely affect operating cash flows in the future.

     Investing activities used $20.4 million and $31.2 million in the three and nine months ended September 30, 2009, respectively. Third quarter 2009 investing activities consisted of net purchases of short-term investments of $13.1 million, acquisition consideration for the purchase of HiveLive, Inc. of $5.9 million, and $1.2 million of capital expenditures. Capital asset additions consisted primarily of equipment acquisitions for our hosting operations, including government hosting, and employee growth.

     Financing activities provided $250,000 and used $1.2 million in the three and nine months ended September 30, 2009, respectively. During the nine months ended September 30, 2009, the cash used for financing activities was primarily due to a repurchase of 231,000 shares of our common stock for $1.8 million in the first quarter of 2009, which completed our $15 million board-approved stock buyback program.

     As of September 30, 2009, we held approximately $4.4 million in par value auction rate securities (“ARS”) that are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors 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 a settlement 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 the non-transferable right (“put option”) to sell our ARS at par value to the broker commencing June 2010 through July 2012, and (2) gave the broker the right to purchase the ARS from us at any time after the executed settlement agreement date as long as we receive par value. We expect to sell the ARS under the put option. However, if we do not exercise the put option during or before July 2012, it will expire and the broker will have no further rights or obligation to buy the ARS. Redemption of these investments may be subject to brokerage house default. As a result of this settlement, we reclassified the ARS from available for sale securities to trading securities. During the nine months ended September 30, 2009, we marked to market the investment in accordance with Topic 320, which resulted in an increase in fair value for a total unrealized gain of $428,000, included in other income, net. Partially offsetting this gain within other income, net was a $397,000 unrealized loss related to the change in fair value of the put option we obtained pursuant to the settlement agreement. We

elected the fair value option on the put option in accordance with Topic 825, and as such, changes in fair value are recorded during each reporting period. Our inability to dispose of our ARS prior to June 2010 could negatively impact our liquidity and cash on hand, which, in turn, could cause us to forego potentially beneficial operational and strategic transactions or to incur additional indebtedness. Additionally, we could be adversely impacted if the broker is unable to meet its obligations under the settlement agreement as the broker’s obligations under the put option are not secured by its assets and do not require the broker to obtain any financing to support its performance obligations under the put option. As a result, the agreement covers $4.4 million par value (fair value $4.1 million) of the ARS held by us as of September 30, 2009.

     We believe our existing cash and short-term investments, together with funds generated from operations, should be sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth and expansion of our sales and marketing activities, the possible acquisition of complementary products or businesses, the timing and extent of spending required for research and development efforts, and the continuing market acceptance of our products. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financings. Additional equity or debt financing may not be available on terms favorable to us or at all.

Off-Balance Sheet Arrangements

     As of September 30, 2009, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

Contractual Obligations and Commitments

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

     Our results of operations and cash flows are subject to fluctuation due to changes in foreign currency exchange rates, particularly changes in the British pound, Australian dollar, and Euro, because our contracts are frequently denominated in local currency. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures. We do not currently have any such contracts in place, nor did we enter into any such contracts during the quarters ended September 30, 2009 or September 30, 2008.

     When compared to the third quarter of 2008, our results were impacted by the strength of the U.S. dollar in the third quarter of 2009 relative to the British pound, Australian dollar, and Euro. The change in exchange rates between the third quarter of 2008 and 2009 had an unfavorable impact to revenue of $1.1 million. Additionally, deferred revenue decreased by approximately $983,000 when comparing the change in exchange rates between the third quarter of 2008 and 2009. Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to offset the revenue impact. These expenses in the third quarter of 2009 were favorably impacted $783,000 when comparing the change in exchange rates between the third quarter of 2008 and 2009. During the nine months ended September 30, 2009, foreign currency fluctuations reduced revenue by approximately $5.2 million, and reduced expenses by approximately $4.1 million, when comparing the change in weighted average exchange rates during the quarter ended September 30, 2009 with the weighted average exchange rates during the quarter ended September 30, 2008. Continued changes in the dollar relative to other currencies may cause us to experience further impact.

