UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED
DECEMBER 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER
000-31321
RIGHTNOW TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE
(State or other jurisdiction
of incorporation or organization)
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81-0503640
(I.R.S. Employer
Identification No.)
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136 ENTERPRISE BLVD, BOZEMAN, MONTANA 59718
(Address of principal executive
offices) (Zip code)
(406) 522-4200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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COMMON STOCK, PAR VALUE $0.001
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THE NASDAQ STOCK MARKET LLC
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Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates of the registrant as of June 30, 2009, the
last business day of the registrants most recently
completed second fiscal quarter, was approximately $374,000,000,
based on the closing sales price of the registrants common
stock on that date as reported by The Nasdaq Global Market. For
the purposes of the foregoing calculation only, all of the
registrants directors, executive officers and persons
known to the registrant to hold ten percent or greater of the
registrants outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This
determination of affiliate status is not a determination for
other purposes.
The number of shares outstanding of the registrants common
stock as of February 28, 2010 was 31,937,173.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Items 10 through 14 of
Part III of this
Form 10-K,
to the extent not set forth herein, is incorporated herein by
reference to portions of the registrants definitive proxy
statement for the registrants 2010 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end
of the fiscal year ended December 31, 2009. Except with
respect to the information specifically incorporated by
reference in this
Form 10-K,
the registrants definitive proxy statement is not deemed
to be filed as a part of this
Form 10-K.
RightNow
Technologies, Inc.
Annual
Report on
Form 10-K
For The
Fiscal Year Ended December 31, 2009
Table of
Contents
2
CAUTIONARY
STATEMENT
In this report, the terms RightNow Technologies,
RightNow, Company, we,
us and our refer to RightNow
Technologies, Inc. and its separate, wholly-owned independent
subsidiaries.
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,
managements 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, managements 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;
fluctuations in our earnings as a result of potential changes to
our valuation allowance(s) on our deferred tax assets; the
success of our efforts to integrate HiveLives personnel
and processes, following our recent acquisition of that entity;
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 or contract 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; fluctuations in backlog; the risk that
our investments in partner relationships and additional
employees will not achieve expected results; 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
future 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.
3
Part I
OVERVIEW
RightNow Technologies (we, us,
our, the Company or
RightNow) provides RightNow CX, an on-demand
(cloud-based) suite of customer experience software
and services that helps consumer-centric organizations improve
customer experiences, reduce costs and increase revenue. In
todays competitive business environment, we believe
providing superior customer experiences can be a powerful way
for companies to drive sustainable differentiation. The Company
helps organizations deliver exceptional customer experiences
across the web, social networks and contact centers.
RightNows technology enables an organizations
service, marketing and sales personnel to leverage a common
application platform to deliver service, to market and to sell
via the 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, implement rapidly, and 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 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
them achieve their strategic objectives and better meet the
needs of those they serve.
RightNow was incorporated in Montana in September 1997 and
reincorporated in Delaware in August 2000. Our principal
executive offices are located at 136 Enterprise Boulevard,
Bozeman, Montana
59718-9300,
and our telephone number is
(406) 522-4200.
We have regional field offices in Boston, Massachusetts;
Boulder, Colorado; Chicago, Illinois; Dallas, Texas;
San Mateo, California; Orange County, California; New York,
New York; Fairport, New York; Herndon, Virginia; and Toronto,
Canada. We also have offices in Maidenhead, England; Munich,
Germany; Sydney, Australia; and Tokyo, Japan. Our internet
address is
http://www.rightnow.com.
The inclusion of our internet address in this report does not
include or incorporate by reference into this report any
information contained on, or accessible through, our website.
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
amendments to those reports and other Securities and Exchange
Commission, or SEC, filings are available free of charge through
our website as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the SEC. Our
common stock trades on The Nasdaq Global Market under the symbol
RNOW.
PRODUCTS
AND SERVICES
RightNow
CXtm,
the Customer Experience Suite
RightNow CX is designed to be a comprehensive customer
experience solution for consumer-centric organizations to enable
interactions across web, social, and contact center touch
points. Our solutions give companies the ability to coordinate
disparate resources across the organization to develop, rapidly
execute, and manage their customer experience strategy.
We believe that our solutions deliver customer experiences that
build loyalty, drive revenue, reduce costs and increase
efficiency.
4
RightNow CX includes and integrates web, social and contact
center experiences, which are layered on RightNow Engage and our
CX cloud platform as illustrated below.
RightNow
Web Experience
Integrates into an existing web infrastructure to provide a
fully interactive, engaging, and branded online customer
experience providing customer access to web self-service and the
ability to seamlessly transition to agent-assisted channels.
Customer Portal gives organizations the ability to create and
manage a branded, highly interactive online customer experience
24-hours-a-day.
Web self-service utilizes artificial intelligence technology
that learns how customers search for and use
knowledge base information. Features include knowledge
syndication to present knowledge base information on any public
page, whether that is the organizations own web page or a
partners.
Email Management is designed to ensure quality communication and
timely responses between organizations and customers by tracking
the progress of every email through escalation and ensuring that
no email is left unanswered. With attribute-based routing
capabilities, consumers questions can be routed to the
agent with the right skill set to address the specific customer
situation.
5
Live chat customer service software facilitates real-time,
online chat sessions between organizations agents and
customers visiting a website. Chat helps to resolve customer
issues and increase purchase conversion rates. Co-Browsing
extends the value of the web experience by providing a visual
connection between agents and their online visitors. Coupled
with a chat session or phone call, agents are able to provide
expert support by guiding customers through the website in
real-time.
RightNow
Social Experience
Enables organizations both to listen and respond to
conversations with their consumers on the social web and build
branded communities to cultivate their own conversations.
RightNows social solutions are integrated into a complete
customer experience solution that helps ensure consistency in
customer information management, knowledge management and
customer experience processes.
Facilitates discussion between customers to talk about products
and services, share tips, and answer each others
questions. Customers can mark the best answers and be rewarded
for their participation and expertise. A resource library keeps
a searchable repository of useful information, including both
company and user-generated content.
Invites customers to submit ideas, vote for their favorite ideas
and be rewarded for their participation and expertise.
Structured feedback is captured to improve the quality of
products and services.
Enables agents to efficiently and effectively engage customers
proactively in the social cloud, monitoring Twitter, YouTube,
RSS-enabled sites, and RightNow powered communities, following
relevant discussions, and determining actionable next steps such
as proactive outreach or creation of a service case based on
information gathered.
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Social Experience Designer
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Provides business users a powerful, do-it-yourself interface to
expand, create, and customize the RightNow community solution.
RightNow
Contact Center Experience
Enables organizations to deliver consistent customer experiences
across multi-channel interactions designed to maximize agent
productivity, lower costs, and drive revenue.
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Intelligent Voice Automation (IVR)
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Personalized speech IVR, voice self-service, and custom voice
applications facilitate a tailored, personalized experience for
each caller based on their individual needs, customer profile,
and business objectives.
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RightNows Dynamic Agent Desktop
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Provides a single unified view into all customer information and
interaction history regardless of contact channel. Scripting,
contextual workspaces and desktop workflow guide agents with
contextually relevant,
just-in-time
knowledge and best practices enabling the delivery of a
consistent customer experience and efficient interaction.
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Contact Center Experience Designer
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Configurable workspaces, scripting, and desktop workflow give
contact center business managers the power and flexibility to
define and tailor the customer experience within the contact
center.
6
RightNow
Engage
Provides the horizontal service, sales, and marketing business
processes that support, span, and inter-connect the web, social
and contact center experiences. RightNow Engage helps enable
organizations provide seamless, personalized customer
experiences through proactive engagement, actionable customer
feedback, and deep business insight.
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Service-Sales-Marketing
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The traditional CRM operational business processes, designed for
consumer-centric business:
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Service: Business processes that support efficient and
effective problem resolution and customer support across
channels.
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Sales: Business processes that support
revenue-generation, such as sales automation, opportunity
management, and upsell and cross sell.
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Marketing: Business processes that drive personalized,
proactive customer communication such as email marketing, lead
generation and campaign management.
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A prerequisite to delivering superior customer experiences
across web, social, and contact center is the ability to gather
the
voice-of-the-customer
in real-time across every customer touch point and take
immediate action.
Managerial and operational insight to measure and analyze
customer experiences, highlight areas of improvement, and
identify trends to anticipate customer needs.
RightNow
CX Cloud Platform
RightNow CX Cloud Platform provides a platform for scalability,
performance, flexibility and security and offers a set of
foundational elements that help enhance value and infuse
knowledge across the RightNow CX applications, enabling the
delivery of a positive customer experience.
Enables organizations to leverage appropriate knowledge
resources to deliver customers and agents real-time, relevant
knowledge across web, social and contact center touch points.
Captures and learns from each interaction to drive continuous
knowledge improvements, and deliver actionable customer and
business insight.
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Enterprise Integration & Extensibility
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Provides an open platform for fast and cost-effective
integration across the agent desktop, business applications,
data and telephone systems, making relevant customer knowledge
easily accessible to the frontlines of the business regardless
of where that knowledge resides. By empowering frontline
employees with comprehensive knowledge at the moment of customer
interaction, it improves the interaction and customer experience.
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RightNow Government Cloud
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Provides a dedicated secure hosting facility for United States
government agencies. Housed in a carrier-class, tier-4 facility,
the Government Hosting Center meets US Federal security and
audit standards as defined by The Federal Information Security
Management Act, or FISMA, including NIST SP
800-37, NIST
SP 800-53,
and FIPS 199.
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RightNow PCI Certified Cloud
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7
RightNow PCI Certified Cloud meets the standards set out by PCI
(a set of comprehensive requirements for enhancing payment
account data security) for Service Provider Level 1
Certification for customers with enhanced security requirements.
RightNow
CX Commitment
The RightNow CX Commitment describes the way in which we engage
with our customers to deliver a superior customer experience.
RightNows Client Success Managers work with organizations
to help them measure their customer experience key performance
indicators, benchmark their system and processes against
industry metrics, and leverage best practices.
Our business processes are designed to make us easy to buy from.
Beginning January 2010, RightNow introduced the Cloud Services
Agreement (CSA), which we believe gives our customers an
arrangement that offers greater flexibility, and is an easy to
read, plain-English framework for purchasing. Among other
things, the CSA includes annual termination for convenience,
price transparency for up to six years, ability to purchase
annual pools of capacity, and cash service level credits. We
identify performance targets and offer cash service level
credits where we fail to meet these targets.
RightNow Centers of Excellence (COEs) bring together experts
from across the organization for each of the five areas in
RightNow CX: Web Experience, Social Experience, Contact Center
Experience, Engage and CX Cloud Platform. The COEs help clients
define best practices, provide technical product expertise, and
drive product innovation.
Professional
Services
Our Professional Services group combines project management
(RightNow Project Methodology) with technical and
business-focused consulting services to our clients. Using
proven methods and customer-centric best practices, our
Professional Services group is experienced in implementing and
integrating RightNow products across many industries, drawing on
in-depth knowledge and practical expertise gained from thousands
of deployments. Professional services helps customers determine
strategic business objectives, align business processes, define
success metrics, help with rapid system configuration and
deployment, and adjust business solutions to support full user
adoption. We also provide
tune-up
services to our clients, auditing their solution against our
library of best practices.
During 2009, we continued to expand our professional service
organization with new investments in both partner relationships
and additional employees. These investments are expected to
allow us to engage in more complex deployments, add scalability
to our business and help drive our growth.
Sales and
Marketing
RightNow products and services are sold predominantly through
our direct sales organization and to a lesser extent through
partner channels. The sales team is organized around geographic
territory, prospect company size and vertical industry, calling
on potential new clients as well as focusing on managing and
further expanding existing client relationships.
A prospective client may deploy a portion or all of our
solutions on a pilot basis to ensure that RightNow CX solutions
meet its needs, prior to committing to any subscription fees. A
pilot project usually lasts between 30 and 90 days. The
prospective clients objectives are quantified and results
measured during the pilot period. As a result of this program,
we believe we have experienced shorter sales cycles, higher sale
closure rates and larger deal sizes.
8
During 2009, we continued to develop our worldwide partner
relationships to enhance the delivery of an optimized customer
experience for our shared clients. Our partner program is
focused on three core strategies extend market reach
and penetration, expand our implementation delivery providers
and extend the RightNow CX solution. These partners represent
many of the worlds largest customer care outsourcers,
including Convergys, Teleperformance, and TELUS.
In addition, we continued to develop an ecosystem of business
and technology alliance partners. These relationships with
leading independent software companies, systems integrators, and
contact center infrastructure providers has opened up new
opportunities for our direct sales organization and has created
a host of complimentary solutions for our customers.
New partners and solutions added to our ecosystem to expand
RightNow CX include Birst, Sterling Commerce, TARGUSinfo, Boomi,
Pervasive, OpenMethods, Interactive Intelligence, Language
Weaver, and Sajan.
We believe these partnerships have enabled our direct sales
organization to expand its contact base in key accounts, enhance
and differentiate the RightNow CX solution, and we believe
ultimately will develop larger and more profitable enterprise
sales opportunities.
In those international markets where we do not have a direct
selling presence, we rely on system integrators and resellers to
offer RightNow CX solutions. This strategy is primarily employed
in mainland Europe, New Zealand, Asia, and Latin America. In
2009, we continued to broaden our distribution to these markets
through resellers.
Our marketing department coordinates future product and service
direction, manages generation of client leads, and oversees
public and industry analyst relations. To expand our client
base, we have also developed and expect to continue to increase
innovative marketing initiatives.
Clients
and Backlog
As of December 31, 2009, we had approximately 1,900 active
clients in various industries with sales generated approximately
20% from technology, 16% from telecommunications, 16% from
public sector, 15% from retail/consumer packaged goods, 11% from
entertainment, 6% from financial services, 5% from travel and
hospitality, 1% from manufacturing, 1% from services, and 9%
from various other industries. For the year ended
December 31, 2009, approximately 46% of our sales were
generated from entities with over $1 billion in annual
sales, 38% of our revenue was generated from entities with less
than $1 billion in annual revenue and 16% of our revenue
was generated from government/educational institutions. No
single client accounted for more than 10% of our revenue in
2007, 2008, or 2009. No individual customer accounted for more
than 10% of the Companys accounts receivable or total net
receivables at December 31, 2008 and December 31,
2009, respectively. Beginning in 2007, our change to
subscriptions from license arrangements required that we no
longer record additions to term receivables. As a result, the
customer concentration as a percentage of term receivables has
increased since the change. One customer represented 22% of term
receivables at December 31, 2008, and the same customer
represented 40% of term receivables at December 31, 2009.
Total backlog is as follows (in thousands):
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December 31,
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2009
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2008
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Current committed backlog
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$
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117,600
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$
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98,100
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Non-current committed backlog
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57,020
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48,300
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Total firm committed backlog
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174,620
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146,400
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Current backlog subject to termination for convenience
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3,400
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3,900
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Non-current backlog subject to termination for convenience
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1,980
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700
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Total backlog
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$
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180,000
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$
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151,000
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9
Total backlog, which represents total invoiced and uninvoiced
deferred revenue, was approximately $180 million and
$151 million as of December 31, 2009 and
December 31, 2008, respectively. Current total backlog,
which is the portion of backlog expected to be recognized as
revenue within the next twelve months was approximately
$121 million and $102 million as of December 31,
2009 and December 31, 2008, respectively.
A certain portion of our backlog includes terms for termination
for convenience at the customer option. Specifically, the
termination for convenience exists in certain of our business
contracted with the federal government, and with some commercial
customers. In the case of federal government customers, some of
the business that is contracted with this group falls under the
termination for convenience guidelines as set forth in the
Federal Acquisition Regulations (FARs). The FARs allow the
federal government at its option to terminate these
arrangements. The majority of our business with the federal
government is sold through reseller arrangements that do not
include termination for convenience provision(s). A minority of
our business is sold either direct to the federal government or
through resellers under contracts that do include a right of
termination for convenience in accordance with the applicable
FARs. We treat this backlog as uncommitted. Most of our business
with the federal government is under twelve month arrangements
and we ensure that the contracting party has approved the
funding prior to recording a transaction or commencing revenue
recognition for both new and renewal arrangements. Based on our
past experience, termination for convenience by our federal
government and commercial customers is rarely exercised.
The backlog not recorded on our balance sheet represents future
billings under our subscription agreements that have not been
invoiced and, accordingly, are not recorded in deferred revenue.
We expect that the amount of backlog may change from
year-to-year
for several reasons, including the specific timing and duration
of large customer subscription agreements, varying billing
cycles of non-cancelable subscription agreements, the specific
timing of customer renewals, foreign currency fluctuations, the
timing of revenue recognition, and changes in customer financial
circumstances. For multi-year subscription agreements billed
annually, the associated unbilled deferred revenue is typically
high at the beginning of the contract period, zero just prior to
renewal, and increases if the agreement is renewed. Low unbilled
backlog revenue attributable to a particular subscription
agreement is typically associated with an impending renewal and
may not be an indicator of the likelihood of renewal or future
revenue from such customer. Accordingly, we expect that the
amount of aggregate unbilled backlog revenue may change from
year-to-year
depending in part upon the number and dollar amount of
subscription agreements at particular stages in their renewal
cycle. Such fluctuations are generally not a reliable indicator
of future revenues.
In January 2010 we introduced the CSA, which includes customer
termination for convenience terms. As a result, we expect the
proportion of total backlog that is uncommitted to increase in
the future.
Please refer to Note 1 (c) of our Notes to
Consolidated Financial Statements for financial information
about our geographic areas.
Product
Development and Technology
Our product development efforts are focused on improving and
enhancing our existing solutions and service offerings as well
as developing new proprietary technology. Our product roadmap
incorporates our long-term strategic view of our market and
incorporates customer feedback to improve and enhance our
products. We currently are developing products and solutions to
broaden and deepen our offerings beyond what is offered in the
traditional CRM market. We are focusing on building applications
that not only improve the internal business processes, but also
improve the end customer experience. We allow our clients to run
different versions of our software and provide customers the
ability to adequately plan, schedule and implement upgrades of
new releases. Our support and development efforts are focused
only on the current and future releases of our products. We
provide support for our software versions for 24 months,
and self service support for 12 months after that. Our
research and development expenses totaled approximately
$17.1 million in 2007, $18.3 million in 2008, and
$20.2 million in 2009.
