RIGHTNOW TECHNOLOGIES INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - RIGHTNOW TECHNOLOGIES INC	Financial_Report.xls
EX-31.2 - SECTION 302 CFO CERTIFICATION - RIGHTNOW TECHNOLOGIES INC	d233070dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - RIGHTNOW TECHNOLOGIES INC	d233070dex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - RIGHTNOW TECHNOLOGIES INC	d233070dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

000-31321

(Commission File No.)

RIGHTNOW TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

81-0503640

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

136 Enterprise Boulevard

Bozeman, Montana 59718-9300

(Address of Principal Executive Offices) (Zip Code)

(406) 522-4200

(Registrant’s Telephone Number, Including Area Code)

N/A

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

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

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 þ No ¨

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


Large accelerated filer ¨	Accelerated filer þ	Non-accelerated filer ¨	Smaller reporting company ¨
	(Do not check if a smaller reporting company)

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

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 28, 2011 was 33,063,806.

RightNow Technologies, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2011

INDEX


	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
a) Condensed consolidated balance sheets (unaudited)		3
b) Condensed consolidated statements of operations (unaudited)		4
c) Condensed consolidated statements of cash flows (unaudited)		5
d) Notes to condensed consolidated financial statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		32
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		33
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3. Defaults Upon Senior Securities		47
Item 4. (Removed and Reserved)		47
Item 5. Other Information		47
Item 6. Exhibits		48
SIGNATURES		49

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RightNow Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands) (Unaudited)

		September 30,			September 30,
	December 31, 2010			September 30, 2011
Assets
Cash and cash equivalents	$	181,948		$	108,299
Short-term investments		94,759			133,152
Accounts receivable		39,338			39,364
Allowance for doubtful accounts		(2,021	)		(1,467	)

Receivables, net		37,317			37,897
Deferred commissions		5,418			6,257
Prepaid and other current assets		4,662			5,447
Deferred tax assets, net		3,801			3,801

Total current assets		327,905			294,853

Property and equipment, net		10,702			13,603
Intangible assets, net		6,149			18,234
Goodwill		7,975			29,825
Deferred commissions, non-current		4,747			4,907
Other		4,921			5,012
Deferred tax assets, non-current, net		16,480			16,507

Total Assets	$	378,879		$	382,941

Liabilities and Stockholders’ Equity
Accounts payable	$	10,463		$	6,949
Commissions and bonuses payable		7,137			5,489
Other accrued liabilities		13,363			16,796
Current portion of deferred revenue		90,350			94,889

Total current liabilities		121,313			124,123

Deferred revenue, net of current portion		2,969			2,256
Other long-term liabilities		—			405
2.50% Convertible senior notes due 2030		175,000			175,000

Total liabilities		299,282			301,784

Stockholders’ equity:
Common stock		35			36
Additional paid-in capital		136,717			161,389
Treasury stock		(29,149	)		(55,031	)
Accumulated other comprehensive income		1,953			1,606
Accumulated deficit		(29,959	)		(26,843	)

Total stockholders’ equity		79,597			81,157

Total Liabilities and Stockholders’ Equity	$	378,879		$	382,941

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Operations

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

		$135,246			$135,246			$135,246			$135,246
	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
Revenue:
Recurring revenue	$	38,613		$	47,924		$	106,368		$	135,246
Professional services		9,980			9,749			27,781			29,572

Total revenue		48,593			57,673			134,149			164,818
Cost of revenue:
Recurring revenue		5,923			9,042			17,754			24,114
Professional services		8,395			8,679			23,105			27,500

Total cost of revenue		14,318			17,721			40,859			51,614

Gross profit		34,275			39,952			93,290			113,204
Operating expenses:
Sales and marketing		20,006			24,685			57,507			72,148
Research and development		5,160			5,143			15,089			16,320
General and administrative		4,975			5,986			13,598			18,534

Total operating expenses		30,141			35,814			86,194			107,002

Income from operations		4,134			4,138			7,096			6,202
Interest and other income (expense), net		454			(1,253	)		656			(1,601	)

Income before income taxes		4,588			2,885			7,752			4,601
Provision for income taxes		(1,693	)		(1,353	)		(2,868	)		(1,485	)