Interest Rate Sensitivity

     Our investments consist of short-term, interest-bearing securities, which are subject to credit and interest rate risk. Our portfolio is investment-grade and diversified among issuers and security types to reduce credit risk. We manage our interest rate risk by maintaining a large portion of our investment portfolio in instruments with short maturities or frequent interest rate resets. We also manage interest rate risk by maintaining sufficient cash and cash equivalents such that we are able to hold investments until maturity. If market interest rates were to increase by 100 basis points from the level at September 30, 2009, the fair value of our portfolio would decline by approximately $243,000.

Liquidation and Valuation Risk

     Our short-term investments consist of approximately $4.4 million in par value auction rate securities (“ARS”) with investment grades of AAA or AA, as of September 30, 2009. Despite the long-term contractual maturities of the ARS, all of these securities are considered trading securities as of September 30, 2009. Since February 2008, uncertainties in the credit markets caused all auctions of our ARS to be unsuccessful. During the fourth quarter of 2008 we executed a settlement 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 the non-transferable right (“put option”) to sell our ARS at par value to the broker commencing June 2010 through July 2012, and (2) gave the broker the right to purchase the ARS from us at any time after the executed settlement agreement date as long as we receive par value. We expect to sell the ARS under the put option. However, if we do not exercise the put option during or before July 2012, it will expire and the broker will have no further rights or obligation to buy the ARS. Redemption of these investments may be subject to brokerage house default. As a result of this settlement, we reclassified the ARS from available for sale securities to trading securities. During the nine months ended September 30, 2009, we marked to market the investment in accordance with Topic 320, which resulted in an increase in fair value for a total unrealized gain of $428,000, included in other income, net. Partially offsetting this gain within other income, net was a $397,000 unrealized loss related to the put option we obtained pursuant to the settlement agreement. Our inability to dispose of our ARS prior to June 2010 could negatively impact our liquidity and cash on hand, which, in turn, could cause us to forego potentially beneficial operational and strategic transactions or to incur additional indebtedness. Additionally, we could be adversely impacted if the broker is unable to meet its obligations under the settlement agreement as the broker’s obligations under the put option are not secured by its assets and do not require the broker to obtain any financing to support its performance obligations under the put option. As a result, the agreement covers $4.4 million par value (fair value $4.1 million) of the ARS held by us as of September 30, 2009. Based on our expected operating cash flows, and other sources and uses of cash, we do not anticipate that the lack of liquidity on these investments will affect our ability to execute our current business plan. We will continue to monitor the state of the credit markets and its potential impact, if any, on the fair value and classification of our portfolio of ARS.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

     Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes to Internal Control over Financial Reporting

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

Part II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

     A restated description of the risk factors associated with our business is set forth below. This description includes any and all changes (whether or not material) to, and supersedes, the description of the 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 or sell our common stock, you should carefully consider the risks described below, in addition to the other cautionary statements and risks described elsewhere and the other information contained in this report and in our other filings with the SEC, including our reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on RightNow, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

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

     Our clients consist of large and small companies in nearly all industry sectors and geographies. Potential new clients or existing clients could defer purchases of our products because of unfavorable macroeconomic conditions, such as fluctuations in currency exchange rates, industry purchasing patterns, industry or national economic downturns, rising interest rates, and other factors. Our ability to grow revenue may be adversely affected by unfavorable economic conditions.

     Starting in 2008 there has been deterioration in global economic conditions due to many factors, including the credit market crisis, reduced credit availability, bank failures, slower economic activity, significant expense reductions, bankruptcies, concerns about inflation, current recession, and general adverse business conditions. These conditions could lead to fewer sales of our products, longer sales cycles, customers requesting longer payment terms, customers failing to pay amounts due, and slower collections of accounts receivable. All of these factors could adversely impact our results of operations, cash flow from operations, and our financial position. In addition, we may be forced to respond to an economic downturn by contracting operations, which we may have difficulties managing in a timely fashion.

We have significant international sales and are subject to risks associated with operating in international markets including the risk of foreign currency exchange rate fluctuations.