10
We believe we have significant technology expertise in
developing and deploying highly scalable and reliable cloud
based customer experience applications. All of our products have
been designed using industry standards for the Internet and are
designed to meet the following goals: cost efficient deployment,
highly configurable, scalable, easily integrated, multi-tenant
and capable of being internationalized. The architectural
components described below form the foundation for the delivery
of a variety of features within our solution.
Intuitive Knowledge Foundation. Artificial
intelligence, self-learning, knowledgebase technologies and
innovative information retrieval technologies form the
foundation of our solution. These technologies are combined
within our customer service solution to provide self-service and
automatic email response to users and as an automated assistant
for our clients customer service representatives. Core
technologies in the area of the knowledge foundation include
automatic learning and decay of the relevancy and relatedness of
information, natural language processing, word-stemming
algorithms, information clustering and classification
algorithms, and information retrieval technologies.
Integration with Other Enterprise
Applications. Our clients are able to integrate
our solution with their other mission-critical enterprise
applications through several techniques, including: web
services, application level triggers; user interface
extensibility that allows the integration of other applications
into our solution; and pass through authentication
that allows our solution to inherit user credentials from other
applications to identify and enforce access to our clients
web sites. The Developer portion of our Customer Community
portal provides our customers an on-line forum of information on
integration topics such as
up-to-date
documentation and sample integrations as well as on-line
discussion forums that are moderated by RightNow experts.
Highly Customizable and Usable User
Interface. The web portal interface portion of
our product, which allows our clients to serve their customers
through the web, is browser based and provides support for all
current browsers and versions, and complies with web
accessibility standards. The web portal interface is designed to
be easily integrated into our clients web sites and simple
for inexperienced internet users to understand. Our back-end
interface utilizes Microsoft Corporations Smart Client
technology. The back-end interface is used by administrators,
agents, sales representatives and marketing users. The Microsoft
Smart Client user interface (or UI) communicates
with our server through web services. This UI combines the speed
and power of traditional client/server applications with the
flexibility and reduced total cost of ownership associated with
browser-based applications. With the Microsoft Smart Client UI,
a richer user experience is possible than could be provided
through a browser. Because the Microsoft Smart Client is
automatically network installed and updated, the desktop
maintenance generally associated with client/server applications
is reduced. Our back-end interface can be easily customized
without programming to support different workflows and can be
extended to incorporate data from other applications.
Software Architecture. Our solution has been
developed using a logical three-tier Internet architecture
consisting of presentation, application logic and data
management layers. Because of the tiered separation, our
solution is designed to be highly scalable, allowing expansion
at each tier. We deploy our solution in highly available, highly
scalable, load-balanced web server and clustered database server
configurations.
Intellectual
Property
Our success depends to a significant degree upon the development
and protection of our intellectual property rights. We believe
we have a rich repository of intellectual property. As of
December 31, 2009, our intellectual property assets
included ten issued U.S. patents, thirteen pending
U.S. patents, one pending European patent, five
U.S. trademark registrations, and multiple foreign
trademark registrations. The majority of our patents and patent
applications concern our knowledgebase technology, including
processes relating to the relative usefulness ranking and the
order of display of retrieved information in the knowledgebase;
the ability of the knowledgebase to suggest related information
to a user accessing the knowledgebase; and the ability of the
knowledgebase to produce a relational map of help information
items based on the historical usage patterns of customers
accessing the knowledgebase. Our patent portfolio also includes
patents and patent applications that relate to our voice
technology, social, marketing and sales solutions.
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The following is a summary of our issued U.S. patents:
Implicit Rating of Retrieved Information in an Information
Search System. This process relates to an
information search and retrieval system through a network, such
as the Internet, in which the relative usefulness ranking and
the order of display of the retrieved information in the
knowledgebase is adjusted based on actions taken by a user. This
patent continues until April 2020.
Temporal Updates of Relevancy Rating of Retrieved Information
in an Information Search System. This process
relates to an information search and retrieval system through a
network, such as the Internet, in which the relative usefulness
ranking and the order of display of the retrieved information in
the knowledgebase is adjusted based on the amount of time
elapsed since the particular information was last accessed. This
patent continues until April 2020.
Usage Based Strength between Related Information in an
Information Retrieval System. This patent
describes an information retrieval system in which information
is displayed based on navigation behavior of previous users.
This patent continues until April 2020.
System and Method for Generating a Dynamic Interface through
a Communications Network. This patent describes a
system for dynamically adapting selections in an automatic phone
support system. This invention enables the provision of
information from a dynamic knowledgebase through a telephone
channel. This patent continues until June 2020.
Usage Based Strength between Related Help Topics and Context
Based Mapping Thereof in a Help Information retrieval
System. This process allows the knowledgebase to
suggest related information to a person based on the keyword
search and navigation patterns of that person. This patent
continues until April 2020.
Display Screen for a Computer. This is a
design patent relating to the user interface to our software.
This patent continues until March 2016.
Method for Routing Electronic Correspondence Based on the
Level and Type of Emotion Contained Therein. This
process relates to determining the emotional content of an
electronic correspondence to route or prioritize the
information, to set the expectations of a customer support
worker, to flag those workers who are using inappropriate
language with the customer, or determine another best course to
send the correspondence. This patent continues until October
2022.
Method of Clustering Automation and Classification
Techniques. This invention covers a method for
automatically classifying and summarizing related information in
a hierarchical manner. The system comprises the steps and means
for the presentation and analysis of collected data through the
application of four distinct processes: feature selection,
clustering, classification and summarization. This patent
continues until August 2021.
Our nine registered trademarks in the United States and eight
foreign registered trademarks are
RIGHTNOW®
(US, Japan, European Union), RIGHTNOW
TECHNOLOGIES®
(stylized) (Canada), BRILLIANT
ANSWERS®
(Australia),
LOCATOR®
(US), RIGHTNOW TECHNOLOGIES &
Design®
(European Union), RIGHTNOW TECHNOLOGIES (&
Design)®
(Australia, Japan),
SALESNET®
(Canada, European Union, US), SALESNET &
DESIGN®,
(Canada),
SALESNET.COM®
(US),
SMARTASSISTANT®
(Australia, Canada, European Union, Japan and US),
HIVELIVE®,
HIVELIVE and
DESIGN®,
SOCIAL BY
DESIGN®,
and
LIVECONNECT®
We use our RightNow mark as a descriptor of all of
our products. These marks continue indefinitely, subject to
continuous use and payment of registration fees at the
statutorily required intervals. We also use the following common
law marks RightNow
CXtm,
RightNow
Analyticstm,
RightNow CX Cloud
Platformtm,
RightNow Contact
Centertm,
RightNow
Marketingtm,
RightNow
Engagetm,
RightNow
Feedbacktm,
RightNow
Salestm,
RightNow
Servicetm,
SmartSensetm,
RightNow
Socialtm,
RightNow
Voicetm,
RightNow
Webtm,
RightNow
Chattm,
RightNow Offer
Advisortm,
RightNow
Connecttm,
and
RightStarttm.
Other trademarks, trade names or service marks appearing in this
report are the property of their respective holders.
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We also incorporate a number of third party software products
into our software pursuant to relevant licenses covering such
software and related underlying patents, the duration of which
range from term licenses to perpetual licenses. Some of the
software is proprietary and some is open source. These functions
are peripheral in nature, we are not substantially dependent
upon these third party software licenses and we believe the
licensed software is generally replaceable, by either licensing
or purchasing similar software from another vendor or building
the software function ourselves.
Competition
The CRM software market consists of three major market segments:
customer service, sales force automation and marketing
automation. Within this segmentation, vendors are offering
solutions through either on demand or traditional on premise
delivery methods. We compete in all segments of the CRM software
market and believe that we are the leader in on demand customer
service.
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.
We face competition from other companies currently providing
customer service solutions, some of which offer hosted services,
including BMC Software Corporation, Inc., eGain Communications
Corporation, Inquira Software, Inc., Kana Software, Inc.,
Liveperson, Microsoft Corporation, Netsuite, nGenera, Oracle
Corporation, Parature, SAP AG, and salesforce.com. In
interactive voice response technology, competing vendors include
Microsoft, TuVox, and Voxify. Social CRM competitors include
Lithium and other niche social providers.
We expect to compete with these and additional companies as we
further expand into the CRM market, and as more companies expand
into the customer service segment. In addition, our solutions
compete with CRM systems that are developed and maintained
internally by businesses, as well as CRM products or services
that are developed, or bundled with other products or services,
and installed on a clients premises by software vendors.
We also face competition from outsourced contact center
providers who bundle solutions and agent labor in their service
offerings. 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.
Many of our current and potential competitors have larger
presence in the general CRM market, greater name recognition,
access to larger customer bases and substantially greater
financial, technical, sales and marketing, management, 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 than we can. 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.
New companies are 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. We 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. It is
possible that these new competitors could rapidly acquire
significant market share.
We believe the principal factors that generally determine a
companys competitive advantage in the on demand customer
service and broader CRM markets include the following:
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Low total cost of ownership and easily demonstrable
cost-effective benefits for clients;
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Effectiveness in improving the quality of clients
interactions with their customers across customer service, sales
and marketing departments;
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Broad product functionality to meet complex client process
requirements;
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Ability to leverage information from customer interactions to
more accurately target marketing efforts and enhance revenue
opportunities;
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Speed and ease of implementation;
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Ease of use and associated high rates of utilization;
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System performance, security, scalability, flexibility and
reliability;
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Ease of integration with existing applications and data;
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Availability and quality of implementation, consulting and
education services;
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Quality of client care;
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Competitive sales and marketing capabilities; and
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Financial stability and reputation of the vendor.
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We cannot assure you that we will be successful in all or any of
these areas that we believe contribute to competitive advantage,
or that we will be able to compete successfully against current
or potential competitors, or that competition will not have a
material adverse effect on our business, financial condition and
results of operations.
Employees
As of December 31, 2009, we had 797 full-time
employees. Of the total employees, we had 255 in sales and
marketing, 169 in software development, 167 in professional
services, 114 in technical support and hosting, and 92 in
finance and administration. None of our employees are
represented by a labor union. We believe that our relationship
with our employees is good.
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, medium 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 revenues
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, recessionary conditions, 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,
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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 31% and 27% of our revenue for the
years ended December 31, 2008 and 2009, respectively. We
intend to continue to pursue and expand our international
business activities. Adverse political and economic 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:
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fluctuations in foreign currency exchange rates;
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political, social and economic instability, including conflicts
in the Middle East, Central Asia and elsewhere abroad, terrorist
attacks and security concerns in general;
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adverse changes in tariffs and other protectionist laws and
business practices that favor local competitors;
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longer collection periods and difficulties in collecting
receivables from foreign entities;
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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;
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reduced protection for our intellectual property in some
countries;
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expenses associated with localizing products for foreign
countries, including translation into foreign languages; and
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import and export license requirements and restrictions of the
United States and each other country in which we operate.
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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 year ended
December 31, 2008, the U.S. dollar fluctuated
significantly compared to the British pound, Australian dollar,
and Euro in the year ended December 31, 2009. The change in
weighted average exchange rates between the years ended
December 31, 2008 and 2009 had an unfavorable impact to
revenue of $4.1 million. Conversely, deferred revenue
increased by approximately $3.1 million when comparing the
change in period-end exchange rates between the years ended
December 31, 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 year ended December 31, 2009
were favorably impacted by $3.5 million when comparing the
change in weighted average exchange rates between the years
ended December 31, 2008 and 2009. The Companys
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 $58.3 million as of
December 31, 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
15
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
twelve months ended December 31, 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:
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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., Liveperson, Microsoft
Corporation, Netsuite, nGenera, Oracle Corporation, Parature,
SAP AG, and salesforce.com;
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CRM systems that are developed and maintained internally by
businesses;
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CRM products or services that are developed, or bundled with
other products or services, and installed on a clients
premises by software vendors;
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Outsourced contact center providers that bundle solutions and
agent labor in their service offerings;
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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;
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Voice system integrators and voice-enabled IVR technology
providers, such as Microsoft, TuVox, and Voxify; and
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Social CRM providers, such as Lithium and other niche social CRM
providers.
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Many of our current and potential competitors have longer
operating histories and larger presence, 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
decline or fall below the expectations of investors or
securities analysts, the price of our common stock could decline
substantially.
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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:
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our ability to retain and increase sales to existing clients,
attract new clients and satisfy our clients requirements;
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general economic, industry and market conditions;
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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;
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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;
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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;
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the timing and success of new product introductions or upgrades
by us or our competitors;
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the timing of professional service sales and our ability to
appropriately staff and train professional service resources
without negatively impacting professional service margins;
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changes in our pricing policies or those of our competitors;
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the amount and timing of expenditures related to expanding our
operations;
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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;
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changes in the payment terms for our products and services,
including changes in the mix of payment options chosen by our
customers;
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the purchasing and budgeting cycles of our clients;
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changes in tax rate affected by changes in the mix of earnings
and losses in jurisdictions with differing statutory tax rates,
certain non-deductible expenses arising from the requirement to
expense stock options and the valuation of deferred tax assets
and liabilities, including our ability to use our net operating
losses; and
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changes in credit market conditions associated with auction rate
securities, which could permanently impair the recoverability of
these investments.
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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.
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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 may not effectively develop and maintain awareness
of the CX brand and our other brands in a cost-effective manner,
not achieve widespread acceptance of our existing and future
services and fail to expand and attract new customers. 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.
Most
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.
Additionally, some of our solutions are sold pursuant to
time-based agreements that allow our customers to terminate for
convenience annually provided they notify us at least
90 days before the contract anniversary date. 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 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.
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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 December 31, 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, 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.
19
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 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 Microsofts .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. 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.
20
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 customer experience 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
21
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 not at the same
stage of development as traditional on-premise enterprise
software, 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 not as mature
as the market for traditional on-premise enterprise software,
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 RightNow CX
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:
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on demand security capabilities and reliability;
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concerns with entrusting a third party to store and manage
critical customer data;
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the level of customization we offer;
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our ability to continue to achieve and maintain high levels of
client satisfaction;
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concerns with purchasing critical CRM solutions from a company
with a history of operating losses; and
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the price, performance and availability of competing products
and services.
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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.
22
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.
If we are unable to successfully develop and sell new and
enhanced versions of our solutions, or introduce new solutions
for the customer service market, our financial performance will
suffer. In recent years, we have expanded our CRM solution
offering to include sales, marketing, feedback, social and
voice-enabled applications. Additionally, we have focused on
eService solutions to call centers. Our efforts to expand our
solution in order to improve the customer experience may not be
successful in part because certain of our competitors may have
far greater experience or brand recognition in the market or
because they have greater financial resources that they can use
to develop or acquire superior products. In addition, our
efforts to expand our on demand software solutions 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:
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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;
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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;
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our existing and potential clients and the customers of the
acquired company may delay purchases due to uncertainty related
to an acquisition;
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an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
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the acquired businesses, products or technologies may not
generate sufficient revenue to offset acquisition costs and
could result in material asset impairment charges;
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we may have to issue equity securities to complete an
acquisition, which would dilute our stockholders and could
adversely affect the market price of our common stock; and
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acquisitions may involve the entry into a geographic or business
market in which we have little or no prior experience.
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We cannot assure you that we will be able to 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, software cost capitalization, unanticipated
ambiguities in fair value
23
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.
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
December 31, 2009, we held approximately $3.8 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 ARS from
available for sale securities to trading securities. During the
twelve months ended December 31, 2009, we marked to market
the investment in accordance with FASB ASC Topic 320,
which resulted in an increase in fair value for a total
unrealized gain of $500,000 included in other income, net.
Partially, offsetting this gain within other income, net was a
$466,000 unrealized loss during the twelve months ended
December 31, 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
brokers 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.
24
The
success of our products and our hosted business depends on the
continued use 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 use 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.
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 stringent restrictions on
the collection and use of personal data that impose significant
burdens on subject businesses. Domestic and international laws
and regulations, and 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
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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 December 31, 2009, Greg Gianforte, our founder and Chief
Executive Officer, and his spouse, Susan Gianforte, have voting
power over approximately 25% 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:
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establishing a classified board in which only a portion of the
total board members will be elected at each annual meeting;
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authorizing the board to issue preferred stock;
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providing the board with sole authority to set the number of
authorized directors and to fill vacancies on the board;
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limiting the persons who may call special meetings of
stockholders;
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prohibiting certain transactions under certain circumstances
with interested stockholders;
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requiring supermajority approval to amend certain provisions of
the certificate of incorporation; and
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prohibiting stockholder action by written consent.
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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.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our corporate headquarters, including our principal
administrative, marketing, technical support and research and
development facilities, are located in Bozeman, Montana, where
we lease approximately 30,000 square feet with a term that
expires in March 2011, and approximately 22,000 square feet
under two leases with terms that expire in March and June 2015.
Additionally, we have a lease agreement for an additional
29,000 square feet in Bozeman with a term that expires in
February 2017. We also currently occupy a number of sales and
service offices in California, Colorado, Illinois,
Massachusetts, New Jersey, New York, Texas, Virginia, Canada,
Australia, Germany, Japan and the United Kingdom, where we lease
or license the use of an aggregate of approximately
80,000 square feet under multiple agreements, which have
terms that expire between March 2010 and February 2017. We
believe that our current facilities are suitable and adequate to
meet our current needs, and that suitable additional or
substitute space will be available as needed to accommodate
expansion of our operations. See Note 11(a) to the
Consolidated Financial Statements and Managements
Discussion and Analysis of Financial Condition and Results of
Operations Contractual Obligations and
Commitments for information regarding our lease
obligations.
|
|
Item 3.
|
Legal
Proceedings
|
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 would 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. On December 23, 2009, KANA
sold substantially all of its assets to Kay Technology Corp,
Inc. Pursuant to an acceleration clause in the settlement
agreement related to the change in control, KANA paid the
Company $1,000,000. RightNow received the entire cash settlement
payment during the fourth quarter of 2009 and recorded the gain
on settlement of this litigation in other income.
From time to time, we are involved in legal proceedings arising
in the ordinary course of business. We believe that the
resolution of these matters will not have a negative material
effect on our consolidated financial position, results of
operations or liquidity.