Net income	$	2,895		$	1,532		$	4,884		$	3,116

Net income per share:
Basic	$	0.09		$	0.05		$	0.15		$	0.09
Diluted	$	0.09		$	0.04		$	0.15		$	0.09
Shares used in the computation:
Basic		32,128			33,001			32,020			32,921
Diluted		33,659			35,652			33,515			35,750

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

		$108,299			$108,299
	Nine Months Ended September 30,
	2010			2011
Operating activities:
Net income	$	4,884		$	3,116
Non-cash adjustments:
Depreciation and amortization		5,749			9,694
Impairment of internally developed software		—			809
Provision for losses on accounts receivable		131			66
Stock-based compensation		5,718			10,581
Foreign currency gain related to acquisition		—			(1,819	)
Changes in operating accounts, net of business acquisitions:
Receivables		(1,424	)		2,379
Prepaid and other current assets		(1,316	)		(175	)
Deferred commissions		726			(979	)
Accounts payable		3,710			(4,175	)
Commissions and bonuses payable		(122	)		(1,667	)
Other accrued liabilities		2,946			2,351
Deferred revenue		(7,661	)		1,268
Other		157			(223	)

Cash provided by operating activities		13,498			21,226

Investing activities:
Net change in investments		23,700			(38,326	)
Acquisition of property and equipment		(5,475	)		(7,624	)
Business acquisitions, net of cash acquired		—			(33,837	)
Intangible asset additions		(3,459	)		(4,919	)

Cash provided by (used in) investing activities		14,766			(84,706	)

Financing activities:
Purchase of treasury stock		—			(25,882	)
Proceeds from issuance of common stock under employee benefit plans		4,636			12,792
Excess tax benefits of stock options exercised		2,621			1,314
Payments on debt		(22	)		(271	)

Cash provided by (used in) financing activities		7,235			(12,047	)
Effect of foreign exchange rates on cash and cash equivalents		683			1,878

Increase (decrease) in cash and cash equivalents		36,182			(73,649	)
Cash and cash equivalents at beginning of period		41,546			181,948

Cash and cash equivalents at end of period	$	77,728		$	108,299

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) Business Description and Basis of Presentation

Business Description

RightNow Technologies, Inc. (the “Company” or “RightNow”) provides RightNow CX^TM, a cloud-based suite of customer experience software solutions for companies of all sizes. The Company’s 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.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the interim condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in the Annual Report on Form 10-K necessary for the fair presentation of the Company’s financial position at September 30, 2011, results of operations for the three and nine month periods ended September 30, 2010 and 2011, and cash flows for the nine month periods ended September 30, 2010 and 2011. This includes all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of the Company’s financial position. The interim period results are not necessarily indicative of the results to be expected for the full year.

The preparation of the interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Management evaluates these estimates on an on-going basis using historical experience and other factors, including the current economic environment, and management believes these estimates to be reasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, fluctuations in foreign currency exchange rates, 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 recoverability of property and equipment and intangible assets, including internal use software cost capitalization; 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.

Recent Developments

Merger Agreement

certain other limited circumstances, the Company may be required to pay Parent a separate fee of $18.3 million, which would be credited against the Termination Fee. The Company may also be required to reimburse Parent for up to $5.0 million of its out-of-pocket expenses in connection with the transaction. A description of the Merger Agreement is contained in the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2011, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.

Concurrently with entering into the Merger Agreement, certain directors, executive officers and stockholders of RightNow, who collectively beneficially own 16.4% of the voting power of RightNow common stock, entered into Voting Agreements with Parent (collectively, the “Voting Agreements”) pursuant to which they agreed, among other things, to vote their shares of RightNow common stock for the adoption of the Merger Agreement and against any alternative proposal and against any action or agreement that would frustrate the purposes of, or prevent or delay the consummation of, the transactions contemplated by the Merger Agreement. A description of the Voting Agreements is contained in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on October 24, 2011, and a copy of the Voting Agreements is attached thereto as Exhibit 99.1.