     International sales comprised 30% and 27% of our revenue for the quarters ended September 30, 2008 and 2009, respectively. We intend to continue to pursue and expand our international business activities. Adverse economic and political conditions could make it difficult for us to increase our international sales or to operate abroad. International operations are subject to many inherent risks, including:

	•		fluctuations in foreign currency exchange rates;
	•		political, social and economic instability, including conflicts in the Middle East, Central Asia and elsewhere abroad, terrorist attacks and security concerns in general;
	•		adverse changes in tariffs and other protectionist laws and business practices that favor local competitors;
	•		longer collection periods and difficulties in collecting receivables from foreign entities;
	•		exposure to different legal standards and burdens of complying with a variety of foreign laws, including employment, tax, privacy and data protection laws and regulations;
	•		reduced protection for our intellectual property in some countries;
	•		expenses associated with localizing products for foreign countries, including translation into foreign languages; and
	•		import and export license requirements and restrictions of the United States and each other country in which we operate.

     We believe that international sales will continue to represent a significant portion of our revenue for the foreseeable future, and that continued growth will require further expansion of our international operations. A substantial percentage of our international sales are denominated in the local currency. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets.

     Margins on sales of our products and services in foreign countries, and on sales of products and services that include costs from foreign based employees or foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. When compared to the third quarter of 2008, the U.S. dollar fluctuated significantly compared to the British pound, Australian dollar, and Euro in the third quarter of 2009. The change in exchange rates between the third quarter of 2008 and 2009 had an unfavorable impact to revenue of $1.1 million. Additionally, deferred revenue decreased by approximately $983,000 when comparing the change in exchange rates between the third quarter of 2008 and 2009. Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to offset the revenue impact. These expenses in the third quarter of 2009 were favorably impacted $783,000 when comparing the change in exchange rates between the third quarter of 2008 and 2009. During the nine months ended September 30, 2009, foreign currency fluctuations reduced revenue by approximately $5.2 million, and favorably benefited expenses by approximately $4.1 million, when comparing the change in weighted average exchange rates during the quarter ended September 30, 2009 with the weighted average exchange rates during the quarter ended September 30, 2008. The Company’s primary exposure to movements in foreign currency exchange rates relate to non-U.S. dollar denominated sales in EMEA, and Asia-Pacific and non-U.S. dollar denominated operating expenses incurred in these respective regions. These foreign currency exposures may make it difficult to compare our financial statements for the current period with financial statements from earlier periods.

We may not be able to sustain or increase profitability in the future.

     We had an accumulated deficit of $61.0 million as of September 30, 2009. We expect to continue to incur significant professional services, sales and marketing, research and development and general and administrative expenses as we expand our operations and, as a result, we will need to generate significant revenue to sustain or increase profitability. We may not be able to continue to improve our operating results at the rate that has occurred in the past. Even though we were profitable during the three and nine months ended September 30, 2009, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future, which may cause the price of our stock to decline.

We face intense competition, and our failure to compete successfully could make it difficult for us to add and retain clients and could reduce or impede the growth of our business.

     The market for CRM solutions is highly competitive and fragmented, and is subject to rapidly changing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of other industry participants. Increased competition could result in commoditization, pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients, and our business, financial condition and results of operations will be seriously harmed.

     We face competition from:

	•		Companies currently providing customer service solutions, some of whom offer hosted services, including ATG, BMC Software Corporation, Inc., eGain Communications Corporation, Inquira Software, Inc., Kana Software, Inc., Microsoft Corporation, Netsuite, nGenera, Oracle Corporation, Parature, SAP AG, and salesforce.com;
	•		CRM systems that are developed and maintained internally by businesses;
	•		CRM products or services that are developed, or bundled with other products or services, and installed on a client’s premises by software vendors;
	•		Outsourced contact center providers that bundle solutions and agent labor in their service offerings;
	•		New companies entering the CRM software market, the on demand applications market and the on demand CRM market, or expanding from any one of these markets to the others; and
	•		Voice system integrators and voice-enabled IVR technology providers, such as Microsoft, TuVox, and Voxify.
	•		Social CRM providers, such as Lithium and other niche social CRM providers.

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

     In addition, many of our current and potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential clients, alliance partners or other third parties, or may combine and consolidate to become more formidable competitors with better resources. We also expect that new competitors, such as enterprise software vendors and online service providers that have traditionally focused on enterprise resource planning or back office applications, will continue to enter the on demand CRM market with competing products as the on demand CRM market develops and matures.

Our quarterly results of operations may fluctuate in the future.

     Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section:

	•		our ability to retain and increase sales to existing clients, attract new clients and satisfy our clients’ requirements;
	•		general economic, industry and market conditions;
	•		the mix of revenue between license arrangements, professional services and subscription arrangements as sales commissions are generally expensed ratably over the term of an agreement for subscription services, and expensed when invoiced for license arrangements and professional services;
	•		changes in the mix of revenue between professional services and software, hosting and support, because the gross margin on professional services is typically lower than the gross margin on software, hosting and support;
	•		changes in the mix of voice self service applications sold and/or usage volume, because the gross margin on voice self service applications is typically lower than the gross margin on our sales, marketing, feedback and service applications;
	•		the timing and success of new product introductions or upgrades by us or our competitors;
	•		the timing of professional service sales and our ability to appropriately staff and train professional service resources without negatively impacting professional service margins;
	•		changes in our pricing policies or those of our competitors;
	•		the amount and timing of expenditures related to expanding our operations;
	•		changes in our assumptions of stock price volatility, employee exercise behaviors, and option forfeiture rates, or changes in the number of stock options granted and vesting requirements in any particular period, which effects the amount of stock-based compensation expense;
	•		changes in the payment terms for our products and services, including changes in the mix of payment options chosen by our customers;
	•		the purchasing and budgeting cycles of our clients;
	•		changes in the mix of subscription and perpetual licenses sold in a particular quarter, because perpetual license revenue is recorded into revenue upon delivery whereas subscriptions are recorded into revenue ratably over the contractual period; and
	•		changes in credit market conditions associated with auction rate securities, which could permanently impair the recoverability of these investments.

     Because the sales cycle for the evaluation and implementation of our solutions typically ranges from 60 to 180 days, we may also experience a delay between increasing operating expenses and the generation of corresponding revenue, if any. Moreover, because most of the revenue from new sales agreements is recognized over time, downturns or upturns in sales may not be immediately reflected in our operating results. Additionally, our professional service margins may be negatively impacted by training requirements

for new professional service resources and/or customer scheduling issues. Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.

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

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

     Increasing our client base and achieving broader market acceptance of our solutions may depend to a significant extent on the effectiveness of our sales and marketing programs/operations. Our business will be seriously harmed if our efforts do not maximize revenue per sales and marketing headcount. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated channel partners, if any existing or future channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services.

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

     Our solutions are generally sold pursuant to time-based agreements that are typically subject to renewal every two years or less and our clients have no obligation to renew. Because our clients may elect not to renew, we may not be able to consistently and accurately predict future renewal rates. Our clients’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our solutions, their ability to continue their operations or invest in customer service, their acceptance of a change from term license agreements to subscription service agreements, or the availability and pricing of competing products. If large numbers of existing clients do not renew, or renew on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

We have experienced growth in recent periods. If we fail to manage 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 to continue to expand our business at an appropriate pace. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We anticipate that this expansion will require substantial management effort and significant additional investment in our infrastructure. If we are unable to successfully manage our growth, our business, financial condition and results of operations will be adversely affected.

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

If there are interruptions or delays in our hosting services through third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with clients and subject us to liability.

     As of September 30, 2009, over 95% of our clients were using our hosting services for deployment of our software applications. We generally provide our hosting services for our applications through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in California, Illinois, Massachusetts, New Jersey and London, England. Our voice applications for several international customers are hosted by third parties who also own and operate the hardware on which our applications reside. We do not maintain long-term supply contracts with any of our hosting providers, and providers do

not guarantee that our clients’ access to hosted solutions will be uninterrupted, error-free or secure. Our operations depend on our providers’ ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. Our back-up computer hardware and systems have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring simultaneously at all hosting facilities. In the event that our hosting facility arrangements were terminated, or there was a lapse of service or accidental or willful damage to such facilities, we could experience lengthy interruptions in our hosting service as well as delays and/or additional expense in arranging new facilities and services. Any or all of these events could cause our clients to lose access to their important data. In addition, the failure by our third-party hosting facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.

     Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our clients’ service to their customers. Any interruptions or delays in our hosting services, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with clients and our 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 to renew their licenses, any of which could adversely affect our business, financial condition and results of operations. In the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Additionally, during the first quarter of 2009, we announced a SaaS service level credit program, which provides for a partial rebate if we fall short of our system availability objective. If we fail to meet this objective for one or all of our customers, we may have to pay a substantial amount of money, which may impact cash reserves, revenue recognition, and our reputation

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

     Our hosting systems and our software store and transmit proprietary information and critical data belonging to our clients and their customers. Any accidental or willful security breaches or other unauthorized access could expose us to a risk of information loss, litigation and other possible liabilities. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our clients’ data, our relationships with clients and our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we and our third-party hosting co-location facilities may be unable to anticipate these techniques or to implement adequate preventative measures.

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

     The CRM industry is characterized by rapid technological advances, changes in client requirements, frequent new product and service introductions and enhancements, changes in protocols and evolving industry standards. Our hosted business model and the on demand CRM market are relatively new and may evolve even more rapidly than the rest of the CRM market. Competing products and services based on new technologies or new industry standards may perform better or cost less than our solutions and could render our solutions less competitive or obsolete. In addition, because our solutions are designed to operate on a variety of network hardware and software platforms using a standard Internet web browser, we will need to continuously modify and enhance our solutions to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies and to integrate with our clients’ systems as they change and evolve. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses.

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

     If we are unable to successfully develop and market new and enhanced solutions that respond in a timely manner to changing technology and evolving industry standards, and if we are unable to satisfy the diverse and evolving technology needs of our clients, our business, financial condition and results of operations will suffer.

Our failure to attract and retain qualified or key personnel may prevent us from effectively developing, marketing, selling, integrating and supporting our products.

     Our success and future growth depends to a significant degree upon the skills, experience, performance and continued service of our senior management, engineering, sales, marketing, service, support and other key personnel. Specifically, we believe that our future success is highly dependent on Greg Gianforte, our founder, Chairman and Chief Executive Officer. In addition, we do not have employment agreements with any of our senior management or key personnel that require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. If we lose the services of Mr. Gianforte or any of our other key personnel, our business will be severely disrupted and we may be unable to operate effectively. We do not maintain “key person” life insurance policies on any of our key employees except Mr. Gianforte. This life insurance policy would not be sufficient to compensate us for the loss of his services. Our future 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, product trainers, and senior personnel.

Our failure to attract, manage, support and retain qualified partners may prevent us from effectively deploying product and professional services.

     Our success and future growth depends in part upon the skills, experience, performance and continued service of our partners. We engage with partners in a number of ways, including assisting us to identify prospective customers, to distribute our solutions, to develop complementary solutions, and to help us to fulfill professional services engagements. We believe that our future success depends in part upon our ability to develop strategic, long term and profitable partnerships. If we do not acquire and retain the right partners, our products might become uncompetitive, we may be unable to take full advantage of the potential demand for our solutions, or our ability to rapidly deliver our solutions may be impaired. The use of partners to fulfill customer requirements may impact our normal margins, and affect the profitability of customer transactions.

If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.

     Our software products may contain undetected errors or defects that may result in product failures, slow response times, or otherwise cause 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 products could hurt our reputation and may damage our clients’ businesses. If that occurs, we could lose future sales, or our existing clients could elect to not renew or to delay or withhold payment to us, which could result in an increase in our provision for doubtful accounts and an increase in collection cycles for accounts receivable. Clients also may make warranty or other claims against us, which could result in the expense and risk of litigation. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our products fails to perform or contains a technical defect, a client may assert a claim against us for substantial damages, whether or not we are responsible for the product failure or defect. We do not currently maintain any warranty reserves.

     Product liability claims could require us to spend significant time and money in litigation or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claims successfully brought against us would cause our business to suffer.

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

     Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws, patents and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. We may not be able to obtain any further patents or trademarks, and our

pending applications may not result in the issuance of patents or trademarks. Any of our issued patents may not be broad enough to protect our proprietary rights or could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

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

     The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. As we seek to extend our CRM product and service offerings, we may be constrained by the intellectual property rights of others. We have in the past been named as a defendant in a lawsuit alleging intellectual property infringement, and we may again in the future have to defend against intellectual property lawsuits. We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements. If any of our products violate third-party proprietary rights, we may be required to re-engineer our products or seek to obtain licenses from third parties, which may not be available on reasonable terms or at all. Because our sales agreements typically require us to indemnify our clients from any claim or finding of intellectual property infringement, any such litigation or successful infringement claims could adversely affect our business, financial condition and results of operations. Any efforts to re-engineer our products, obtain licenses from third parties on favorable terms or license a substitute technology may not be successful and, in any case, may substantially increase our costs and harm our business, financial condition and results of operations.