27
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Securities
|
The graph depicted below shows a comparison of cumulative total
stockholder returns for our common stock, the NASDAQ Global
Market Index and the Standard Industrial Code Index for
Prepackaged Software for the period from December 31, 2004,
to December 31, 2009, the last trading day of 2009.
COMPARISON
OF 5-YEAR
CUMULATIVE TOTAL RETURN AMONG
RIGHTNOW TECHNOLOGIES, INC., NASDAQ MARKET INDEX AND
PREPACKAGED SOFTWARE
ASSUMES $100 INVESTED ON DEC. 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2009
The graph above assumes that $100 was invested in the common
stock of RightNow at its closing price and in each index, on
December 31, 2004, and that all dividends were reinvested.
RightNow has not paid or declared any cash dividends on its
common stock. The Standard Industrial Code (SIC)
used is 7372 Prepackaged Software.
Notwithstanding anything to the contrary set forth in any of our
previous filings made under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
that might incorporate future filings made by us under those
statutes, neither the preceding Stock Performance Graph, nor the
information relating to it, is soliciting material
or is filed or is to be incorporated by reference
into any such prior filings, nor shall such graph or information
be incorporated by reference into any future filings made by us
under those statutes.
Market
Information for Common Stock
Our common stock is traded on The Nasdaq Global Market under the
symbol RNOW. The table below reflects the quarterly high and low
per share sales prices of our common stock for the period
January 1, 2008 through December 31, 2009, as reported
by The Nasdaq Global Market. These prices represent prices among
dealers, do not include retail markups, markdowns or
commissions, and may not represent actual transactions.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Mar 31
|
|
June 30
|
|
Sept 30
|
|
Dec 31
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
15.06
|
|
|
$
|
14.98
|
|
|
$
|
17.26
|
|
|
$
|
12.12
|
|
Low
|
|
|
9.93
|
|
|
|
10.47
|
|
|
|
11.07
|
|
|
|
5.80
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
9.25
|
|
|
$
|
12.35
|
|
|
$
|
14.75
|
|
|
$
|
18.22
|
|
Low
|
|
|
5.72
|
|
|
|
6.84
|
|
|
|
9.86
|
|
|
|
13.36
|
|
Holders
On February 28, 2010, there were approximately 77 holders
of record of our common stock.
Dividends
We have never declared or paid cash dividends on our capital
stock since converting from an S corporation to a C
corporation at the end of 1999. We currently intend to retain
future earnings, if any, to finance the growth and development
of our business, and therefore do not anticipate paying any cash
dividends in the foreseeable future.
Unregistered
Sales of Equity Securities
None.
Use of
Proceeds from Sales of Registered Securities
On August 5, 2004, the Securities and Exchange Commission
declared effective our Registration Statement on
Form S-1
(Reg. File
No. 333-115331)
under the Securities Act of 1933, as amended, in connections
with the initial public offering of our common stock, par value
$.001 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.
Purchases
of Equity Securities by the Issuer or Affiliated
Purchasers
None.
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with the Consolidated Financial Statements
and Notes thereto and with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and other financial data included elsewhere in
this report. The consolidated statement of operations data for
the years ended December 31, 2009, 2008 and 2007, and the
29
consolidated balance sheet data at December 31, 2009 and
2008, are derived from audited consolidated financial statements
included elsewhere in this report. The consolidated statement of
operations data for the years ended December 31, 2006 and
2005, and the consolidated balance sheet data at
December 31, 2007, 2006 and 2005, are derived from audited
consolidated financial statements not included in this report.
The historical results are not necessarily indicative of results
to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
$
|
67,944
|
|
|
$
|
86,257
|
|
|
$
|
86,983
|
|
|
$
|
102,576
|
|
|
$
|
115,395
|
|
Professional services
|
|
|
19,204
|
|
|
|
24,131
|
|
|
|
25,094
|
|
|
|
37,859
|
|
|
|
37,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
87,148
|
|
|
|
110,388
|
|
|
|
112,077
|
|
|
|
140,435
|
|
|
|
152,687
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
|
9,111
|
|
|
|
13,260
|
|
|
|
18,411
|
|
|
|
20,397
|
|
|
|
20,948
|
|
Professional services
|
|
|
11,956
|
|
|
|
19,110
|
|
|
|
22,012
|
|
|
|
30,440
|
|
|
|
26,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
21,067
|
|
|
|
32,370
|
|
|
|
40,423
|
|
|
|
50,837
|
|
|
|
47,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
66,081
|
|
|
|
78,018
|
|
|
|
71,654
|
|
|
|
89,598
|
|
|
|
105,129
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
42,683
|
|
|
|
61,504
|
|
|
|
65,118
|
|
|
|
67,628
|
|
|
|
64,751
|
|
Research and development
|
|
|
10,428
|
|
|
|
14,478
|
|
|
|
17,084
|
|
|
|
18,292
|
|
|
|
20,221
|
|
General and administrative
|
|
|
6,445
|
|
|
|
9,578
|
|
|
|
11,500
|
|
|
|
13,615
|
|
|
|
15,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
59,556
|
|
|
|
85,560
|
|
|
|
93,702
|
|
|
|
99,535
|
|
|
|
100,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
6,525
|
|
|
|
(7,542
|
)
|
|
|
(22,048
|
)
|
|
|
(9,937
|
)
|
|
|
4,356
|
|
Interest and other income, net
|
|
|
1,646
|
|
|
|
3,064
|
|
|
|
3,683
|
|
|
|
2,696
|
|
|
|
2,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8,171
|
|
|
|
(4,478
|
)
|
|
|
(18,365
|
)
|
|
|
(7,241
|
)
|
|
|
6,450
|
|
Provision for income taxes
|
|
|
(478
|
)
|
|
|
(530
|
)
|
|
|
(276
|
)
|
|
|
(42
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
7,693
|
|
|
|
(5,008
|
)
|
|
|
(18,641
|
)
|
|
|
(7,283
|
)
|
|
|
5,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.18
|
|
Diluted
|
|
|
0.23
|
|
|
|
(0.16
|
)
|
|
|
(0.56
|
)
|
|
|
(0.22
|
)
|
|
|
0.18
|
|
Shares used in the computation(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,631
|
|
|
|
32,241
|
|
|
|
33,078
|
|
|
|
33,362
|
|
|
|
31,752
|
|
Diluted
|
|
|
33,695
|
|
|
|
32,241
|
|
|
|
33,078
|
|
|
|
33,362
|
|
|
|
32,336
|
|
|
|
|
(1) |
|
See Note 1 of Notes to Consolidated Financial Statements
for an explanation of the calculation of basic and diluted
income (loss) per share and for an explanation of the
determination of the number of weighted average shares used for
such calculations. |
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,874
|
|
|
$
|
39,208
|
|
|
$
|
43,681
|
|
|
$
|
51,405
|
|
|
$
|
41,546
|
|
Short-term investments
|
|
|
23,314
|
|
|
|
39,127
|
|
|
|
52,644
|
|
|
|
34,412
|
|
|
|
54,977
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,963
|
|
|
|
|
|
Working capital
|
|
|
45,156
|
|
|
|
50,374
|
|
|
|
45,063
|
|
|
|
34,075
|
|
|
|
40,392
|
|
Total assets
|
|
|
123,676
|
|
|
|
178,242
|
|
|
|
173,786
|
|
|
|
162,337
|
|
|
|
164,435
|
|
Deferred revenue
|
|
|
67,923
|
|
|
|
114,578
|
|
|
|
114,660
|
|
|
|
113,198
|
|
|
|
101,327
|
|
Long-term debt, less current portion
|
|
|
117
|
|
|
|
85
|
|
|
|
68
|
|
|
|
22
|
|
|
|
|
|
Total stockholders equity
|
|
|
44,655
|
|
|
|
47,474
|
|
|
|
38,181
|
|
|
|
27,183
|
|
|
|
40,242
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the financial statements and related notes in
this report. This discussion contains forward-looking statements
that involve risks and uncertainties. These forward-looking
statements are based on our current expectations, estimates and
projections about our industry, managements 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 and managements future strategic plans. Our
actual results could differ significantly from those projected
in the forward-looking statements as a result of factors,
including those discussed under Risk Factors and
elsewhere in this report. We assume no obligation to update the
forward-looking statements or such risk factors.
Overview
RightNow Technologies provides RightNow CX, a cloud-based suite
of customer experience software and services that helps
consumer-centric organizations improve customer experiences,
reduce costs and increase revenue. In todays competitive
business environment, we believe providing superior customer
experiences can be a powerful way for companies to drive
sustainable differentiation. RightNows technology enables
an organizations service, marketing and sales personnel to
leverage a common application platform to deliver service, to
market and to sell via the 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, implement rapidly, and 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 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
them achieve their strategic objectives and better meet the
needs of those they serve.
We released our initial version of RightNow Service
tm
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
tm,
RightNow Sales
tm,
RightNow Feedback
tm,
and RightNow Cloud
Monitortm,
which automate aspects of marketing campaigns, sales operations,
and
31
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
2009 quarterly releases, RightNow CX November 09, includes
the first major integration of our social solution, and
functionality related to Section 508 of the Disabilities
Act as part of our expanded government cloud offering.
Additionally, RightNow CX November 09 includes for the
first time RightNow Order Management, which allows order entry
directly from the RightNow agent desktop. 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. Our products served approximately 2.5 billion
customer interactions, or unique sessions hosted by our
solutions, during the year ended December 31, 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. Recurring
revenue, referred to in this report, includes software,
hosting and support revenue from term license and subscription
agreements.
Software, hosting and support revenue includes fees earned under
subscriptions and software license arrangements. Subscription
arrangements are for a fixed term and 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 are also for a fixed term (a
term license). For term licenses, software, hosting
and support revenue is recognized ratably over the length of the
agreement. Beginning in 2007, we substantially eliminated
perpetual license arrangements. Due to the change, perpetual
license revenue decreased from $2.1 million, or 2% of
revenue in the year ending December 31, 2007, to $312,000
in the year ending December 31, 2008 and $145,000 in the
year ending December 31, 2009, or less than 1% of revenue
in the year ending December 31, 2008, and December 31,
2009, respectively.
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 clients specific business application. Professional
services revenue was approximately 22% of total revenue during
2007, 27% in 2008, and 24% in 2009.
Professional services are typically sold with initial sales
arrangements and at times 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, stock based compensation 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
32
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, depreciation for furniture and
equipment, and certain employee benefits, based on headcount. As
a result, these common 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
arrangements when earned, which is typically at the time the
related sale is invoiced to the client. Since the majority of
our historical revenue has been from software, hosting and
support arrangements recognized over time, we have experienced a
delay between increasing sales and marketing expenses and the
recognition of corresponding revenue. We expect to increase
sales and marketing expenses in absolute dollars as we continue
to hire additional sales and marketing personnel to increase the
level of sales and marketing activities.
Research and Development Expenses. Research
and development expenses consist primarily of salary and related
expenses for development personnel and costs related to the
development of new products, enhancement of existing products,
translation fees, quality assurance, testing and allocated
overhead. To date, we have not capitalized any costs related to
development of software 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. Beginning in 2009, we capitalized
costs of internally developed computer software to be sold as a
service, which were incurred during the application development
stage. We capitalized approximately $550,000 of cost of
internally developed computer software as of December 31,
2009. We intend to continue to expand and enhance our product
offerings. To accomplish this, we plan to utilize existing
personnel, hire additional personnel and, from time to time,
contract with third parties. We expect that research and
development expenses will increase in absolute dollars as we
seek to expand our technology and product offerings. We also
expect that the capitalized cost of internally developed
computer software will increase as we continue to sell and
deliver our solution as a service.
General and Administrative Expenses. General
and administrative expenses consist primarily of salary and
related expenses for management, finance and accounting, legal,
information systems and human resources personnel, professional
fees, other corporate expenses and allocated overhead. We
anticipate that we will incur additional employee salaries and
related expenses, professional service fees and insurance costs
related to the growth of our business and operations.
Critical
Accounting Policies and Estimates
Our financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the
United States. Preparing financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses
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 managements
application of accounting policies. Our critical accounting
policies include revenue recognition, valuation of receivables
and deferred tax assets, accounting for share-based
compensation, and software cost capitalization. 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; estimates of
expected term and volatility
33
in determining share based compensation expense; and software
cost capitalization. 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 term-based 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.
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 customers
current creditworthiness; customer concentration; age of the
receivable balance; and general economic conditions that may
affect a customers ability to pay. Actual customer
collections could differ from our estimates and could 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
34
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 has been based primarily on our lack of
taxable earnings. We continue to monitor the necessity for a
full or partial valuation allowance against our deferred tax
assets.
Effective January 1, 2007, we adopted Topic 740, Income
Taxes, and it did not have a significant impact on our
financial position or results of operations. Topic 740
requires judgment when evaluating tax positions. Our
judgment includes, but is not limited to, an evaluation of our
material positions taken on tax return filings. The ultimate
resolution of tax issues may result in a significant change to
our recorded tax assets and liabilities.
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 behaviors, forfeitures, and
the related income tax effects. Our assumptions are based
primarily on our historical information.
Software
Capitalization
Industry Topic 985, Software, requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility. We establish
technological feasibility upon completion of a working model.
Historically, the period between achieving technological
feasibility and general availability of such software has been
short and software development costs qualifying for
capitalization have been immaterial. Accordingly, we have not
capitalized any software development costs under this standard.
Topic 350, Intangibles Goodwill and Other,
requires capitalization of costs incurred during the
application development stage of certain internally developed
computer software to be sold as a service. We capitalize these
software development costs when application development begins,
it is probable that the project will be completed, and the
software will be used as intended. Costs associated with
preliminary project stage activities, training, maintenance and
all other post implementation stage activities are expensed as
incurred. Our policy provides for the capitalization of certain
payroll, benefits and other payroll-related costs for employees
who are directly associated with internal use computer software
development projects, as well as share-based compensation costs,
and external direct costs of materials and services associated
with developing or obtaining internal use software. Capitalized
costs are being amortized and recognized as a cost of software,
hosting and support revenue, on a straight-line basis, over the
estimated useful lives of the related applications which is
approximately three years. The capitalized costs are included in
intangible assets, net on our Consolidated Balance Sheets.
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 effective January 1, 2010.
35
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
|
78
|
%
|
|
|
73
|
%
|
|
|
76
|
%
|
Professional services
|
|
|
22
|
|
|
|
27
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
|
16
|
|
|
|
14
|
|
|
|
14
|
|
Professional services
|
|
|
20
|
|
|
|
22
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
36
|
|
|
|
36
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
64
|
|
|
|
64
|
|
|
|
69
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
58
|
|
|
|
48
|
|
|
|
43
|
|
Research and development
|
|
|
15
|
|
|
|
13
|
|
|
|
13
|
|
General and administrative
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
83
|
|
|
|
71
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(19
|
)
|
|
|
(7
|
)
|
|
|
3
|
|
Interest and other income (expense), net
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(16
|
)
|
|
|
(5
|
)
|
|
|
4
|
|
Provision for income taxes
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(17
|
)%
|
|
|
(5
|
)%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Customer interactions (in millions)
|
|
|
1,466
|
|
|
|
2,099
|
|
|
|
2,494
|
|
Revenue by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring (subscriptions, term licenses, hosting and support)
|
|
|
78
|
%
|
|
|
73
|
%
|
|
|
76
|
%
|
Professional services
|
|
|
22
|
|
|
|
27
|
|
|
|
24
|
|
Revenue by geography in:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
71
|
%
|
|
|
69
|
%
|
|
|
73
|
%
|
Europe
|
|
|
21
|
|
|
|
23
|
|
|
|
19
|
|
Asia Pacific
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
Overview
of 2009
Due to the deteriorating macroeconomic conditions that began in
2008 and persisted in 2009, our two primary objectives for 2009
were to take care of our customers and increase profitability.
Our investments were managed and focused primarily on ensuring
that existing customers were satisfied with their solutions and
that new offerings we developed would enable us to expand the
breadth of our product footprint.
36
Total revenue for 2009 was $152.7 million, compared to 2008
revenue of $140.4 million. Software, hosting and support
revenue increased 12% in 2009 over 2008. We believe revenue
increased in 2009 due to our focus on taking care of our
customers combined with sales and marketing efforts aimed at
increasing our customer base among consumer centric
organizations. Additionally, we believe our expanded contact
center offerings and our strategy to win small, initial deals
with customers (land) and then grow our customer
penetration based on measurable success (expand)
resulted in increased revenue.
We adjusted our sales processes to better align with customer
buying patterns, primarily by improving our understanding of the
customers procurement requirements and the greater levels
of scrutiny required to initiate and close projects in the
difficult economic environment. A portion of our revenue is also
contingent on customers renewing subscription agreements. We saw
some customers reduce their solution needs at renewal time
primarily because their requirements had changed. Additionally,
we saw some smaller organizations fail to renew their
subscriptions for a variety of reasons, including that some
ceased operations, were consolidated, or purchased less
expensive solutions from competitors.
Revenue per customer increased primarily due to higher average
selling price per customer, which we believe was attributable to
expansion of our customer base. Sales to customers with annual
revenues greater than $1 billion and the public sector made
up approximately 62% of total revenue in 2009, compared to
approximately 60% of total revenue in 2008 and 59% of total
revenue in 2007.
As part of our objective to grow profitability while still
making investments in customer satisfaction, we continued adding
partners to support our solution offerings, capacity to support
our hosting operations and customer support, research and
development personnel to work on quarterly releases and quality
assurance testing automation, and administrative personnel to
support operations. We reduced the investment in less productive
sales and marketing channels and overall managed expenses
including staff utilization and compensation. We monitored and
continue to monitor these investments on a regular basis so that
we can reduce spending in a given function or across all
functions if it significantly puts at risk increasing our
profitability. Lastly, to further our competitive advantage, we
invested in expanding our offering by acquiring HiveLive, and in
October 2009, we rebranded our offering as RightNow CX, the
Customer Experience Suite.
These investments, and approximately $1.0 million of
incremental expense during the fourth quarter of 2009 as a
result of headcount additions from the acquisition of HiveLive,
caused total expenses to increase in absolute dollars, but to
decrease 5% as a percentage of revenue during 2009. Total
revenue growth combined with improved leverage in our business
model and the increased focus on operating expenses resulted in
an improvement from an operating loss as a percentage of revenue
of (7)% in 2008 to operating income as a percentage of revenue
of 3% in 2009.