Shareholder Lawsuits

On October 25, 2011, and November 1, 2011, two purported shareholders of RightNow filed putative class action lawsuits in the Court of Chancery in the State of Delaware (Israni v. RightNow Technologies, Inc. et al; and Coyne v. RightNow Technologies, Inc. et al) naming the Company and its directors, as well as Oracle Corporation, OC Acquisition LLC and Rhea Acquisition Corporation as defendants. The lawsuits concern Oracle’s and Rhea’s proposed acquisition of the Company. The complaints allege that the Company’s directors breached their fiduciary duties by allegedly failing to take steps to maximize the value of RightNow to its shareholders, and that Oracle and Rhea Acquisition allegedly aided and abetted in this breach. The complaints seek various equitable reliefs, including an injunction preventing the proposed acquisition, rescission in the event the acquisition is consummated, and an award of any demands resulting from the alleged breaches of fiduciary duty. The Company intends to defend these cases vigorously. There can be no assurance, however, that the Company will be successful in its defense of these actions. It is not known when or on what basis the actions will be resolved.

(2) Certain Risks and Concentrations

The Company’s revenue is derived from the subscription, license, hosting and support of its software products and provision of related professional services. The markets in which the Company competes are highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, or the emergence of competitive products with new capabilities or technologies could materially adversely affect the Company’s operating results. The Company has historically derived a majority of its revenue from customer experience software solutions. These products are expected to continue to account for a significant portion of revenue for the foreseeable future. As a result of this revenue concentration, the Company’s business could be materially 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 receivable. The Company maintains cash, cash equivalents, and short-term investments with various domestic and foreign financial institutions. The Company’s cash balances with its financial institutions may exceed deposit insurance limits. Short-term investments are investment grade, interest-earning securities, and are diversified by type and industry.

The Company’s customers are worldwide with approximately 65% of total revenue in North America, 20% in EMEA (Europe, the Middle East and Africa) and 15% in Asia Pacific on a trailing twelve month basis.

No individual customer accounted for more than 10% of the Company’s revenue for the three and nine months ended September 30, 2010 and 2011. No individual customer accounted for more than 10% of the Company’s accounts receivable at December 31, 2010 or September 30, 2011.

As of December 31, 2010 and September 30, 2011, assets located outside North America totaled 12% and 22% of total assets, respectively. The income from operations outside of North America totaled $1.2 million and $3.6 million for the nine months ended September 30, 2010 and 2011, respectively. Revenue by geographical region follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
North America	$	33,389	$	37,552	$	93,806	$	106,542
EMEA		9,304		11,483		25,678		33,044
Asia Pacific		5,900		8,638		14,665		25,232

	$	48,593	$	57,673	$	134,149	$	164,818

(3) Revenue Recognition

The Company earns its revenues from the delivery of hosted software and support services (recurring revenue), and from the delivery of professional services. Recurring revenues are primarily generated under subscription arrangements and, to a lesser extent, license arrangements. Hosting and support services involve the remote management of the software, technical assistance, and unspecified product upgrades and enhancements on a when and if available basis. Professional services include consulting, training and development services. Under the Company’s subscription contracts, the Company applies ASU 2009-13, “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13”), rather than Industry Topic 985, Software, because the customer does not have the right to take possession of the software without incurring a significant incremental penalty. As such, these arrangements are considered service contracts and are not within the scope of Industry Topic 985.

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

Subscriptions include access to the Company’s software through its hosting services, technical support, and product upgrades when and if available, all for a bundled fee. In the first quarter of 2010, we elected early adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2009-13, “Revenue Arrangements with Multiple Deliverables.” ASU 2009-13, which amended FASB Topic 605-25, “Multiple-Element Arrangements,” requires a vendor to allocate revenue to each unit of accounting in arrangements involving multiple deliverables. It changes the level of evidence of fair value of an element to allow an estimated selling price which represents management’s best estimate of the stand-alone selling price of deliverables when vendor specific objective evidence or third party evidence of selling price is not available and requires that revenue be allocated among the elements on a relative fair value basis. The adoption of ASU 2009-13 did not have a material impact on the timing or amount of revenue recognized as the Company had established fair value for all elements in the vast majority of its historical subscription arrangements.

The Company bases the fair value of subscriptions on stand-alone sales of subscription agreements, which are evidenced by subscription renewals. The fair value of professional services is based on stand-alone sales of professional services. The arrangement fee is then allocated to the individual elements based on their relative fair values. Revenue for subscriptions is recognized over the contractual period and revenue for professional services is recognized as delivered provided that the above criteria have been met.