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

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

     The market for on demand application services is at a relatively early stage of development, and it is uncertain whether these application services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of companies to increase their use of on demand application services in general and for on demand customer relationship management applications in particular. The willingness of companies to increase their use of any on demand application services is in part dependent on the actual and perceived reliability of hosted solutions. In addition, many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on demand application services. While we have supported traditional on site deployment of our software applications, widespread market acceptance of our on demand software solutions is critical to the success of our business. Other factors that may affect the market acceptance of our solutions include:

	•		on demand security capabilities and reliability;
	•		concerns with entrusting a third party to store and manage critical customer data;
	•		our ability to meet the needs of broader segments of the CRM market or other on demand markets;
	•		the level of customization we offer;

	•		our ability to continue to achieve and maintain high levels of client satisfaction;
	•		concerns with purchasing critical CRM solutions from a company with a history of operating losses;
	•		customer acceptance of our subscription sales arrangements; and
	•		the price, performance and availability of competing products and services.

     If businesses do not perceive the benefits of on demand solutions in general, or our on demand solutions in particular, then the market for these solutions may not develop further, or it may develop more slowly 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 new solutions or expand the applications for our products and solutions to broader CRM markets do not succeed, our ability to grow our business will be adversely affected.

     Approximately 90% of our sales are derived from RightNow Service, a suite of solutions used to optimize customer service operations. If we are unable to successfully develop and sell new and enhanced versions of RightNow Service, or introduce new products and solutions for the customer service market, our financial performance will suffer. Although to date the majority of business has been focused on providing solutions for customer service operations, we provide sales, marketing, feedback, voice-enabled, and social applications to expand our solution offerings. Additionally, we have focused on eService solutions to call centers. Our efforts to expand beyond the customer service market may not be successful in part because certain of our competitors have far greater experience and brand recognition in the broader segments of the CRM market. In addition, our efforts to expand our on demand software solutions beyond the customer service market may divert management resources from our existing operations and require us to commit significant financial resources to a market where we are less proven, which may harm our business, financial condition and results of operations.

Recently completed and/or future acquisitions could disrupt our business and harm our financial condition and results of operations.

     In order to expand our addressable market, we may decide to acquire additional businesses, products and technologies. In May 2005, we acquired the assets of Convergent Voice and in May 2006, we acquired Salesnet, Inc. Most recently, in September 2009 we acquired HiveLive, Inc. Acquisitions could require significant capital infusions into the acquired business and could involve many risks, including, but not limited to, the following:

	•		an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;
	•		we may encounter difficulties in assimilating and integrating the business, technologies, products, personnel or operations of companies that we acquire, particularly if key personnel of the acquired company decide not to work for us;
	•		our existing and potential clients and the customers of the acquired company may delay purchases due to uncertainty related to an acquisition;
	•		an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
	•		the acquired businesses, products or technologies may not generate sufficient revenue to offset acquisition costs and could result in material asset impairment charges;
	•		we may issue equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock; and
	•		acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience.

     We cannot assure you that we will be able to identify or consummate any future acquisitions on favorable terms, or at all. If we do pursue any future acquisitions, it is possible that we may not realize the anticipated benefits from the acquisitions or that the financial markets or investors will negatively view the acquisitions. Even if we successfully complete an acquisition, it could adversely affect our business, financial condition and results of operations.

Changes to financial accounting standards may affect our results of operations and financial condition.

     Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, such as software revenue recognition, accounting for stock-based compensation, unanticipated ambiguities in fair value accounting standards and income tax uncertainties, are complex and involve subjective judgments by management. Changes to generally accepted accounting principles, their interpretation, or changes in our products or business could significantly change our reported earnings and financial condition and could add significant volatility to those measures.

The required adoption of Topic 718, Compensation-Stock Compensation makes stock options a less attractive form of employee compensation, and our use of alternative forms of employee compensation in response to Topic 718 could adversely affect our ability to attract and retain personnel.