When compared to the year ended December 31, 2008, our
results were impacted by the strength of the U.S. dollar
for the year ended December 31, 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 year ended
December 31, 2009 increased by $12.3 million, or 9%
over total revenue reported in the same period of 2008. If
weighted average currency exchange rates in the year ended
December 31, 2009 had remained constant with
December 31, 2008, revenue as of December 31, 2009
would have increased by approximately $16.4 million, which
is an additional $4.1 million, or a further 3%. In other
words, the change in exchange rates between the year ended
December 31, 2008 and 2009 had an unfavorable impact to
revenue of approximately $4.1 million or 3%. Using similar
methodology, the change in period-end exchange rates between the
year ended December 31, 2008 and 2009 had a favorable
impact on deferred revenue of $3.1 million. 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 year ended December 31, 2009 decreased by
$2.0 million, or (1)% over total cost of revenue and
operating expenses reported in the year ended December 31,
2008. If currency exchange rates in the year ended
December 31, 2009 had remained constant with the same
period of 2008, these total expenses
37
as of December 31, 2009 would have increased by
approximately $1.5 million, which is an additional
$3.5 million, or a further 2%. In other words, the change
in weighted-average exchange rates between the year ended
December 31, 2008 and 2009 had a favorable impact to these
total expenses of approximately $3.5 million or 2%. The
expenses most significantly exposed to currency exchange
fluctuations are within sales and marketing and professional
services cost of revenue.
For the year ended December 31, 2009, we generated
$16.1 million of cash from operations compared to
$14.7 million of cash in 2008. Our cash and investments
balances increased to $96.5 million at December 31,
2009 from $90.8 million a year earlier, which was primarily
due to strong collections, timing of new sales during the year,
increased profitability over the prior year, and a non-recurring
litigation settlement gain which is described below in
Note 11(d) of our Notes to Consolidated Financial
Statements. We grew our cash and investment balances while at
the same time using $1.8 million to repurchase
231,000 shares of our common stock and completing the
acquisition of HiveLive for a purchase price of
$5.9 million.
As of December 31, 2009, we had an accumulated deficit of
$58.3 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.
Years
Ended December 31, 2007, 2008 and 2009
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
Change
|
|
|
|
(Amounts in thousands)
|
|
|
Software, hosting and support
|
|
$
|
86,983
|
|
|
$
|
102,576
|
|
|
|
18
|
%
|
|
$
|
115,395
|
|
|
|
12
|
%
|
Professional services
|
|
|
25,094
|
|
|
|
37,859
|
|
|
|
51
|
|
|
|
37,292
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
112,077
|
|
|
$
|
140,435
|
|
|
|
25
|
%
|
|
$
|
152,687
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue for 2009 was $152.7 million, an increase of
$12.3 million, or 9%, over total revenue of
$140.4 million for 2008. If currency exchange rates in the
year ended December 31, 2009 had remained constant with the
currency exchange rates in the year ended December 31,
2008, total revenue during 2009 would have increased by
approximately $16.4 million, which is an additional
$4.1 million, or a further 3%, with the majority of the
currency rate impact within software, hosting and support
revenue.
Software, hosting and support revenue, increased
$12.8 million in 2009, or 12%, over software, hosting and
support revenue of $102.6 million for 2008 primarily due to
expansion sales within our existing customer base, and new
customer acquisitions over the comparable period. If currency
exchange rates in the year ended December 31, 2009 had
remained constant with the currency exchange rates in the year
ended December 31, 2008, software, hosting and support
revenue during 2009 would have increased by approximately
$15.7 million, which is an additional $2.9 million, or
a further 3%. Total active customers remained constant at 1,900
as of December 31, 2009 and December 31, 2008. We
believe our latest product, appeals to large customers because
of robust performance characteristics, notably within the
contact center, which in turn has driven expansion within our
existing customer base and higher average transaction prices per
customer. Average recurring revenue per customer 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, were approximately
2.5 billion in 2009, a 19% increase over 2008. Our client
retention rate was approximately 90% in 2009.
Professional services revenue decreased $567,000, or (1.5)%, in
2009 over 2008, primarily due to currency exchange rate impact.
If currency exchange rates in the year ended December 31,
2009 had remained constant with the currency exchange rates in
the year ended December 31, 2008, professional services
revenue during 2009 would have increased by approximately
$600,000, which is an additional $1.2 million, or a further
3%. Customers generally purchase professional services with
initial license or subscription arrangements, and from time to
time over the life of the contract.
38
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 gross profit earned on software, hosting and
support revenue. Professional services revenue represented 24%
of total revenue in 2009 compared to 27% of total revenue in
2008 and 22% of total revenue in 2007.
Total revenue for 2008 was $140.4 million, an increase of
$28.3 million, or 25%, over total revenue of
$112.1 million for 2007. If currency exchange rates in 2008
had remained constant with 2007 rates, revenue in 2008 would
have increased approximately by an additional $700,000, or a
further 1%.
Software, hosting and support revenue, increased
$15.6 million in 2008, or 18%, over software, hosting and
support revenue of $87.0 million for 2007. Software,
hosting and support revenue increased 18% over 2007 primarily
due to expansion sales within our existing customer base, and
new customer acquisitions over the comparable period. Total
active customers increased to 1,900 at December 31, 2008
from approximately 1,800 at December 31, 2007. Average
recurring revenue per customer increased as a result of sales of
capacity additions, contract renewals and new products. Customer
interactions were approximately 2.1 billion in 2008, a 40%
increase over 2007. Our client retention rate was approximately
90% in 2008 and 2007.
Professional services revenue increased $12.8 million, or
51%, in 2008 over 2007. The growth in professional services
revenue was primarily due to a higher volume of larger customer
projects in 2008 as compared to 2007, which we believe was a
result of the release of RightNow 8.0, which created, expanded
opportunities within the contact center space.
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
Change
|
|
|
|
(Amounts in thousands)
|
|
|
Software, hosting and support
|
|
$
|
18,411
|
|
|
$
|
20,397
|
|
|
|
11
|
%
|
|
$
|
20,948
|
|
|
|
3
|
%
|
Professional services
|
|
|
22,012
|
|
|
|
30,440
|
|
|
|
38
|
|
|
|
26,610
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
40,423
|
|
|
$
|
50,837
|
|
|
|
26
|
%
|
|
$
|
47,558
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue for 2009 was $47.6 million, a
decrease of $3.3 million, or (6)%, over total cost of
revenue of $50.8 million in 2008.
Cost of software, hosting and support increased $551,000, or 3%
in 2009 due primarily to increased headcount to assist with
technical support and delivering our solutions, which increased
salaries and related expenses, such as salaries, bonuses,
stock-based compensation by $1.2 million, $215,000 of
increased
sub-contractor
hours to assist with hosting, and $211,000 of increased telecom
maintenance to support government secure pods. These costs were
offset by decreased depreciation expense of approximately
$620,000 associated with hosting operations, and improved
hosting bandwidth service costs, which decreased $430,000 when
compared to the year ended December 31, 2008. Average
employee count in our hosting and technical support operations
was 110 in 2009 as compared to 91 in 2008. As a percent of the
associated revenue, the cost of software, hosting and support
was 18% in 2009 as compared to 20% in 2008 due to improved
leverage in our business model, combined with focused expense
management.
Cost of professional services decreased $3.8 million, or
(13)%, in 2009 due primarily to a favorable foreign currency
exchange rate benefit of $1.2 million, a reassignment of
professional service employees to support sales and marketing,
reduction in utilization of third-party partners that assisted
in the deployment of professional services, and a reduction in
travel-related costs. Average employee count in our professional
services organization decreased to 166 in 2009 from 178 in 2008,
partially due to a reassignment of professional service
employees. Employee training, customer scheduling requirements,
and use of third-party resources can cause the cost of
professional services to fluctuate as a percentage of revenue
from period to period.
Total cost of revenue for 2008 was $50.8 million, an
increase of $10.4 million, or 26%, over total cost of
revenue of $40.4 million in 2007.
39
Cost of software, hosting and support increased
$2.0 million, or 11% in 2008 due primarily to capacity
additions to our hosting data centers, increased voice and
non-voice hosting volume and staff additions. Capacity additions
to our hosting data centers and growth in customer interactions
increased third party hosting provider costs by $766,000 in 2008
over 2007, and capacity additions to our data centers increased
telecom maintenance and depreciation expense in 2008 by $487,000
over 2007. Staff additions to our hosting and technical support
organizations increased salaries and related expenses by
$477,000 during 2008 over 2007. Average employee count in our
hosting and technical support operations was 91 in 2008 as
compared to 80 in 2007. As a percent of the associated revenue,
software, hosting and support costs were 20% in 2008 as compared
to 21% in 2007 due to improved leverage in our business model,
combined with focused expense management.
Cost of professional services increased $8.4 million, or
38%, in 2008 due primarily to employee staff additions,
increased third-party resource usage, and increased travel
related expenses. Average employee count in our professional
services organization grew to 178 in 2008 from 142 in 2007,
which increased salaries and related expenses by
$4 million, and increased common expenses, which are
allocated based upon headcount, such as payroll taxes, benefits,
office rent, supplies and other overhead expenses by $893,000.
Increased utilization of third-party providers used to assist in
the deployment of professional services increased by
$2.6 million during 2008 over 2007. Travel related expenses
associated with professional service deployments increased by
$521,000 during 2008. As a percent of the associated revenue,
professional services costs decreased to 80% in 2008 from 88% in
2007 due to focused expense management and favorable currency
impact in the third and fourth quarters of 2008 primarily in the
strength of the US dollar relative to the British Pound, Euro,
and Australian dollar.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
Change
|
|
|
|
(Amounts in thousands)
|
|
|
Sales and marketing
|
|
$
|
65,118
|
|
|
$
|
67,628
|
|
|
|
4
|
%
|
|
$
|
64,751
|
|
|
|
(4
|
)%
|
Research and development
|
|
|
17,084
|
|
|
|
18,292
|
|
|
|
7
|
|
|
|
20,221
|
|
|
|
11
|
|
General and administrative
|
|
|
11,500
|
|
|
|
13,615
|
|
|
|
18
|
|
|
|
15,801
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
93,702
|
|
|
$
|
99,535
|
|
|
|
6
|
%
|
|
$
|
100,773
|
|
|
|
1
|
%
|
Sales and
Marketing Expenses
Sales and marketing expenses of $64.8 million in 2009
declined (4%), or $2.8 million, compared to
$67.6 million in 2008. The decrease was due primarily to
$2.0 million in favorable foreign currency exchange rate
impact. Additionally we had reduced headcount during the first
two quarters of 2009, $746,000 of reduced recruitment and
relocation costs and $422,000 of reduced travel related
spending. These costs were primarily offset by increased
commissions and bonus expense of approximately $400,000 due to
increased sales over 2008. The average employee headcount in our
sales and marketing organizations was relatively consistent from
261 in 2009 as compared to 262 in 2008.
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 approximately $14.0 million
and $13.6 million for the year ended December 31, 2009
and 2008, respectively. Our deferred commissions were
$9.9 million and $8.2 million at December 31,
2009 and December 31, 2008, respectively.
Sales and marketing expenses of $67.6 million in 2008 were
4%, or $2.5 million, higher than $65.1 million in
2007. Staff additions to our sales and marketing organization
increased salaries and common expense allocation by
$2.9 million. The average number of employees in our sales
and marketing organizations was relatively constant at 262 in
2008 and 263 in 2007. Headcount in sales and marketing declined
during the fourth quarter of 2008 due to expense reduction
efforts in the fourth quarter of 2008; prior to this the
40
headcount was increasing throughout 2008 when compared to the
comparable quarters in 2007. Commissions and bonus expense
increased $2.1 million due to increased sales over 2007.
Offsetting the increased salaries and related expenses were
lower advertising costs of $1.7 million, and $700,000
favorable currency impact primarily due to the strength of the
US dollar relative to the British Pound, Euro, and Australian
dollar in the third and fourth quarter of 2008.
Our deferred commissions were $8.2 million and
$5.0 million at December 31, 2008 and
December 31, 2007, respectively.
Research
and Development Expenses
Research and development expenses increased $1.9 million in
2009 to $20.2 million, or 11%, over 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 increased to
169 in 2009 from 146 in 2008.
Our capitalized cost of internally developed computer software
to be sold as a service was approximately $550,000 and $0 as of
December 31, 2009 and December 31, 2008, respectively.
Research and development expenses increased $1.2 million in
2008 to $18.3 million, or 7%, over 2007, primarily due to
increased salaries and related expenses and outsourced services.
Salary and related expense increased $1.0 million primarily
due to staff additions, and common expense allocation increased
by $332,000. These costs were offset by a reduction in
third-party research and development services, and other
employee related expenses of $166,000. The average number of
employees in our research and development organization increased
to 146 in 2008 from 133 in 2007.
General
and Administrative Expenses
General and administrative expenses increased $2.2 million
to $15.8 million, or 16%, in 2009 over 2008 primarily due
to staff additions, which increased salaries, related expenses,
stock-based compensation and common expense allocation by
approximately $1.8 million. The average number of employees
in our general and administrative organization was 90 in 2009 as
compared to 79 in 2008. Employee additions in 2009 were
primarily for finance, accounting and information technology
personnel.
General and administrative expenses increased $2.1 million
to $13.6 million, or 18%, in 2008 over 2007 primarily due
to staff additions, which increased salaries, related expenses
and common expense allocation approximately $1.4 million.
The average number of employees in our general and
administrative organization was 79 in 2008 compared to 68 in
2007. Additionally, donations increased $308,000 compared to the
same period in 2007 related to sponsorship programs including a
computer science grant program at a university and the Special
Olympics.
Stock-Based
Compensation Expense
Total stock-based compensation expense for 2009 was
$7.8 million, a 30% increase compared to $6.0 million
in 2008. The
year-over-year
increase in stock-based compensation expense was primarily due
to a change in estimated forfeiture rates during the second
quarter of 2009, combined with a one-time directors 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.
41
Interest
and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
Change
|
|
|
|
(Amounts in thousands)
|
|
|
Interest income
|
|
$
|
3,898
|
|
|
$
|
2,906
|
|
|
|
(25
|
)%
|
|
$
|
1,023
|
|
|
|
(65
|
)%
|
Interest expense
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
n/m
|
|
|
|
(7
|
)
|
|
|
n/m
|
|
Other income (expense)
|
|
|
(208
|
)
|
|
|
(198
|
)
|
|
|
n/m
|
|
|
|
1,078
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other income (expense), net
|
|
$
|
3,683
|
|
|
$
|
2,696
|
|
|
|
(27
|
)%
|
|
$
|
2,094
|
|
|
|
(22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income decreased (65%) in 2009 over 2008 due to
declining investment yields. Our investment portfolio consists
primarily of investment-grade government securities, corporate
debt instruments, and auction-rate securities.
Other income (expense) in 2009 consists primarily of a
non-recurring litigation settlement gain. KANA Software, Inc.
(KANA) paid $1,000,000 during the fourth quarter of
2009, under an acceleration clause pursuant to the terms of a
General Release and Settlement Agreement. On October 16,
2009, RightNow entered into a General Release and Settlement
Agreement with 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. For further discussion related
to the settlement please refer to Note 11 (d) of our
Notes to Consolidated Financial Statements.
Interest income decreased (25%) in 2008 over 2007 due to
declining investment yields driven by decreases in the federal
funds rate. Our investment portfolio consists primarily of
investment-grade government securities, corporate debt
instruments, and auction-rate securities.
Other income (expense) consists primarily of losses on
transactions denominated in foreign currencies, and an other
than temporary impairment loss on auction-rate securities. These
losses were primarily offset by a gain on a put option
settlement right associated with the auction-rate securities.
Refer to Note 4 of our Notes to Consolidated Financial
Statements for further discussion on the ARS investments and put
option.
Provision
for Income Taxes
The provision for income taxes of $579,000 in 2009, $42,000 in
2008, and $276,000 in 2007, consists primarily of foreign
withholding taxes, and various state income taxes. Our effective
tax rate differs from the federal statutory rate primarily due
to the utilization of net operating loss carry forwards, tax
credits, foreign rate differentials, and non-deductible meal and
entertainment expenses. Our effective tax rate in 2010 will
depend on a number of factors, such as the amount and mix of
stock-based compensation expense to be recorded under Topic
718, the level of business in state and foreign tax
jurisdictions, managements expectation of the realization
of deferred tax assets and the associated valuation allowance,
and other factors.
At December 31, 2009, we had approximately $24 million
of net deferred tax assets that have been reserved in full by a
valuation allowance. During 2010, we anticipate that we may
recognize a tax benefit as a result of the removal of some or
all of the valuation allowance on our deferred tax assets
dependent on our financial performance in 2010. Excluding any
benefit from the removal of some or all of the valuation
allowance, we expect our full year 2010 effective income tax
rate will increase to more closely approximate the federal and
state blended statutory rate.
42
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
2007
|
|
2008
|
|
Change
|
|
2009
|
|
Change
|
|
|
(Amounts in thousands)
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
96,325
|
|
|
$
|
85,817
|
|
|
|
(11
|
)%
|
|
$
|
96,523
|
|
|
|
12
|
%
|
Long-term investments
|
|
|
|
|
|
|
4,963
|
|
|
|
100
|
|
|
|
|
|
|
|
(100
|
)
|
Cash provided by operating activities
|
|
|
21,034
|
|
|
|
14,724
|
|
|
|
(30
|
)%
|
|
|
16,097
|
|
|
|
9
|
%
|
We have historically funded our operations with cash from
operations, equity financings and debt borrowings. At
December 31, 2009, cash and cash equivalents, and
short-term investments, totaled $96.5 million. In addition
to our cash and short-term investments, other sources of
liquidity at December 31, 2009 included a $3.0 million
bank line of credit facility, under which there have been no
borrowings.
Operating activities provided $16.1 million of cash during
the year ended December 31, 2009 as compared to
$14.7 million in 2008 and $21.0 million in 2007.