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

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

If an arrangement includes a right of acceptance or a right to cancel, revenue is recognized when acceptance is received or the right to cancel has expired. If the fee for the license has any payment term that is due in excess of the Company’s normal payment terms (over 90 days), the fee is not considered fixed or determinable, and the amount of revenue recognized 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 Company’s solutions requires additional fees if used by more than a specified number of users or for more than a specified number of interactions. Fixed minimums are recognized as revenue ratably over the term of the arrangement. Usage fees above fixed minimums are recognized as revenue when such amounts are known and billed.

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

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

(4) Sales Incentives

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 $4.6 million and $5.0 million for the three months ended September 30, 2010 and September 30, 2011, respectively. Sales incentive expense was $12.8 and $13.7 million for the nine months ended September 30, 2010 and September 30, 2011, respectively. Deferred commissions at December 31, 2010 and September 30, 2011 were $10.2 million and $11.2 million, respectively.

(5) 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 developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. The capitalized costs are being amortized and recognized as a cost of recurring revenue, on a straight-line basis, over the estimated useful lives of the related applications which are approximately three years. Net capitalized cost of internally developed computer software was approximately $4.7 million and approximately $7.6 million as of December 31, 2010 and September 30, 2011, respectively. The capitalized costs are included in intangible assets, net on the Company’s Condensed Consolidated Balance Sheets. During the quarter ended September 30, 2011, the Company recorded an impairment to internally developed computer software of $809,000 for projects primarily related to the voice product because the Company will partner for its voice applications in the future.

(6) 2.50% Convertible Senior Notes

In November 2010, the Company issued at par value, $175.0 million in the aggregate principal amount of convertible senior notes due 2030 (the “Notes”).

The Notes bear interest at a rate of 2.50% per annum, which is payable semi-annually, and mature on November 15, 2030, unless earlier redeemed, repurchased or converted. The Notes are convertible at any time, at the holders’ option, have an initial conversion rate of approximately 31.36 shares of RightNow common stock (subject to adjustment in certain circumstances) per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $31.89 per share. If fully converted the Notes

would convert into 5,487,786 shares of common stock at the initial conversion rate. The conversion rate will be subject to adjustment upon the occurrence of certain specified events. In addition, upon the occurrence of a “fundamental change,” the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such fundamental change. On October 23, 2011, RightNow entered into an Agreement and Plan of Merger (the “Merger Agreement”), which is deemed to be an occurrence of a “fundamental change”. Please refer to Note 15 herein for further information related to the Merger Agreement.

The Company may not redeem any of the Notes at its option prior to November 20, 2015. At any time on or after November 20, 2015, the Company will have the right, at its option, to redeem the Notes in whole or in part for cash at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, together with accrued and unpaid interest to, but excluding, the date of redemption. On November 15, 2015, November 15, 2020 and November 15, 2025, holders may require the Company to repurchase all or a portion of their Notes for cash in an amount equal to 100% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest to, but excluding, the date of repurchase.

The Notes are general unsecured obligations, rank equally in right of payment to all existing and future senior indebtedness and senior in right of payment to any future indebtedness that is expressly subordinated to the Notes.

The Notes are governed by an indenture dated, November 22, 2010, between the Company and The Bank of New York Mellon Trust Company, N.A.

In accounting for the issuance of the Notes, the Company classified the Notes as Long-term, Convertible Senior Notes. The debt issuance costs associated with the Notes are included in other current and non-current assets on the Company’s Condensed Consolidated Balance Sheets and are being amortized over 5 years. Debt issuance costs, net of amortization were $4.2 million as of September 30, 2011.

(7) Net Income Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
Weighted average common shares outstanding for basic net income per share		32,128		33,001		32,020		32,921
Effect of dilutive securities:
Employee stock awards		1,531		2,651		1,495		2,829

Weighted average shares outstanding for dilutive net income per share		33,659		35,652		33,515		35,750

The Company included in the computation of diluted net income per share options to purchase 2,651,000 and 2,829,000 shares of common stock for the three and nine months ended September 30, 2011, respectively, because the Company incurred net income for the period and the option price was less 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 per share because their impact was anti-dilutive (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2010

2011

2010

2011

Employee stock options

4,878

3,690

4,914

3,512

In addition, the Company excluded from the computation of diluted net income per share the effect of the conversion of the convertible senior notes due 2030 (“the Notes”) as they were anti-dilutive. If the Notes had been dilutive, our diluted net income per share would have included additional earnings of $815,000 and $2.4 million for the three and nine months ended September 30, 2011, respectively. Also included would have been incremental common shares of 5,487,786 for the three and nine months ended September 30, 2011. Please refer to Note 6 herein for more details of the Notes.