     We have historically used stock options as a key component of our employee compensation because we believe it aligns employees’ interests with our stockholders’ interest, encourages employee retention, and provides a competitive component of our overall compensation program. Due to the required adoption of Topic 718, and the recording of stock option expense on our operating statements, we may determine that it is in our best interest to reduce the number or size of our stock-based awards, or change the type of awards granted. In doing so, we may not be able to attract, retain and motivate our employees.

With the recent volatility in the capital markets, there is a risk that we could suffer a loss of principal in our cash and cash equivalents and short term investments and suffer a reduction in our interest income or in our return on investments. Additionally funds associated with auction rate securities may be inaccessible in excess of 12 months, which may result in market value declines, which could have a material impact on our operating results in the period it is recognized.

     We invest our cash and cash equivalents and short-term investments pursuant to our investment policy in cash, money market funds, commercial paper, corporate bonds and government agency securities, which are of investment grade quality. Prior to March 3, 2008 our investment policy allowed us to invest cash in auction-rate securities (“ARS”). At September 30, 2009 we held approximately $4.4 million par value ARS that are subject to general credit, liquidity, market, and interest rate risks, which may be exacerbated by U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets and caused credit and liquidity issues. During the fourth quarter of 2008, we executed a settlement 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 the non-transferable right (“put option”) to sell our ARS at par value to the broker commencing June 2010 through July 2012, and (2) gave the broker the right to purchase the ARS from us at any time after the executed settlement agreement date as long as we receive par value. However, if we do not exercise the put option during or before July 2012, it will expire and the broker will have no further rights or obligation to buy the ARS. Redemption of these investments may be subject to brokerage house default. As a result of this settlement, we reclassified the $4.4 million par value ARS from available for sale securities to trading securities. During the nine months ended September 30, 2009, we marked to market the investment in accordance with Topic 320, which resulted in an increase in fair value for a total unrealized gain of $428,000 included in other income, net. Partially, offsetting this gain within other income, net was a $397,000 unrealized loss during the nine months ended September 30, 2009 related to the put option we obtained pursuant to the settlement agreement. Our inability to dispose of our ARS prior to June 2010 could negatively impact our liquidity and cash on hand, which, in turn, could cause us to forego potentially beneficial operational and strategic transactions or to incur additional indebtedness. Additionally, we could be adversely impacted if the broker is unable to meet its obligations under the settlement agreement as the broker’s obligations under the put option are not secured by its assets and do not require the broker to obtain any financing to support its performance obligations under the put option.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

     We may require additional capital to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure, fund expansion, respond to competitive pressures and acquire complementary businesses, products and technologies. Absent sufficient cash flow from operations, we may need to engage in equity or debt financings to secure additional funds to meet our operating and capital needs. In addition, even though we may not need additional

funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, to pay dividends and to pursue business opportunities, including potential acquisitions. In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our interest or principal payments.

The success of our products and our hosted business depends on the continued growth and acceptance of the Internet as a business and communications tool, and the related expansion of the Internet infrastructure.

     The future success of our products and our hosted business depends upon the continued and widespread adoption of the Internet as a primary medium for commerce, communication and business applications. Our business growth would be impeded if the performance or perception of the Internet, or companies providing hosted solutions, was harmed by security problems such as “viruses,” “worms” and other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet activity, increased costs, decreased accessibility and quality of service, or increased government regulation and taxation of Internet activity.

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

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

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

     Businesses using our solutions collect personal information regarding their customers when those customers contact them with customer service inquiries. A valuable component of our solutions is their ability to allow our clients to use and analyze their customers’ information to increase sales, marketing and up-sell or cross-sell opportunities. Federal, state and foreign government bodies and agencies, however, have adopted and are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our clients may limit the use and adoption of 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 in our solutions, privacy concerns may cause our clients’ customers to resist providing the personal data necessary to allow our clients to use our solutions most effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market acceptance of our products.

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

     In addition to government activity, privacy advocacy groups and the technology and direct marketing industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. If the gathering of profiling information were to be curtailed in this manner, customer service CRM solutions would be less effective, which would reduce demand for our solutions and harm our business.

Non-solicitation concerns, laws or regulations may adversely affect our clients’ ability to perform outbound marketing and other email communications, which could reduce sales of our solutions.