Strong cash collections from growth in sales was the primary
driver of the cash provided in operating activities during the
year ended December 31, 2009. We typically bill customers
on net
30-day terms
at the beginning of the contract period, which is reflected in
accounts receivable and deferred revenue. Cash flow from
operations can vary significantly from year- to-year for many
reasons, including the timing of business in a given period, and
customer payment preferences and patterns. During the third and
fourth quarters of 2009, the percentage of business signed with
monthly or periodic billing terms increased from historical
rates of
15-25% to
approximately 39 and 46%, respectively. Deferred revenue is not
recorded for subscriptions with monthly or periodic billing
terms until the invoices are issued. A change in the billing
practice resulting in delayed payment or 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 6% and 5% of current accounts and term receivables
at December 31, 2009 and 2008, respectively. Accounts
written off in 2009 increased over 2008, primarily due to small
to mid-size companies that have gone out of business or have
liquidity issues. 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.
We have approximately $6.4 million of payments due in 2010
under contractual obligations and purchase commitments for
operating and capital leases, hosting services and other items.
Total purchase commitments at December 31, 2009 were
$15.9 million to be paid per the table set forth below
under the heading Contractual Obligations and
Commitments. We believe we will generate sufficient cash
from operations to satisfy the commitments that will come due
within the next twelve months.
Investing activities used $28.0 million in 2009, which
included net purchases of short-term investments of
$15.8 million, acquisition consideration for the purchase
of HiveLive, Inc. of $5.9 million, and approximately
$6.2 million of capital expenditures. As indicated in
Item 5, the source of the funds used for the acquisition
came from the proceeds of our initial public offering. Cash
generated through investing activities in 2008 was
$7.6 million, due to $13.4 million from net proceeds
from sales or maturities of short-term investments offset by
$5.8 million for capital expenditures.
Financing activities provided $147,000 in 2009, which was
primarily due to approximately $1.7 million generated from
exercises of common stock options issued under our employee
incentive plan and stock purchases under our employee stock
purchase plan, offset by 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 stock buyback program.
At December 31, 2009 we held $3.8 million 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,
43
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 year ended
December 31, 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 $500,000, included
in other income, net. Partially offsetting this gain within
other income, net was a $466,000 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 brokers 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 $3.8 million par value (fair value
$3.5 million) of the ARS held by us as of December 31,
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 future acquisitions 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, in a timely fashion or at
all.
Off-Balance
Sheet Arrangements
As of December 31, 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
The following table summarizes our contractual payment
obligations and commitments as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
13,448
|
|
|
$
|
4,601
|
|
|
$
|
6,905
|
|
|
$
|
1,430
|
|
|
$
|
512
|
|
Obligations under capital leases
|
|
|
1,980
|
|
|
|
1,579
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
Purchase obligations hosting services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations other
|
|
|
485
|
|
|
|
205
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,913
|
|
|
$
|
6,385
|
|
|
$
|
7,586
|
|
|
$
|
1,430
|
|
|
$
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease our office facilities and certain office equipment
under operating lease agreements that expire at various dates
through 2017. Obligations under capital leases pertain to
certain tenant improvements in our main office facility.
Purchase obligations consist of agreements with third parties to
provide co-location services for hosting operations, and
obligations for marketing and other miscellaneous services.
44
|
|
Item 7A.
|
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 years ended December 31,
2009 or December 31, 2008.
When compared to the year ended December 31, 2008, our
results were impacted by the strength of the U.S. dollar in
the year ended December 31, 2009 relative to the British
pound, Australian dollar, and Euro. The change in weighted
average exchange rates between the years ended December 31,
2008 and 2009 had an unfavorable impact to revenue of
$4.1 million. Additionally, deferred revenue increased by
approximately $3.1 million when comparing the change in
period-end exchange rates between the years ended
December 31, 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 year ended December 31, 2009
were favorably impacted $3.5 million when comparing the
change in period-end exchange rates between the years ended
December 31, 2008 and 2009.
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 December 31, 2009, the fair value of our portfolio would
decline by approximately $237,000.
Liquidation
and Valuation Risk
Our short-term investments consist of approximately
$3.8 million in par value auction rate securities
(ARS) with investment grades of AAA or AA, as of
December 31, 2009. Despite the long-term contractual
maturities of the ARS, all of these securities are considered
trading securities as of December 31, 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
year ended December 31, 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
$500,000, included in other income, net. Partially offsetting
this gain within other income, net was a $466,000 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 brokers 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 $3.8 million par value (fair value
$3.5 million) of the ARS held by us as of December 31,
2009. Based on our expected operating cash flows, and other
sources and uses of cash,
45
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 8.
|
Financial
Statements and Supplementary Data
|
Our consolidated financial statements, together with our related
notes and report of KPMG LLP, our independent registered public
accounting firm, are set forth on the pages indicated in
Item 15.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
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). Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2009 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 accounting 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.
Report of
Management on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining a
system of internal control over financial reporting as defined
under the Exchange Act Rules 13a 15(f) and
15d-15(f).
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of our financial
reporting and preparation of financial statements for external
purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting
includes maintaining records that in reasonable detail
accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary
for preparation of our financial statements in accordance with
U. S. generally accepted accounting principles; providing
reasonable assurance that our receipts and expenditures are made
in accordance with authorizations of our management and
directors; and providing reasonable assurance that unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our financial statements would be prevented
or detected on a timely basis. Because of its inherent
limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of
our financial statements would be prevented or detected.
Management conducted an assessment of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management
concluded that our internal control over financial reporting was
effective as of December 31, 2009 to provide reasonable
assurance regarding the reliability of financial reporting and
preparation of financial statements for external reporting
purposes in accordance with U.S. generally accepted
accounting principles. Our independent registered public
accounting firm, KPMG LLP has issued an audit report on the
effectiveness of our internal control over financial reporting
which is included in this Item 9A below.
46
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders RightNow Technologies,
Inc.:
We have audited RightNow Technologies, Incs internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). RightNow
Technologies, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, RightNow Technologies, Inc maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of RightNow Technologies, Inc as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2009, and
our report dated March 9, 2010 expressed an unqualified
opinion on those consolidated financial statements.
Portland, OR
March 9, 2010
47
|
|
Item 9B.
|
Other
Information
|
On February 16, 2010, we renewed our lease agreements with
Genesis Partners, LLC for our office space located at 77
Discovery Drive and 110 Enterprise Boulevard in Bozeman,
Montana. The renewals include the same terms and conditions as
the original leases, except for the negotiated rent. The 77
Discovery Drive lease was renewed for a period of 60 months
from April 1, 2010 at a monthly rent of $11,786, and
includes a renewal option for an additional 60 month
period. The 110 Enterprise Boulevard lease was renewed for a
period of 60 months from June 13, 2010 at a monthly
rent of $16,570, and includes a renewal option for an additional
60 month period. The renewals of the 77 Discovery Drive and
110 Enterprise Boulevard leases are filed under Item 15 (a)
(3) as Exhibits 10.23 and 10.24, respectively, and are
incorporated in their entirety herein by this reference.
Greg Gianforte, our Chairman, Chief Executive Officer and
President, and Steve Daines, our Vice President and General
Manager of Asia-Pacific, beneficially own, directly or
indirectly, 50% and 25% membership interests in Genesis Partners
LLC, respectively. The remaining 25% of Genesis Partners is
beneficially owned by Mr. Daines father, Clair
Daines, who is a commercial real estate developer and builder.
On March 3, 2010, our Board of Directors amended our 2004
Equity Incentive Plan to eliminate the automatic option grant
program thereunder for our directors. Notwithstanding this
amendment, our directors remain eligible to receive
discretionary option grants pursuant to the existing terms of
our 2004 Equity Incentive Plan.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
|
|
(a)
|
Identification
of Directors.
|
The information under the captions Proposal One:
Election of Directors and Corporate Governance,
Board Composition and Board Committees, appearing in our
proxy statement for our 2010 annual meeting of stockholders, is
hereby incorporated by reference.
|
|
(b)
|
Identification
of Executive Officers and Certain Significant
Employees.
|
The information under the caption Executive
Officers, appearing in our proxy statement for our 2010
annual meeting of stockholders, is hereby incorporated by
reference.
|
|
(c)
|
Compliance
with Section 16(a) of the Exchange Act.
|
The information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance, appearing in
our proxy statement for our 2010 annual meeting of stockholders,
is hereby incorporated by reference.
Our board of directors has adopted a code of ethics and business
conduct that applies to all of our employees, officers
(including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions) and directors. The full text of
our code of ethics and business conduct is posted on our web
site at
http://www.rightnow.com
under the Investor Relations section. We intend to disclose
future amendments to certain provisions of our code of ethics
and business conduct, or waivers of such provisions, applicable
to our directors and executive officers (including our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions), at the same location on our web site identified
above. The inclusion of our web site address in this report does
not include or incorporate by reference the information on, or
accessible through, our web site into this report.
48
|
|
(e)
|
Corporate
Governance.
|
The information under the caption Corporate Governance,
Board Composition and Board Committees, appearing in our
proxy statement for our 2010 annual meeting of stockholders, is
hereby incorporated by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information under the captions Compensation Discussion
and Analysis, Compensation Committee Interlocks and
Insider Participation, and Compensation Committee
Report, appearing in our proxy statement for our 2010
annual meeting of stockholders, is hereby incorporated herein by
reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information under the captions Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters and Securities Authorized for Issuance Under
Equity Compensation Plans, appearing in our proxy
statement for our 2010 annual meeting of stockholders, is hereby
incorporated by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
|
|
(a)
|
Certain
Relationships and Related Transactions.
|
The information under the caption Certain Relationships
and Related Person Transactions appearing in our proxy
statement for our 2010 annual meeting of stockholders, is hereby
incorporated by reference.
|
|
(b)
|
Director
Independence.
|
The information under the captions
Proposal One: Election of
Directors and Corporate Governance, Board
Composition and Board Committees, appearing in our proxy
statement for our 2010 annual meeting of stockholders, is hereby
incorporated by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information under the captions Principal Accountant
Fees and Services, and Audit Committee Pre-Approval
of Audit and Permissible Non-Audit Services of Independent
Auditors, appearing in our proxy statement for our 2010
annual meeting of stockholders, is hereby incorporated by
reference.
Part IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a)(1)
Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-1
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
(a)(2)
Financial Statement Schedules
The financial statement schedules required by
Regulation S-X
and Item 8 of this report are included in the financial
statements and notes thereto listed in Item 15(a)(1) of
this report.
49
(a)(3)
Exhibits
The following is a list of exhibits to this report.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1
|
|
Amended and restated certificate of incorporation of the
registrant.(1)
|
|
3
|
.2
|
|
Amended and restated bylaws of the registrant.(4)
|
|
10
|
.1
|
|
Form of indemnification agreement between the registrant and its
officers and directors.(2)
|
|
10
|
.2
|
|
Amended and restated 1998 Long-Term Incentive and Stock Option
Plan.(2)
|
|
10
|
.3
|
|
2004 Equity Incentive Plan, as amended and restated.
|
|
10
|
.4
|
|
2004 Employee Stock Purchase Plan.(2)
|
|
10
|
.5
|
|
Lease agreement dated July 10, 2000, between Genesis
Partners, LLC and the registrant (relating to property at 40
Enterprise Blvd, Bozeman, MT).(2)
|
|
10
|
.6
|
|
Lease agreement dated July 10, 2000, between Genesis
Partners, LLC and the registrant (relating to property at 77
Discovery Drive, Bozeman, MT).(2)
|
|
10
|
.7
|
|
Severance policy for executive officers.(2)
|
|
10
|
.8
|
|
Form of executive officer offer letter and schedule of omitted
material details thereto.(2)
|
|
10
|
.9
|
|
Form of executive officer incentive stock option agreement and
schedule of omitted material details thereto.(2)
|
|
10
|
.10
|
|
Form of executive officer non-incentive stock option agreement
and schedule of omitted material details thereto.(2)
|
|
10
|
.11
|
|
Form of director non-incentive stock option agreement and
schedule of omitted material details thereto.(2)
|
|
10
|
.12
|
|
Form of Notice of Grant of Stock Options and Stock Option
Agreements.(5)
|
|
10
|
.13
|
|
Form of Incentive Stock Option Agreement.(6)
|
|
10
|
.14
|
|
Form of Non-Incentive Stock Option Agreement.(6)
|
|
10
|
.15
|
|
Lease agreement dated March 28, 2005, between the
registrant and Genesis Partners, LLC for office space located at
110 Enterprise Boulevard, Bozeman, Montana.(3)
|
|
10
|
.16
|
|
Renewed lease agreement, dated March 28, 2005, between the
registrant and Genesis Partners, LLC for office space located at
77 Discovery Drive, Bozeman, Montana.(3)
|
|
10
|
.17
|
|
Form of amended employment offer letter for executive
officers.(7)
|
|
10
|
.18
|
|
Lease agreement, dated November 1, 2005 and commencing
March 23, 2007, between the registrant and Genesis
Partners, LLC for office space located at 136 Enterprise
Boulevard, Bozeman, Montana.(8)
|
|
10
|
.19
|
|
Form of offer letter for Jason Mittelstaedt, Joseph Brown, Steve
Daines, and Michael Saracini, and schedule of omitted material
details thereto.(9)
|
|
10
|
.20
|
|
Form of executive officer offer letter and schedule of material
differences thereto for Jeff Davison and Susan Carstensen.(10)
|
|
10
|
.21
|
|
Offer letter with Marcus Bragg, VP and GM of the Americas.(11)
|
|
10
|
.22
|
|
Terms of understanding with Michael Saracini, Former VP and GM
of Americas.(12)
|
|
10
|
.23
|
|
Renewed lease agreement, dated February 16, 2010, between
the registrant and Genesis Partners, LLC for office space
located at 77 Discovery Drive, Bozeman, Montana.
|
|
10
|
.24
|
|
Renewed lease agreement, dated February 16, 2010, between
the registrant and Genesis Partners, LLC for office space
located at 110 Enterprise Boulevard, Bozeman, Montana.
|
|
21
|
.1
|
|
Subsidiaries of the registrant.
|
|
23
|
.1
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to Exchange
Act
Rule 13a-14(a)
or 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
50
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to Exchange
Act
Rule 13a-14(a)
or 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
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).
|
|
|
|
(1) |
|
Incorporated by reference to Exhibit 4.2 of the
registrants registration statement on
Form S-8
(File
No. 333-118515)
filed with the Securities and Exchange Commission on
August 24, 2004. |
|
(2) |
|
Incorporated by reference to the exhibit of the same number from
the registrants registration statement of
Form S-1
(File
No. 333-115331)
initially filed with the Securities and Exchange Commission on
May 10, 2004, as amended. |
|
(3) |
|
Incorporated by reference to the exhibit of the same number from
the registrants current report on
Form 8-K
(File
No. 000-31321)
filed with the Securities and Exchange Commission on
April 1, 2005. |
|
(4) |
|
Incorporated by reference to Exhibit 3.1 of the
registrants current report on
Form 8-K
filed with the Securities and Exchange Commission on
January 25, 2006. |
|
(5) |
|
Incorporated by reference to Exhibits 10.13, 10.14 and
10.15 of the registrants annual report on
Form 10-K
filed with the Securities and Exchange Commission on filed on
March 31, 2005. |
|
(6) |
|
Incorporated by reference to Exhibits 10.20 and 10.21,
respectively, of the registrants quarterly report on
Form 10-Q
filed with the Securities and Exchange Commission on
May 10, 2006. |
|
(7) |
|
Incorporated by reference to the exhibit of the same number from
the registrants annual report on
Form 10-K
filed with the Securities and Exchange Commission on
March 14, 2007. |
|
(8) |
|
Incorporated by reference to the exhibit of the same number from
the registrants quarterly report on
Form 10-Q
filed with the Securities and Exchange Commission on May 8,
2007. |
|
(9) |
|
Incorporated by reference to Exhibit 10.30 of the
registrants quarterly report on
Form 10-Q
filed with the Securities and Exchange Commission on
August 9, 2007. |
|
(10) |
|
Incorporated by reference to Exhibit 10.31 of the
registrants current report on
Form 8-K
filed with the Securities and Exchange Commission on
January 30, 2008. |
|
(11) |
|
Incorporated by reference to Exhibit 10.1 of the
registrants quarterly report on
Form 10-Q
filed with the Securities and Exchange Commission on
November 7, 2008. |
|
(12) |
|
Incorporated by reference to Exhibit 10.2 of the
registrants quarterly report on
Form 10-Q
filed with the Securities and Exchange Commission on
November 7, 2008. |
|
|
|
Denotes management contract or compensatory plan or arrangement. |
(b)
Exhibits
The
exhibits filed as part of this report are listed in
Item 15(a)(3) of this report.
(c)
Financial Statement Schedules
The financial statement schedules required by
Regulation S-X
and Item 8 of this report are included in the financial
statements and notes thereto listed in Item 15(a)(1) of
this report.
51
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RIGHTNOW TECHNOLOGIES, INC.
|
|
By: |
/s/ JEFFREY
C. DAVISON
|
Jeffrey C. Davison
Chief Financial Officer, Vice President and Treasurer
(Principal Financial and Accounting Officer)
March 9, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
March 9, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ GREG
R. GIANFORTE
Greg
R. Gianforte
|
|
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
|
|
|
|
/s/ JEFFREY
C. DAVISON
Jeffrey
C. Davison
|
|
Chief Financial Officer, Vice President and Treasurer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ GREGORY
M. AVIS
Gregory
M. Avis
|
|
Director
|
|
|
|
/s/ THOMAS
W. KENDRA
Thomas
W. Kendra
|
|
Director
|
|
|
|
/s/ WILLIAM
J. LANSING
William
J. Lansing
|
|
Director
|
|
|
|
/s/ ALLEN
E. SNYDER
Allen
E. Snyder
|
|
Director
|
|
|
|
/s/ RICHARD
E. ALLEN
Richard
E. Allen
|
|
Director
|
|
|
|
/s/ STEVEN
S. SINGH
Steven
S. Singh
|
|
Director
|
52
Independent
Auditors Report
The Board of Directors and Stockholders RightNow Technologies,
Inc.:
We have audited the accompanying consolidated balance sheets of
RightNow Technologies, Inc. as of December 31, 2009 and
2008, and the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
December 31, 2009. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of RightNow Technologies, Inc. as of December 31,
2009 and 2008, and the results of their operations and their
cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
RightNow Technologies, Incs internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control- Integrated
Framework issued by the Committee Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated
March 9, 2010 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting
March 9, 2010
F-1
RIGHTNOW
TECHNOLOGIES, INC.