(8) Comprehensive Income (Loss)

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

		$000,000			$000,000			$000,000		$000,000
	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010		2011
Net income	$	2,895		$	1,532		$	4,884	$	3,116
Other comprehensive income (loss):
Unrealized gain on short-term investments		(20	)		(9	)		22		49
Foreign currency translation adjustments		488			(2,808	)		434		(397	)

Comprehensive income (loss)	$	3,363		$	(1,285	)	$	5,340	$	2,768

(9) Fair Value

Fair value is defined 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 fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

•

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.

The following table represents fair value hierarchy for the Company’s financial assets (cash equivalents and investments) which are measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

		$000,000		$000,000		$000,000		$000,000
	Level 1		Level 2		Level 3		Total
Cash	$	101,399	$	—	$	—	$	101,399
Money market funds		6,651		—		—		6,651
Certificates of deposit		996		—		—		996
Commercial paper		—		1,898		—		1,898
Corporate notes and bonds		—		19,463		—		19,463
U.S. Government agency securities		—		84,166		—		84,166
State and municipal securities		—		26,878		—		26,878

	$	109,046	$	132,405	$	—	$	241,451

(10) Stock-Based Compensation

Stock-based compensation costs are recognized based on the estimated fair value at the grant date for all stock-based awards. The Company estimates grant date fair values using the Black-Scholes-Merton option pricing model, which requires assumptions of the life of the award and the stock price volatility over the term of the award. The Company records compensation cost of stock-based awards using the straight line method, which is recorded into earnings over the vesting period of the award.

The following table illustrates the stock-based compensation expense resulting from stock-based awards included in the Condensed Consolidated Statement of Operations (amounts in thousands):

		0000000		0000000		0000000		0000000
	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
Stock-based compensation expense:
Cost of recurring revenue	$	127	$	226	$	357	$	650
Cost of professional services		128		494		364		1,300
Sales and marketing expenses		818		1,579		2,295		4,052
Research and development expenses		254		434		751		1,128
General and administrative expenses		875		1,121		1,951		3,451

Total stock-based compensation expense	$	2,202	$	3,854	$	5,718	$	10,581

Stock-based compensation expense capitalized during the nine months ended September 30, 2010 and September 30, 2011 was insignificant, respectively.

Unrecognized stock-based compensation expense of outstanding stock options and employee stock purchase plan at September 30, 2011 was approximately $28.5 million, which is expected to be recognized over a weighted average period of 2.6 years.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
Fair value per share		$7.69		$15.73		$7.80		$14.31
Risk free rate		1.6%		.8%		1.9%		1.9%
Expected term		4.5 yrs		4.5 yrs		4.5 yrs		4.7 yrs
Volatility		63%		62%		64%		62%
Dividend yield		0%		0%		0%		0%

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

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

Expected Term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is 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.

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

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

Activity under the Company’s stock option plans for the nine months ended September 30, 2011 was as follows (option shares in thousands):

		00000000			00000000			00000000		00000000		00000000
	Shares available for grant			Shares underlying outstanding options			Weighted average exercise price per share		Aggregate intrinsic value (in thousands)		Weighted average remaining contractual life (in years)
Balance at December 31, 2010		2,433			6,223		$	12.02				7.0
Annual reserve addition (1)		1,000			—			—
Granted (2)		(1,608	)		1,505			27.52
Exercised		—			(1,173	)		9.50
Forfeited, expired, exchanged or canceled (3)		224			(213	)		14.65

Balance at September 30, 2011		2,049			6,342		$	16.08	$	107,651		7.3

Vested or expected to vest at September 30, 2011					6,115		$	15.80	$	105,477		7.2

Exercisable at September 30, 2011					3,343		$	12.90	$	67,357		6.1

(1)

The 2004 Equity Incentive Plan provides for an automatic, annual increase on the first of each year in an amount equal to the lesser of: a) 1,000,000 shares; b) 4% of the number of outstanding common shares on the last day of the previous fiscal year; or c) such lesser amount as determined by the board of directors. The annual automatic increase has been approved by stockholders through December 31, 2014.