     In January 2004, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Act regulates the transmission and content of commercial emails and, among other things, obligates the sender of such emails to provide recipients with the ability to opt-out of receiving future emails from the sender, and establishes penalties for the transmission of email messages which are intended to deceive the recipient as to source or content. Many state legislatures also have adopted laws that impact the delivery of commercial email, and laws that regulate commercial email practices have been enacted in many of the international jurisdictions in which we do business, including Europe, Australia, Japan, and Canada. In addition, Internet service providers and licensors of software products have introduced a variety of systems and products to filter out certain types of commercial email, without any common protocol to determine whether 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 generated by our clients using our solutions will be permitted by spam filters to reach the intended recipients.

     Our RightNow Marketing solution specifically serves the market for mass distribution marketing and other email communications. The increasing regulation of email delivery, both domestically and internationally, and the spam filtering practices of Internet service providers and email users generally, will place significant additional burdens on our clients who have outbound communication programs, and may cause those clients to substantially change their outbound communications programs or abandon them altogether. These factors may lead to a reduction in sales of our RightNow Marketing solution, may make it necessary to redesign our RightNow Marketing solution to make it easier for our clients to conform to the requirements of such laws and standards, which would increase our expenses, or may make it necessary for us to redefine the market for and use of our RightNow Marketing solution, which could reduce our revenue.

The significant influence over stockholder voting matters and our office leases that may be exercised by our founder and Chief Executive Officer will limit your ability to influence corporate actions and may require us to find alternative office space to lease or buy in the future.

     At September 30, 2009, Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, have voting power over approximately 25.2% of our outstanding common stock and, together with other officers and directors, have voting power over approximately 31% of our outstanding common stock. In addition, none of the shares of common stock over which Mr. Gianforte and Mrs. Gianforte have voting power are subject to vesting restrictions. As a result, Mr. Gianforte and Mrs. Gianforte, acting together with some of our other officers and directors, may be able to influence matters requiring stockholder approval, including the election of directors, management changes and approval of significant corporate transactions. This concentration of voting power may have the effect of delaying, preventing or deterring a change in control of RightNow, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of RightNow and might reduce the market price of our common stock.

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

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

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

	•		establishing a classified board in which only a portion 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 the number of authorized directors and to fill vacancies on the board;
	•		limiting the persons who may call special meetings of stockholders;
	•		prohibiting certain transactions under certain circumstances with interested stockholders;
	•		requiring supermajority approval to amend certain provisions of the certificate of incorporation; and
	•		prohibiting stockholder action by written consent.

     It is possible that the provisions contained in our certificate of incorporation and bylaws, the voting rights held by insiders and the ability of our board of directors to issue preferred stock without stockholder action may have the effect of delaying, deferring or preventing a change 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 of our common stock and may adversely affect the market price of our common stock and 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 Unregistered Securities

     Not applicable.

(b) Use of Proceeds from Sales of Registered Securities

     On August 5, 2004, the Securities and Exchange Commission declared effective our Registration Statement on From S-1 (Reg. File No. 333-115331) under the Securities Act of 1933, as amended, in connection with the initial public offering of our common stock, par value $.0001 per share. We sold 6.4 million shares, including shares sold upon exercise of the underwriters’ over-allotment option, for an aggregate offering price of $44.9 million, and 321,945 shares, including shares sold upon exercise of the underwriters’ over-allotment option, were sold by a selling stockholder for an aggregate offering price of $2.3 million. After deducting $3.3 million in underwriting discounts and commissions and $1.8 million in other offering costs, 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 paid directly or indirectly to any director, officer, general partner of RightNow or their associates, persons owning 10% or more of any class of equity securities of RightNow, or an affiliate of RightNow.

     In May 2005, we spent $1 million of the offering proceeds 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. In September 2009, we spent $5.9 million of the offering proceeds to acquire HiveLive, Inc. We currently intend to use the remaining proceeds for general corporate purposes as described in the prospectus for the offering. Pending these uses, the net proceeds from the offering are invested in short-term, interest-bearing, investment-grade securities.

(c) Purchases of Equity Securities

     Not applicable.

Item 3. Defaults Upon Senior Securities.

     None.

Item 4. Submission of Matters to a Vote of Security Holders.

     None.

Item 5. Other Information.

     None.

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).

SIGNATURE

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

Dated: Novermber 6, 2009