Consolidated
Balance Sheets
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,405
|
|
|
$
|
41,546
|
|
Short-term investments
|
|
|
34,412
|
|
|
|
54,977
|
|
Accounts receivable
|
|
|
36,770
|
|
|
|
31,850
|
|
Term receivables, current
|
|
|
5,752
|
|
|
|
2,417
|
|
|
|
|
|
|
|
|
|
|
Total current receivables
|
|
|
42,522
|
|
|
|
34,267
|
|
Less allowance for doubtful accounts
|
|
|
(2,277
|
)
|
|
|
(1,914
|
)
|
|
|
|
|
|
|
|
|
|
Total current receivables, net
|
|
|
40,245
|
|
|
|
32,353
|
|
Deferred commissions
|
|
|
5,381
|
|
|
|
6,394
|
|
Prepaid and other current assets
|
|
|
2,150
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
133,593
|
|
|
|
137,704
|
|
Long-term investments
|
|
|
4,963
|
|
|
|
|
|
Property and equipment, net
|
|
|
10,141
|
|
|
|
10,122
|
|
Term receivables, non-current
|
|
|
3,547
|
|
|
|
1,105
|
|
Intangible assets, net
|
|
|
6,399
|
|
|
|
11,141
|
|
Deferred commissions, non-current
|
|
|
2,840
|
|
|
|
3,461
|
|
Other assets
|
|
|
854
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
162,337
|
|
|
$
|
164,435
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,058
|
|
|
$
|
5,427
|
|
Commissions and bonuses payable
|
|
|
5,665
|
|
|
|
6,271
|
|
Other accrued liabilities
|
|
|
11,165
|
|
|
|
11,146
|
|
Current portion of long-term debt
|
|
|
46
|
|
|
|
22
|
|
Current portion of deferred revenue
|
|
|
77,584
|
|
|
|
74,446
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
99,518
|
|
|
|
97,312
|
|
Long-term debt, less current portion
|
|
|
22
|
|
|
|
|
|
Deferred revenue, net of current portion
|
|
|
35,614
|
|
|
|
26,881
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
135,154
|
|
|
|
124,193
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value. Authorized and
undesignated 15,000 shares at December 31, 2008, and
2009, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value. Authorized
150,000 shares; issued and outstanding 33,712 and
31,830 shares at December 31, 2008; issued and
outstanding 33,992 and 31,879 respectively at December 31,
2009
|
|
|
34
|
|
|
|
34
|
|
Additional paid-in capital
|
|
|
102,662
|
|
|
|
112,439
|
|
Treasury Stock, at cost. 1,882 shares and 2,113 shares
at December 31, 2008 and 2009, respectively
|
|
|
(13,209
|
)
|
|
|
(15,007
|
)
|
Accumulated other comprehensive income
|
|
|
1,916
|
|
|
|
1,125
|
|
Accumulated deficit
|
|
|
(64,220
|
)
|
|
|
(58,349
|
)
|
Total stockholders equity
|
|
|
27,183
|
|
|
|
40,242
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
162,337
|
|
|
$
|
164,435
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-2
RIGHTNOW
TECHNOLOGIES, INC.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
$
|
86,983
|
|
|
$
|
102,576
|
|
|
$
|
115,395
|
|
Professional services
|
|
|
25,094
|
|
|
|
37,859
|
|
|
|
37,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
112,077
|
|
|
|
140,435
|
|
|
|
152,687
|
|
Costs of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
|
18,411
|
|
|
|
20,397
|
|
|
|
20,948
|
|
Professional services
|
|
|
22,012
|
|
|
|
30,440
|
|
|
|
26,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
40,423
|
|
|
|
50,837
|
|
|
|
47,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
71,654
|
|
|
|
89,598
|
|
|
|
105,129
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
65,118
|
|
|
|
67,628
|
|
|
|
64,751
|
|
Research and development
|
|
|
17,084
|
|
|
|
18,292
|
|
|
|
20,221
|
|
General and administrative
|
|
|
11,500
|
|
|
|
13,615
|
|
|
|
15,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
93,702
|
|
|
|
99,535
|
|
|
|
100,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(22,048
|
)
|
|
|
(9,937
|
)
|
|
|
4,356
|
|
Interest and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,898
|
|
|
|
2,906
|
|
|
|
1,023
|
|
Interest expense
|
|
|
(7
|
)
|
|
|
(12
|
)
|
|
|
(7
|
)
|
Other
|
|
|
(208
|
)
|
|
|
(198
|
)
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other income, net
|
|
|
3,683
|
|
|
|
2,696
|
|
|
|
2,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(18,365
|
)
|
|
|
(7,241
|
)
|
|
|
6,450
|
|
Provision for income taxes
|
|
|
(276
|
)
|
|
|
(42
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(18,641
|
)
|
|
$
|
(7,283
|
)
|
|
$
|
5,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.56
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
(0.56
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
0.18
|
|
Shares used in the computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,078
|
|
|
|
33,362
|
|
|
|
31,752
|
|
Diluted
|
|
|
33,078
|
|
|
|
33,362
|
|
|
|
32,336
|
|
See accompanying notes to consolidated financial statements
F-3
RIGHTNOW
TECHNOLOGIES, INC.
Consolidated
Statements of Stockholders Equity and Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(Amount in thousands)
|
|
|
Balance at December 31, 2006
|
|
|
32,788
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
86,069
|
|
|
|
(332
|
)
|
|
|
(38,296
|
)
|
|
|
47,474
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,436
|
|
|
|
|
|
|
|
|
|
|
|
3,436
|
|
Employee stock purchase plan
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,471
|
|
|
|
|
|
|
|
|
|
|
|
5,471
|
|
Tax benefit of stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
Fair value of options granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,641
|
)
|
|
|
(18,641
|
)
|
Unrealized loss on available for sale investments net of tax of
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
78
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,453
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
95,377
|
|
|
|
(292
|
)
|
|
|
(56,937
|
)
|
|
|
38,181
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
236
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
1,177
|
|
Employee stock purchase plan
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,025
|
|
|
|
|
|
|
|
|
|
|
|
6,025
|
|
Tax benefit of stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
(135
|
)
|
Fair value of options granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at cost
|
|
|
|
|
|
|
|
|
|
|
1,882
|
|
|
|
(13,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,209
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,283
|
)
|
|
|
(7,283
|
)
|
Unrealized gain on available for sale investments net of tax of
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
|
|
|
|
|
242
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,966
|
|
|
|
|
|
|
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,712
|
|
|
|
34
|
|
|
|
1,882
|
|
|
|
(13,209
|
)
|
|
|
102,662
|
|
|
|
1,916
|
|
|
|
(64,220
|
)
|
|
|
27,183
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
1,497
|
|
Employee stock purchase plan
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,786
|
|
|
|
|
|
|
|
|
|
|
|
7,786
|
|
Tax benefit of stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
Fair value of options granted to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at cost
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
(1,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,798
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,871
|
|
|
|
5,871
|
|
Unrealized gain on available for sale investments net of tax of
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(802
|
)
|
|
|
|
|
|
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,992
|
|
|
$
|
34
|
|
|
|
2,113
|
|
|
|
(15,007
|
)
|
|
$
|
112,439
|
|
|
$
|
1,125
|
|
|
$
|
(58,349
|
)
|
|
$
|
40,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
RIGHTNOW
TECHNOLOGIES, INC.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(18,641
|
)
|
|
$
|
(7,283
|
)
|
|
$
|
5,871
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,266
|
|
|
|
7,771
|
|
|
|
7,491
|
|
Stock-based compensation
|
|
|
5,471
|
|
|
|
6,025
|
|
|
|
7,786
|
|
Provision for losses on accounts receivable
|
|
|
384
|
|
|
|
212
|
|
|
|
157
|
|
Changes in operating assets and liabilities (net of assets
acquired):
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
27,552
|
|
|
|
4,774
|
|
|
|
11,255
|
|
Prepaid and other current assets
|
|
|
(226
|
)
|
|
|
(101
|
)
|
|
|
(209
|
)
|
Deferred commissions
|
|
|
(4,803
|
)
|
|
|
(3,623
|
)
|
|
|
(1,282
|
)
|
Accounts payable
|
|
|
(45
|
)
|
|
|
895
|
|
|
|
238
|
|
Commissions and bonuses payable
|
|
|
957
|
|
|
|
930
|
|
|
|
451
|
|
Other accrued liabilities
|
|
|
3,733
|
|
|
|
462
|
|
|
|
(424
|
)
|
Deferred revenue
|
|
|
(606
|
)
|
|
|
4,169
|
|
|
|
(14,916
|
)
|
Other
|
|
|
(8
|
)
|
|
|
493
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,034
|
|
|
|
14,724
|
|
|
|
16,097
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(57,512
|
)
|
|
|
(47,908
|
)
|
|
|
(69,952
|
)
|
Sales or maturities of investments
|
|
|
43,995
|
|
|
|
61,339
|
|
|
|
54,119
|
|
Purchase of property and equipment
|
|
|
(6,687
|
)
|
|
|
(5,738
|
)
|
|
|
(5,591
|
)
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(5,906
|
)
|
Proceeds from sale of property and equipment
|
|
|
55
|
|
|
|
(21
|
)
|
|
|
14
|
|
Intangible asset additions
|
|
|
(610
|
)
|
|
|
(33
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(20,759
|
)
|
|
|
7,639
|
|
|
|
(27,970
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
(13,209
|
)
|
|
|
(1,798
|
)
|
Proceeds from issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants
|
|
|
3,436
|
|
|
|
1,177
|
|
|
|
1,497
|
|
Employee stock purchase plan
|
|
|
218
|
|
|
|
219
|
|
|
|
251
|
|
Excess (shortfall) tax benefit of stock options exercised
|
|
|
183
|
|
|
|
(135
|
)
|
|
|
243
|
|
Payments on long-term debt
|
|
|
(36
|
)
|
|
|
(43
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,801
|
|
|
|
(11,991
|
)
|
|
|
147
|
|
Effect of foreign exchange rates on cash and cash equivalents
|
|
|
397
|
|
|
|
(2,648
|
)
|
|
|
1,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
4,473
|
|
|
|
7,724
|
|
|
|
(9,859
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
39,208
|
|
|
|
43,681
|
|
|
|
51,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,681
|
|
|
$
|
51,405
|
|
|
$
|
41,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
RIGHTNOW
TECHNOLOGIES, INC.
Notes to
Consolidated Financial Statements
Years
ended December 31, 2007, 2008 and 2009
|
|
(1)
|
Business
Description and Summary of Significant Accounting
Policies
|
RightNow Technologies, Inc. (the Company or
RightNow) provides RightNow CX, a cloud-based suite
of customer experience software solutions for companies of all
sizes. The Companys customer experience solution is
designed to help consumer-centric organizations improve customer
experiences, reduce costs and increase revenue. The Company
helps organizations deliver exceptional customer experiences
across the web, social networks and contact centers, all
delivered through its cloud service. 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.
|
|
(b)
|
Basis
of Consolidation
|
The accompanying consolidated financial statements have been
prepared in accordance with United States generally accepted
accounting principles, which include the accounts of the Company
and its foreign subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
|
|
(c)
|
Certain
Risks and Concentrations
|
The Companys 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
Companys 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 Companys
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,
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 Companys 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 $3.8 million of short-term investments
consist of auction rate securities (ARS) and a
repurchase put option associated with the ARS as further
described in Note 4.
The Companys customers are worldwide with approximately
71% of total revenue in North America during 2007, approximately
69% of total revenue in North America in 2008 and approximately
73% of total revenue in North America during 2009. No individual
customer accounted for more than 10% of the Companys
revenue in 2007, 2008 or 2009. No individual customer accounted
for more than 10% of the Companys accounts receivable or
total net receivables at December 31, 2008 and
December 31, 2009, respectively. Beginning in 2007, as a
result of the Companys change to subscriptions from
license arrangements RightNow no longer records 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 customer represented 40% of
term receivables at December 31, 2009.
F-6
Assets located outside North America were 12% and 18% of total
assets at December 31, 2008 and 2009, respectively. The
loss from operations outside the United States totaled
$12.9 million, $1.4 million, and $849,000 for the
years ended December 31, 2007, 2008 and 2009, respectively.
Revenue by geographical region is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
North America
|
|
$
|
79,540
|
|
|
$
|
97,640
|
|
|
$
|
110,814
|
|
Europe
|
|
|
23,561
|
|
|
|
31,946
|
|
|
|
28,544
|
|
Asia Pacific
|
|
|
8,976
|
|
|
|
10,849
|
|
|
|
13,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,077
|
|
|
$
|
140,435
|
|
|
$
|
152,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, foreign currency, 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, including software cost
capitalization; 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.
The Company considers all highly liquid investments purchased
with an original maturity date of three months or less to be
cash equivalents. Cash equivalents are recorded at cost, which
approximates market value.
|
|
(f)
|
Short-Term
Investments
|
Short-term investments in debt and equity securities, excluding
ARS, are classified as
available-for-sale
and are recorded at fair market value as determined by
quotations from national exchanges. Realized gains and losses
are included in income based on the specific identification
method. Unrealized gains and losses (excluding
other-than-temporary
impairments), net of tax, are recorded to Other Comprehensive
Income (Loss), a component of stockholders equity.
Approximately $3.5 million of short-term investments
consist of ARS with investment grades of AAA or AA, as of
December 31, 2009. Additionally, the ARS investments
consist of a repurchase put option associated with the ARS.
Despite the long-term contractual maturities of the auction rate
securities, all of these securities are considered trading
securities and are recorded at fair market value as determined
by assumed risk premiums, and assumed work out periods using a
discounted cash flow model. The put option associated with the
ARS was recorded at fair value using a discounted cash flow
model as determined by assumed risk premiums, and assumed work
out periods. The amounts derived through the discounted cash
flow model for the ARS and put option were generally consistent
with the fair value indicated by the broker statement at
December 31, 2009. Realized and unrealized gains and losses
are included in income based on the changes in
F-7
fair market value as these instruments are marked to market at
period end. Refer to Note 4 for further discussion on the
ARS investments and put option.
A decline in market value of any
available-for-sale
security below cost, which is deemed to be
other-than-temporary
results in an impairment charge to reduce the carrying amount to
fair value. The impairment is charged to earnings and a new cost
basis for the security is established. If the cost of an
investment exceeds its fair value, we evaluate, among other
factors, general market conditions, the duration and extent that
cost is less than fair value, as well as our ability and intent
to hold the investment. We also consider specific adverse
conditions of the investee, including industry and sector
performance, operational and cash flow factors, and rating
agency actions.
|
|
(g)
|
Accounts
Receivable and Term Receivables
|
Accounts receivable represents amounts currently due from
customers for which revenue has been recognized or is being
recognized ratably in future periods, and amounts currently due
under contract billings for which revenue has not been
recognized. In license arrangements, term receivables include
the remaining minimum committed amounts due from customers for
which no revenue has been recognized. The Company performs
credit evaluations when considered necessary, but generally does
not require collateral to extend credit.
The allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in the
Companys existing receivables. The Company determines the
allowance based on factors such as historical collection
experience, customers current creditworthiness, customer
concentration, age of accounts receivable balance and general
economic conditions that may affect a customers ability to
pay. Actual customer collections could differ from estimates.
Account balances are charged to the allowance after all means of
collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance
sheet credit exposure related to its customers.
Provisions to the allowance for doubtful accounts are charged to
expense
and/or
against deferred revenue for accounts receivable and against
deferred revenue for term receivables. Following is a summary of
the activity in the allowance for doubtful accounts (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Balance, beginning of year
|
|
$
|
2,621
|
|
|
$
|
1,918
|
|
|
$
|
2,277
|
|
Provision charged to expense
|
|
|
384
|
|
|
|
212
|
|
|
|
157
|
|
Provision charged against deferred revenue
|
|
|
1,785
|
|
|
|
1,515
|
|
|
|
1,158
|
|
Write-downs charged against the allowance
|
|
|
(2,990
|
)
|
|
|
(1,399
|
)
|
|
|
(2,160
|
)
|
Recoveries of amounts previously charged-off
|
|
|
118
|
|
|
|
31
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,918
|
|
|
$
|
2,277
|
|
|
$
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(h)
|
Property
and Equipment
|
Property and equipment, including software purchased for
internal use, are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization is computed
using the straight-line method over the estimated useful lives
of the assets, generally three to seven years. Repairs and
maintenance are expensed as incurred.
Intangible assets include purchased technologies and goodwill.
Purchased technologies are carried at cost less accumulated
amortization. The Company amortizes these assets on a
straight-line basis over their estimated useful lives of two to
five years. Goodwill is the excess of cost over the fair value
of the net identifiable assets acquired in business
acquisitions. Goodwill is not amortized, but is evaluated for
impairment at least annually and more often if indicators of
potential impairment exist.
F-8
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 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 Companys fee for providing the
software and services is fixed or determinable; and
d) collection of the Companys fee is probable.
Subscriptions include access to the Companys 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 of subscription agreements are evidenced by
subscription renewals and stand-alone sales of professional
services are evidenced 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 over the contractual period and professional
services are recognized as incurred provided the above criteria
have been met.
Under the Companys subscription contracts, the Company
applies Topic
605-25
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 Companys 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). The majority of term licenses 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
licenses, the Company treats the software license, hosting and
support services as 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.
The Companys 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 has any payment term
that is due in excess of the Companys normal payment terms
(over 90 days), the fee is not considered fixed or
determinable, and the amount of revenue recognized 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 agreements that provide for usage fees
above fixed minimums. Usage of the Companys 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.
F-9
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.
The following table sets forth revenue by product or service as
a percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenue by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hosting and support
|
|
|
78
|
%
|
|
|
73
|
%
|
|
|
76
|
%
|
Professional services
|
|
|
22
|
|
|
|
27
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue represents amounts received or due from
customers for which the revenue recognition criteria have not
been met. The majority of deferred revenue results from the
upfront billing of term and subscription contracts while revenue
is recognized ratably over the contractual period. Deferred
revenue is recognized into revenue when the Company provides its
products and services, assuming all other revenue recognition
criteria noted above are met. Under subscriptions, the amount
currently due and payable from the customer is reflected in
accounts receivable and deferred revenue. Under licenses, the
full customer commitment is reflected in accounts receivable for
amounts currently due, or term receivables for amounts due over
the contractual term, and deferred revenue. The Company does not
provide refunds for customer cancellations.
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
$10.5 million, $13.6 million, and $14.0 million
for the years ended December 31, 2007, 2008 and 2009,
respectively. Deferred commissions at December 31, 2008 and
December 31, 2009 were $8.2 million and
$9.9 million, respectively.
|
|
(l)
|
Research
and Development
|
Research and development expenditures are expensed as incurred.
Industry Topic 985, Software, requires capitalization of
certain software development costs subsequent to the
establishment of technological feasibility. Based on the
Companys product development process, technological
feasibility is established upon completion of a working model.
Historically, the period between achieving technological
feasibility and general availability of such software has been
short and software development costs qualifying for
capitalization have been immaterial. Accordingly, the Company
has not capitalized any software development costs.
|
|
(m)
|
Internal
Use Software
|
Topic 350, Intangibles Goodwill and Other,
requires capitalization of costs incurred during the
application development stage of certain internally developed
computer software to be sold as a service. The Company
capitalizes these software development costs when application
development begins, it is probable that the project will be
completed, and the software will be used as intended. Costs
associated with preliminary project stage activities, training,
maintenance and all other post implementation stage activities
are expensed as incurred. Our policy provides for the
capitalization of certain payroll, benefits and other
payroll-related costs for employees who are directly associated
with internal use computer software development projects, as
well as share-based compensation costs, external direct costs of
materials and services associated with
F-10
developing or obtaining internal use software. Capitalizable
personnel costs are limited to the time directly spent on such
projects. In the second half of 2009, the Company began to sell
voice and social exclusively as a service. The capitalized costs
are being amortized and recognized as a cost of software,
hosting and support revenue, on a straight-line basis, over the
estimated useful lives of the related applications which is
approximately three years. Cost of internally developed computer
software to be sold as a service capitalized was $0 and
approximately $550,000 as of December 31, 2008 and
December 31, 2009, respectively. The capitalized costs are
included in intangible assets, net on the Companys
Consolidated Balance Sheets.
The Company records income taxes under the asset and liability
method as prescribed under Topic 740, Income Taxes.
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
on deferred tax assets and liabilities of a change in tax rates
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.
Effective January 1, 2007, the Company adopted the
provisions of Topic 740, Income Taxes, which deal with
accounting for uncertainties in income taxes. The adopted
provisions did not have a significant impact on the
Companys financial position or results of operations. The
provisions prescribe a recognition threshold and measurement
attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return,
and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. As of December 31, 2009 and
January 1, 2009, the Company had an insignificant amount of
unrecognized tax benefits, none of which would affect the
Companys effective tax rate if recognized. The Company
does not anticipate that the amount of unrecognized tax benefits
will significantly increase or decrease in the next
12 months. The Companys policy is to recognize
interest and penalties on unrecognized tax benefits as interest
expense and other expense, respectively in the Consolidated
Statements of Operations. The amount of interest and penalties
accrued for the year ended December 31, 2009 was not
significant. 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.
|
|
(o)
|
Impairment
of Long-Lived Assets
|
Long-lived assets, including intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future
undiscounted cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the
assets. Fair value is determined based on discounted cash flow
or appraised value, depending on the nature of the asset. Assets
to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Goodwill is tested for
impairment at least annually, and more frequently if indicators
of potential impairment exist. No impairments of long-lived
assets have been identified in any of the periods presented.
F-11
|
|
(p)
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Weighted average common shares outstanding for basic net income
(loss) per share
|
|
|
33,078
|
|
|
|
33,362
|
|
|
|
31,752
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for dilutive net income
(loss) per share
|
|
|
33,078
|
|
|
|
33,362
|
|
|
|
32,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company included in the computation of diluted net income
(loss) per share options to purchase 584,000 shares of
common stock for the period ending December 31, 2009,
because the Company incurred net income for the period and the
option price was greater than the average market price of the
common stock during the period.
The following common stock equivalents were excluded from the
computation of diluted earnings income (loss) per share because
they had an anti-dilutive impact (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Employee stock options
|
|
|
3,874
|
|
|
|
4,428
|
|
|
|
5,363
|
|
|
|
(q)
|
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. Pursuant to the income tax provisions included in
Topic 718, the Company has elected the short cut
method of computing its hypothetical pool of additional
paid-in capital that is available to absorb future tax benefit
shortfalls.
Compensation cost recorded in the years ended December 31,
2007, 2008 and 2009 includes the cost for all stock-based awards
granted prior to, but not yet vested as of December 31,
2005, based on the grant-date fair value estimated in accordance
with the original provisions of Topic 718. Compensation
expense for all stock-based awards granted after
December 31, 2005 was based on the grant-date fair value
estimated in accordance with the provisions of Topic 718.
|
|
(r)
|
Foreign
Currency Translation
|
For
non-U.S. operations,
the functional currency is the local currency. Assets and
liabilities of those operations are translated into
U.S. dollars using year-end exchange rates; income and
expenses are translated using the average exchange rates for the
reporting period. Translation adjustments are deferred in
accumulated other comprehensive income (loss), a separate
component of stockholders equity. Realized foreign
currency transaction gains and losses are included in other
income and expense.
|
|
(s)
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) includes net income or loss, as well
as other changes in stockholders equity that result from
transactions and economic events other than those with
stockholders. Additional elements of other comprehensive income
or loss are attributable to foreign currency translation
adjustments and unrealized gains or losses on short-term
investments.
F-12
The Company expenses advertising costs as
incurred. Advertising costs were
$4.3 million, $2.9 million and $2.6 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
Certain amounts in the consolidated financial statements and
notes thereto have been reclassified to conform to the current
period presentation.
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 a platform for customer support, engagement and
loyalty, and ideation communities. The acquisition has been
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 a broad
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.
F-13
Unaudited 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
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(Unaudited)
|
|
Unaudited)
|
|
Total Revenues
|
|
$
|
36,176
|
|
|
$
|
41,579
|
|
|
$
|
140,800
|
|
|
$
|
153,437
|
|
Net income (loss)
|
|
|
(535
|
)
|
|
|
2,607
|
|
|
|
(11,143
|
)
|
|
|
2,704
|
|
The amounts of revenue and earnings of HiveLive since the
acquisition date are included in the consolidated statement of
operations for the three and twelve month period ended
December 31, 2009. The Company recognized revenue from
HiveLive of $268,000 and incurred a net loss of $954,000 since
the date of the acquisition through December 31, 2009.
|
|
(3)
|
Supplemental
Cash Flow Information
|
Supplemental statement of cash flow information follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
7
|
|
Income taxes
|
|
|
140
|
|
|
|
28
|
|
|
|
262
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital lease
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Cash
Equivalents, Short and Long-Term Investments, and Fair
Value
|
The components of cash equivalents and short and long term
investments at December 31, 2008 and 2009 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Market
|
|
|
Cash
|
|
|
Short and Long-
|
|
December 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Equivalents
|
|
|
Term Investments
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
28,527
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,527
|
|
|
$
|
28,527
|
|
|
$
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
3,034
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
3,018
|
|
|
|
|
|
|
|
3,018
|
|
U.S. Government agency securities
|
|
|
27,754
|
|
|
|
251
|
|
|
|
(1
|
)
|
|
|
28,004
|
|
|
|
|
|
|
|
28,004
|
|
State and municipal securities
|
|
|
3,383
|
|
|
|
7
|
|
|
|
|
|
|
|
3,390
|
|
|
|
|
|
|
|
3,390
|
|
Auction rate state and municipal securities
|
|
|
5,000
|
|
|
|
|
|
|
|
(775
|
)
|
|
|
4,225
|
|
|
|
|
|
|
|
4,225
|
|
Auction rate settlement agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase put option
|
|
|
|
|
|
|
738
|
|
|
|
|
|
|
|
738
|
|
|
|
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals at December 31, 2008
|
|
$
|
67,698
|
|
|
|
996
|
|
|
|
(792
|
)
|
|
$
|
67,902
|
|
|
$
|
28,527
|
|
|
$
|
39,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Market
|
|
|
Cash
|
|
|
Short-
|
|
December 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Equivalents
|
|
|
Term Investments
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
15,655
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,655
|
|
|
$
|
15,655
|
|
|
$
|
|
|
Commercial paper
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
1,400
|
|
|
|
1,400
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
738
|
|
|
|
|
|
|
|
738
|
|
Commercial paper
|
|
|
5,597
|
|
|
|
|
|
|
|
|
|
|
|
5,597
|
|
|
|
|
|
|
|
5,597
|
|
Corporate notes and bonds
|
|
|
3,274
|
|
|
|
5
|
|
|
|
|
|
|
|
3,279
|
|
|
|
|
|
|
|
3,279
|
|
U.S. Government agency securities
|
|
|
41,309
|
|
|
|
39
|
|
|
|
(29
|
)
|
|
|
41,319
|
|
|
|
|
|
|
|
41,319
|
|
State and municipal securities
|
|
|
248
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
247
|
|
|
|
|
|
|
|
247
|
|
Auction rate state and municipal securities
|
|
|
3,800
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
3,525
|
|
|
|
|
|
|
|
3,525
|
|
Auction rate settlement agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase put option
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals at December 31, 2009
|
|
$
|
72,021
|
|
|
|
316
|
|
|
|
(305
|
)
|
|
$
|
72,032
|
|
|
$
|
17,055
|
|
|
$
|
54,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate state and municipal securities and the repurchase
put option were classified as short-term as of December 31,
2009. The unrealized gains at December 31, 2009 of $316,000
include $44,000 related to investment-grade, fixed income
securities, and are primarily attributable to changes in
interest rate and $272,000 recorded as other income associated
with the repurchase put option. Unrealized losses at
December 31, 2009 of $305,000 include $30,000 related to
securities held more than one year and an other-than temporary
impairment of $275,000 associated with auction rate state and
municipal securities recorded as other expense. Realized gains
and losses from sales of
available-for-sale
securities in 2007, 2008 and 2009 were insignificant.
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
|
F-15
|
|
|
|
|
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 adoption of this statement did not have a material impact on
the Companys consolidated results of operations and
financial condition.
The following table represents the Companys fair value
hierarchy for its financial assets (cash equivalents and
investments) measured at fair value on a recurring basis as of
December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash
|
|
$
|
24,491
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,491
|
|
Money market funds
|
|
|
15,655
|
|
|
|
|
|
|
|
|
|
|
|
15,655
|
|
Certificates of deposit
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
738
|
|
Commercial paper
|
|
|
|
|
|
|
6,997
|
|
|
|
|
|
|
|
6,997
|
|
Corporate notes and bonds
|
|
|
|
|
|
|
3,279
|
|
|
|
|
|
|
|
3,279
|
|
U.S. Government agency securities
|
|
|
|
|
|
|
41,319
|
|
|
|
|
|
|
|
41,319
|
|
State and municipal securities
|
|
|
|
|
|
|
247
|
|
|
|
|
|
|
|
247
|
|
Auction rate state and municipal securities
|
|
|
|
|
|
|
|
|
|
|
3,525
|
|
|
|
3,525
|
|
Auction rate security put option
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,884
|
|
|
$
|
51,842
|
|
|
$
|
3,797
|
|
|
$
|
96,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the activity of
level 3 assets from December 31, 2008 to
December 31, 2009 (in thousands):
|
|
|
|
|
Fair value at December 31, 2008
|
|
$
|
4,963
|
|
Unrealized gain adjustment-ARS
|
|
|
500
|
|
Unrealized loss adjustment-put option
|
|
|
(466
|
)
|
Redemptions
|
|
|
(1,200
|
)
|
|
|
|
|
|
Fair value at December 31, 2009
|
|
$
|
3,797
|
|
|
|
|
|
|
As of December 31, 2009, assets characterized as
level 3 for fair value purposes consisted of
approximately $3.8 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 Companys 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
F-16
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 brokers 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
$3.8 million par value (fair value of $3.5 million) of
the ARS held by the Company as of December 31, 2009.
RightNow considers the put option to be a freestanding financial
instrument and has accounted for it 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 year ended December 31, 2009, the Company
recorded an unrealized loss on the put option of $466,000, in
other income, net. The fair value of the instrument is recorded
as an asset of $272,000 on the Companys balance sheet in
short-term investments as of December 31, 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 Companys intent to exercise the put option
during the redemption period. Prior to entering into the
settlement agreement, the Companys 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 period ended December 31, 2009, the Company
recognized an increase in fair value for a total unrealized gain
of $500,000, included in other income, net.
The Company estimated the fair value of its 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 and put option fair value indicated by the broker
statement at December 31, 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 Companys 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.
F-17
|
|
(5)
|
Property
and Equipment, Net
|
Property and equipment, net are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Computer equipment
|
|
$
|
18,922
|
|
|
$
|
21,421
|
|
Purchased software
|
|
|
7,942
|
|
|
|
7,808
|
|
Equipment
|
|
|
819
|
|
|
|
738
|
|
Furniture and fixtures
|
|
|
1,487
|
|
|
|
1,697
|
|
Leasehold improvements
|
|
|
1,057
|
|
|
|
1,209
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
30,227
|
|
|
|
32,873
|
|
Less accumulated depreciation
|
|
|
(20,086
|
)
|
|
|
(22,751
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
10,141
|
|
|
$
|
10,122
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information regarding intangible
assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
|
Purchased
|
|
|
Internally Developed
|
|
|
|
|
|
|
Goodwill
|
|
|
Relationships
|
|
|
Technologies
|
|
|
Software
|
|
|
Total
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying value
|
|
$
|
4,358
|
|
|
$
|
3,250
|
|
|
$
|
4,547
|
|
|
$
|
|
|
|
$
|
12,155
|
|
Accumulated amortization
|
|
|
|
|
|
|
(2,121
|
)
|
|
|
(3,635
|
)
|
|
|
|
|
|
|
(5,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
4,358
|
|
|
$
|
1,129
|
|
|
$
|
912
|
|
|
$
|
|
|
|
$
|
6,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying value
|
|
$
|
7,975
|
|
|
$
|
3,450
|
|
|
$
|
4,204
|
|
|
$
|
556
|
|
|
$
|
16,185
|
|
Accumulated amortization
|
|
|
|
|
|
|
(2,948
|
)
|
|
|
(2,091
|
)
|
|
|
(5
|
)
|
|
|
(5,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
7,975
|
|
|
$
|
502
|
|
|
$
|
2,113
|
|
|
$
|
551
|
|
|
$
|
11,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average amortization period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
n/a
|
|
|
|
4.0
|
|
|
|
4.1
|
|
|
|
3.0
|
|
|
|
3.7
|
|
Aggregate amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
|
|
|
$
|
765
|
|
|
$
|
708
|
|
|
$
|
|
|
|
$
|
1,473
|
|
2008
|
|
|
|
|
|
|
766
|
|
|
|
831
|
|
|
|
|
|
|
|
1,597
|
|
2009
|
|
|
|
|
|
|
827
|
|
|
|
797
|
|
|
$
|
5
|
|
|
|
1,629
|
|
Estimated amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
|
|
|
$
|
367
|
|
|
$
|
822
|
|
|
$
|
202
|
|
|
$
|
1,391
|
|
2011
|
|
|
|
|
|
|
50
|
|
|
|
520
|
|
|
|
202
|
|
|
|
772
|
|
2012
|
|
|
|
|
|
|
50
|
|
|
|
453
|
|
|
|
147
|
|
|
|
650
|
|
2013
|
|
|
|
|
|
|
35
|
|
|
|
318
|
|
|
|
|
|
|
|
353
|
|
F-18
|
|
(7)
|
Long-Term
Debt and Credit Facility
|
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Obligations under capital leases for tenant improvements to
leased property and furniture, payable monthly in installments
of $3 and $1 through May 2010 and June 2010, respectively at
approximately 6% interest
|
|
$
|
68
|
|
|
$
|
22
|
|
Less current portion
|
|
|
46
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
$
|
22
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, the Company entered into an office lease agreement that
included $162,000 of tenant improvements, which have been
capitalized and will be repaid to the landlord over the initial
lease term of five years. The improvements are being amortized
over an expected useful life of seven years since the Company
expects to renew the office lease upon its initial term
expiration in 2010. During 2007, the Company assumed $30,000 of
capital lease obligations associated with furniture in its
Washington D.C. office space, which will be repaid over the
initial lease term of three years.
During 2008 and 2009, the Company had a $3.0 million
working capital line of credit agreement with a commercial bank.
Advances under the line bear a variable rate of interest which
approximates the prime lending rate, and are payable monthly.
The working capital line of credit is secured by substantially
all of the United States dollar-denominated accounts receivable
of the Company. There were no advances under the line during
2008 or 2009.
|
|
(8)
|
Redeemable
Convertible Preferred Stock
|
The Company has authorized 15 million shares of preferred
stock, $.001 par value, which may be issued from time to
time by its board of directors without further action by
stockholders unless otherwise required by the rules of The
Nasdaq Stock Market. Shares of preferred stock may be issued
with dividend, redemption, voting or other rights senior to
existing common shares. There were no outstanding shares of
preferred stock at December 31, 2008 or 2009.
On October 20, 2008, the Company announced a share
repurchase program under which the board of directors authorized
the repurchase of up to $15.0 million of the Companys
common stock over the next two years. The Company was permitted
to purchase shares from time to time at prevailing prices in the
open market, in block transactions, in privately negotiated
transactions,
and/or in
accelerated share repurchase programs, in accordance with
Rule 10b-18
of the Securities and Exchange Commission. As of
December 31, 2008, the Company repurchased
1,881,877 shares of common stock under this program at a
total price of $13.2 million. During the first quarter of
2009, the Company repurchased an additional 231,115 shares
of common stock under this program at a total price of
$1.8 million. Consequently, there can be no further
repurchases made under this program because the entire amount of
the authorized $15.0 million has been utilized.
|
|
(10)
|
Stock-Based
Compensation
|
The Companys 1998 Long-Term Incentive and Stock Option
Plan, as amended, and the 2004 Equity Incentive Plan (the
equity plans) provide for stock options to be
granted to employees, consultants, independent contractors,
officers and directors. The equity plans have been approved by
stockholders. Except for automatic grants to directors, options
are granted at the discretion of the Companys board of
directors, at an exercise price and term determined by the
board. However, exercise prices are not less than the fair
market value at the date of grant, and the term of the options
is not greater than ten years. Options generally vest over a
period of four years in eight equal increments. The Company also
has an employee stock purchase plan (ESPP) that
allows employees to purchase shares of common stock at a
discount to the fair market value at
F-19
the date of purchase. Purchase periods under the ESPP issuances
are consecutive six-month periods ending on the last day in June
and December each year. Shares issued to satisfy stock option
exercises and ESPP are newly issued. At December 31, 2009,
the Company had approximately 2.8 million shares available
for future issuance under the equity plans and ESPP.
Compensation expense recognized in the statement of operations
for the year ended December 31, 2008 and 2009 is based on
awards ultimately expected to vest and reflects an estimate of
awards that will be forfeited. Topic 718 requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
The following table illustrates the stock-based compensation
expense resulting from stock-based awards included in the
consolidated statement of operations (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software, hosting and support
|
|
$
|
288
|
|
|
$
|
323
|
|
|
$
|
460
|
|
Cost of professional services
|
|
|
647
|
|
|
|
638
|
|
|
|
612
|
|
Sales and marketing
|
|
|
2,264
|
|
|
|
2,454
|
|
|
|
3,029
|
|
Research and development
|
|
|
887
|
|
|
|
969
|
|
|
|
1,178
|
|
General and administrative
|
|
|
1,385
|
|
|
|
1,641
|
|
|
|
2,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income taxes
|
|
|
5,471
|
|
|
|
6,025
|
|
|
|
7,786
|
|
Income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense, net of income taxes
|
|
$
|
5,471
|
|
|
$
|
6,025
|
|
|
$
|
7,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock-based compensation expense was capitalized during the
years ended December 31, 2007 and 2008 and an insignificant
amount was capitalized during the year ended December 31,
2009.
Unrecognized compensation expense of outstanding stock options
at December 31, 2009 was approximately $11.9 million,
which is expected to be recognized over a weighted-average
period of 2.7 years.
The estimated weighted-average fair value per share of stock
options granted in 2007, 2008 and 2009 was $7.33, $5.54 and
$4.75, respectively. For all shares purchased under the ESPP in
2007, 2008, and 2009 ending on the last day of June and
December, no compensation cost was recognized in the
accompanying statement of operations because the terms of the
plan were determined to be noncompensatory under Topic
718. Assumptions used to obtain the estimated fair values
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average risk free rate
|
|
|
4.5
|
%
|
|
|
2.6
|
%
|
|
|
1.7
|
%
|
Weighted average expected term
|
|
|
4.2
|
yrs
|
|
|
4.5
|
yrs
|
|
|
4.4
|
yrs
|
Weighted average volatility
|
|
|
52
|
%
|
|
|
55
|
%
|
|
|
67
|
%
|
Dividend yield
|
|
|
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 U.S. Treasury yields at or near
the time of grant for time periods similar to the expected term
of the award.
Expected Term: The expected term represents
the period that the Companys stock-based awards are
expected to be outstanding and is estimated based on historical
experience of similar awards, giving consideration to the
contractual term of the awards, vesting schedules and
expectations of employee exercise behavior.
F-20
Volatility: The Companys estimate of
expected volatility is based on the historical volatility of the
Companys common stock over the expected life of the
options as this represents the Companys best estimate of
future volatility.
Dividend Yield: The dividend yield assumption
is based on the Companys history and expectation of
dividend payouts.
Activity under the Companys stock option plans was as
follows (option shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
Average
|
|
|
|
Available
|
|
|
Outstanding
|
|
|
Price Per
|
|
|
Intrinsic
|
|
|
Remaining
|
|
|
|
for Grant
|
|
|
Options
|
|
|
Share
|
|
|
Value
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Balance at December 31, 2008
|
|
|
3,610
|
|
|
|
4,428
|
|
|
$
|
11.81
|
|
|
|
|
|
|
|
6.8
|
|
Annual reserve addition(1)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted(2)
|
|
|
(2,113
|
)
|
|
|
2,089
|
|
|
|
8.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(261
|
)
|
|
|
5.74
|
|
|
|
|
|
|
|
|
|
Forfeited, expired or exchanged(3)
|
|
|
277
|
|
|
|
(309
|
)
|
|
|
13.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
2,774
|
|
|
|
5,947
|
|
|
$
|
10.96
|
|
|
$
|
38,690
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2009
|
|
|
|
|
|
|
5,738
|
|
|
$
|
11.01
|
|
|
$
|
37,099
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
|
|
|
|
3,203
|
|
|
$
|
11.30
|
|
|
$
|
19,939
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 2004 Equity Incentive Plan provides for an automatic, annual
increase on the first of each year in an amount equal to the
lesser of; a) 1,000,000 shares, b) 4% of the
number of outstanding common shares on the last day of the
previous fiscal year, or c) such lesser amount as
determined by the board of directors. The automatic annual
increase has been approved by shareholders through
December 31, 2014. |
|
(2) |
|
On September 16, 2009, the Company granted 24,180
restricted stock units to certain employees at a fair value of
$12.20 per share. The shares were granted from the 2004 Equity
Incentive Plan. |
|
(3) |
|
Shares forfeited, expired, exchanged or canceled under the 1998
Long-Term Equity Incentive and Stock Option Plan are not
available for re-grant under the 2004 Equity Incentive Plan. |
The total intrinsic value of options exercised in 2007, 2008 and
2009 was $7.5 million, $1.8 million and
$1.7 million, respectively.
|
|
(11)
|
Commitments
and Contingencies
|
The Company leases its office facilities and certain office
equipment under various non-cancelable operating lease
agreements with various expiration dates through 2017. Future
minimum payments for the next five years and thereafter as of
December 31, 2009, under these leases, are as follows (in
thousands):
|
|
|
|
|
2010
|
|
$
|
4,601
|
|
2011
|
|
|
3,197
|
|
2012
|
|
|
1,916
|
|
2013
|
|
|
1,792
|
|
2014
|
|
|
880
|
|
Thereafter
|
|
|
1,062
|
|
Rent expense was $4.1 million, $4.2 million and
$4.5 million in 2007, 2008 and 2009, respectively. Rent
expense is determined using the straight-line method of the
minimum expected rent paid over the term of the agreement. The
Company has no contingent rent agreements.
F-21
The Company leases a portion of its office facilities from a
development group, of which the Companys chief executive
officer is a 50% member and the Companys Vice President
and General Manager of Asia-Pacific is a 25% member. During
2007, 2008 and 2009, the Company paid $1.2 million,
$1.2 million and $1.3 million, respectively, to the
development group under these leases.
The Company has agreements with third parties to provide
co-location services for hosting operations. The agreements
require payment of a minimum amount per month for a fixed period
of time in return for which the hosting service provider
provides certain guarantees of network availability.
Future minimum payments as of December 31, 2009 under these
arrangements were $1.6 million for 2010, and $401,000 in
2011.
|
|
(c)
|
Warranties
and Indemnification
|
The Companys on demand application service is typically
warranted to perform in accordance with its user documentation.
The Companys arrangements generally include certain
provisions for indemnifying customers against liabilities if its
products or services infringe a third-partys 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 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 persons service as a director or officer, including
any action by the Company, arising out of that persons
services as the Companys director or officer or that
persons services provided to any other company or
enterprise at the Companys request.
From time to time, the Company is involved in legal proceedings
arising in the ordinary course of business. The Company believes
that the resolution of these matters will not have a material
negative effect on the Companys consolidated financial
position, results of operations or liquidity. Legal fees are
charged to expense as incurred, unless the Company considers the
potential loss from any dispute or legal matter probable and the
amount or range of the loss can be estimated, in which case the
Company will accrue a liability for the estimated loss in
accordance with Topic 450,Contingencies.
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 would 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. On December 23, 2009, KANA
sold substantially all of its assets to Kay Technology Corp,
Inc. Pursuant to an acceleration clause in the settlement
agreement related to the change in control, KANA paid the
Company $1,000,000. RightNow received the entire cash settlement
payment during the fourth quarter of 2009 and recorded the gain
on settlement of this litigation in other income.
F-22
The domestic and foreign components of income (loss) before
provision for income taxes consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
United States
|
|
$
|
(5,437
|
)
|
|
$
|
(5,856
|
)
|
|
$
|
7,299
|
|
Foreign
|
|
|
(12,928
|
)
|
|
|
(1,385
|
)
|
|
|
(849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
$
|
(18,365
|
)
|
|
$
|
(7,241
|
)
|
|
$
|
6,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the income tax provision are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
|
|
Foreign
|
|
|
(109
|
)
|
|
|
(134
|
)
|
|
|
(155
|
)
|
State
|
|
|
(287
|
)
|
|
|
92
|
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(276
|
)
|
|
|
(42
|
)
|
|
$
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(276
|
)
|
|
$
|
(42
|
)
|
|
$
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax attributable to operations
computed at the U.S. Federal statutory income tax rate of
34% to income tax (benefit) expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Statutory federal tax rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
34
|
%
|
Net operating loss tax benefits not realized (realized)
|
|
|
34
|
|
|
|
29
|
|
|
|
(23
|
)
|
Tax credits
|
|
|
(4
|
)
|
|
|
|
|
|
|
(11
|
)
|
Stock-based compensation
|
|
|
2
|
|
|
|
5
|
|
|
|
1
|
|
State income taxes, net of federal benefit
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
4
|
|
Foreign taxes
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Foreign tax rate differential
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
Nondeductible meals & entertainment expense
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax rate
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
Deferred tax components are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
10,836
|
|
|
$
|
13,634
|
|
Deferred revenue
|
|
|
8,401
|
|
|
|
3,757
|
|
Stock compensation
|
|
|
3,288
|
|
|
|
6,813
|
|
Tax credits
|
|
|
957
|
|
|
|
1,256
|
|
Fixed assets and intangibles
|
|
|
296
|
|
|
|
65
|
|
Other
|
|
|
3,091
|
|
|
|
1,647
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
26,869
|
|
|
|
27,172
|
|
Valuation allowance
|
|
|
(23,873
|
)
|
|
|
(24,239
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,996
|
|
|
|
2,933
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred commissions
|
|
|
(2,509
|
)
|
|
|
(2,686
|
)
|
Other
|
|
|
(487
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,996
|
)
|
|
|
(2,933
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The ultimate realization of deferred tax assets is dependent
upon the existence, or generation, of taxable income in the
periods when those temporary differences and net operating loss
carry forwards are deductible. Management considers the
scheduled reversal of deferred tax liabilities, taxes paid in
carry back years, projected future taxable income, available tax
planning strategies, and other factors in making this
assessment. Based on available evidence, management does not
believe it is more likely than not that any or all of the
deferred tax assets will be realized as of December 31,
2009. Accordingly, the Company has established a valuation
allowance equal to the net deferred tax assets. The valuation
allowance decreased by $573,000 in 2008 and increased by
$366,000 in 2009.
At December 31, 2009, the Company had domestic Federal and
State net operating loss carry forwards of approximately
$28.1 million and $26.8 million, respectively. The
Company also has approximately $31.5 million of foreign net
operating loss carry forwards, of which $29.4 million are
not subject to expiration. The remaining $2.1 million of
foreign net operating loss carry forwards expire between 2013
and 2027. Federal net operating loss carry forwards expire at
various dates between 2019 and 2029, while state net operating
loss carry forwards expire between 2010 and 2029. In addition,
the Company has federal and state research and development
credits and foreign tax credits available to reduce future
domestic income taxes. The total amount of these credits is
approximately $4.9 million. The federal and state research
and development credits expire between 2019 and 2028, and
between 2014 and 2023, respectively. The foreign tax credits
expire between 2012 and 2019.
Under the Tax Reform Act of 1986, as amended, the amounts of and
benefits from net operating loss carry forwards and research and
development credits may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
The Companys acquisition of Salesnet, Inc. in May 2006 and
HiveLive, Inc. in September 2009 constituted an ownership change
to each entity, and therefore the availability of Salesnet,
Inc.s and HiveLive, Inc.s net operating loss carry
forwards which approximate $5.8 million and
$6.4 million, respectively, will be limited in future years.
The Companys deferred tax assets as of December 31,
2008 and 2009 have been reduced in accordance with Topic
718. As such, net operating loss carry forwards and other
attributes created by excess tax benefits from the exercise of
stock options are not recorded as deferred tax assets. Instead
such amounts are recorded as an addition to stockholders
equity if and when they are utilized. Deferred tax assets and
the related
F-24
valuation allowance in the above presentation have been reduced
by $18.9 million and $18.7 million, as of
December 31, 2008 and 2009, respectively, for the effect of
excess tax deductions from stock options.
|
|
(13)
|
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 December 31, 2008 and at
December 31, 2009. 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.
|
|
(14)
|
Employee
Benefit Plans
|
The Company has a voluntary defined contribution retirement plan
qualifying under Section 401(k) of the Internal Revenue
Code of 1986. The plan covers substantially all full-time
employees. Under the terms of the plan, participants may
contribute up to the lower of 12% of their salary or the
statutorily prescribed limit to the plan. Employees are eligible
after 90 days of service. At its discretion, the Company
may make matching contributions. The Company made matching
contributions during 2007, 2008 and 2009 of $982,000, $1.3
million and $1.3 million, respectively. The Company also
has retirement benefit plans related to its foreign
subsidiaries. Amounts expensed under these plans were $370,000,
$414,000 and $405,000 during 2007, 2008 and 2009, respectively.
The Company has a medical, dental and vision benefit plan and a
short-term disability program covering full-time employees of
the Company and their dependents. The plan is a partially
self-funded plan under which participant claims are obligations
of the plan. The plan is funded through employer and employee
contributions at a level sufficient to pay for the benefits
provided by the plan. The Company contributions to the plan were
$2.0 million during 2007, $3.0 million during 2008,
and $3.2 million during 2009. During 2009 the plan
maintained individual and aggregate stop loss insurance policies
on the medical portion of the plan of $95,000 and
$4.6 million (based on actual plan participants, adjusted
monthly), respectively, to mitigate losses.
In July 2004, the Company adopted the 2004 Employee Stock
Purchase Plan (Plan) which became effective in
conjunction with the Companys initial public offering of
common stock. The Plan is administered by the compensation
committee of the board of directors and is intended to qualify
as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Under the terms
of the plan, substantially all employees are eligible to
purchase shares of RightNow common stock through periodic
after-tax payroll deductions at a purchase price established by
the administrator. Payroll deductions are limited to 15% of the
employees regular compensation for each purchase period.
The administrator may set the purchase price equal to or
discounted from fair market value on the first or last day of
each purchase period. Purchase periods are consecutive six-month
periods ending on the last day in June and December each year.
For the purchase periods ended December 31, 2007, 2008 and
2009, and June 30, 2008 and 2009, the plan was deemed
noncompensatory because the terms were no more favorable than
those available to all holders of our common stock. Activity
under the plan for 2007, 2008 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Date
|
|
|
Dec 31,
|
|
June 30,
|
|
Dec 31,
|
|
June 30,
|
|
Dec 31,
|
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
2009
|
|
Purchase price per share
|
|
$
|
15.06
|
|
|
$
|
12.99
|
|
|
$
|
7.34
|
|
|
$
|
11.21
|
|
|
$
|
16.50
|
|
Shares purchased
|
|
|
6,357
|
|
|
|
8,930
|
|
|
|
14,129
|
|
|
|
11,903
|
|
|
|
7,038
|
|
F-25
The Company accounts for its subsequent events in accordance
with FASB Accounting Standards Codification, Topic 855,
Subsequent Events.
On February 16, 2010, RightNow Technologies, Inc. renewed
its lease agreement with Genesis Partners, LLC for office space
located at 77 Discovery Drive and 110 Enterprise Boulevard in
Bozeman, Montana. The renewals include the same terms and
conditions as the original leases, except for the negotiated
rent. The 77 Discovery Drive lease was renewed for a period of
60 months at a monthly rent of $11,786, and includes a
renewal option for an additional 60 month period. The 110
Enterprise Boulevard lease was renewed for a period of
60 months at a monthly rent of $16,570, and includes a
renewal option for an additional 60 month period.
Greg Gianforte, the Companys Chairman, Chief Executive
Officer and President, and Steve Daines, the Companys Vice
President and General Manager of Asia-Pacific, beneficially own,
directly or indirectly, 50% and 25% membership interests in
Genesis Partners LLC, respectively. The remaining 25% of Genesis
Partners is beneficially owned by Mr. Daines father,
Clair Daines, who is a commercial real estate developer and
builder.
On March 3, 2010, our Board of Directors amended our 2004
Equity Incentive Plan to eliminate the automatic option grant
program thereunder for our directors. Notwithstanding this
amendment, our directors remain eligible to receive
discretionary option grants pursuant to the existing terms of
our 2004 Equity Incentive Plan.
|
|
(16)
|
Quarterly
Results (Unaudited)
|
Quarterly results of operations are as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(Unaudited)
|
|
Operating statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
32,898
|
|
|
$
|
35,221
|
|
|
$
|
36,237
|
|
|
$
|
36,079
|
|
Gross profit
|
|
|
20,578
|
|
|
|
22,368
|
|
|
|
22,799
|
|
|
|
23,853
|
|
Net income (loss)
|
|
|
(3,396
|
)
|
|
|
(3,132
|
)
|
|
|
(1,447
|
)
|
|
|
692
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(Unaudited)
|
|
Operating statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
36,037
|
|
|
$
|
36,340
|
|
|
$
|
38,731
|
|
|
$
|
41,579
|
|
Gross profit
|
|
|
24,080
|
|
|
|
25,040
|
|
|
|
27,134
|
|
|
|
28,875
|
|
Net income
|
|
|
1,263
|
|
|
|
36
|
|
|
|
1,965
|
|
|
|
2,607
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.04
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
F-26