(2)	During the nine months ended September 30, 2011, there were 103,226 restricted stock units granted under 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. During the nine months ended September 30, 2011, there were 10,742 shares of restricted stock withheld by the Company to pay for employee taxes due upon vesting of the restricted stock units and 205 restricted stock units canceled under the 2004 Equity Incentive Plan.

The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2011 was $2.9 million and $24.6 million, respectively.

(11) Common Stock Repurchase Program

On August 8 and August 31, 2011, the Company’s Board of Directors authorized increases of $15 million and $25 million, respectively, (for a total of $65 million) to its common stock repurchase program. The stock repurchase program was initially authorized for $10 million, as announced on July 28, 2010 and subsequently increased by $15 million, as announced on November 17, 2010. The additional increases will stay in place until August 2013. The shares may be purchased 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.

During the third quarter ended September 30, 2011, the Company repurchased 912,784 shares of common stock under this program. As of September 30, 2011, a total of $40.0 million has been repurchased, leaving $25.0 million remaining available to be repurchased pursuant to this program. The Company cannot assure any further repurchases will be made under this program and does not intend to make any further repurchases during the pendency of the Merger. If any repurchases are made, the Company cannot assure as to the amount or frequency of repurchases the Company may make under this program. The Company expects to fund such repurchases through its cash and short-term investments, which as of September 30, 2011 were $241.5 million.

(12) Commitments and Contingencies

Warranties and Indemnification

The Company’s cloud-based application service is typically warranted to perform in accordance with its user documentation.

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

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

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

Litigation

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

(13) Income Taxes

The provision for income taxes of $1.4 million and $1.5 million in the three and nine months ended September 30, 2011, respectively, consists primarily of tax expense resulting from federal taxes, foreign tax withholdings and various state income taxes. The Company’s effective tax rate without period specific items differs from the federal statutory rate primarily due to state and foreign taxes, research and development tax credits, foreign rate differentials, and non-deductible meal and entertainment expenses. Excess stock option deductions are expected to reduce federal and state taxes payable such that the Company does not have significant income taxes payable at September 30, 2011. The Company does not expect that the obligation for unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties on the liability for unrecognized tax benefits as interest expense and other expense, respectively, in its Condensed Consolidated Statements of Operations. The amount of interest and penalties for the three and nine months ended September 30, 2011 was insignificant. Tax years beginning in 2005 are subject to examination by taxing authorities, although net operating loss and credit carry forwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. The jurisdictions which could be subject to examination include the U.S., Montana, Illinois, California, Massachusetts, New York, United Kingdom, Germany, Australia, Japan, Canada, Spain and the Netherlands.

(14) Acquisition

On January 26, 2011, the Company acquired all of the stock of Q-go.com B.V. (“Q-go”) and its subsidiaries for approximately $35.7 million in cash. Q-go is a natural language search provider, which the Company believes helps organizations increase customer revenue and improve web visitor experiences. Q-go was headquartered in Amsterdam with subsidiary operations in Germany, Spain and the United States. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of Q-go are included in the condensed consolidated financial statements since the acquisition date.

The Company has allocated the purchase price to the Q-go assets acquired and liabilities assumed at estimated fair values. The purchase price, and purchase price allocation are as follows (amounts in thousands):


Cash consideration	$	35,673

Total purchase price	$	35,673

Purchase price allocation: Net assets assumed	$	531
Goodwill and intangible assets		35,142

Total purchase price	$	35,673

As part of the acquisition accounting for Q-go, the Company recognized provisional amounts for the fair value of certain assets acquired and liabilities assumed. The Company continues to review these matters during the measurement period, and if it obtains new information about the facts and circumstances that existed at the acquisition date, which identify adjustments to the initially recorded balances, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts. Subsequent revisions, if any, are not expected to be material.

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


Goodwill	$	23,091
Developed technology		9,586
Customer relationships		1,369
Trade name and trademarks		685
Non-compete agreements		411

Intangible assets	$	35,142

The change in goodwill was as follows (amounts in thousands):


	Nine Months Ended September 30,
	2010		2011
Balance, beginning of period	$	7,975	$	7,975
Acquisition of Q-go		—		23,091
Deferred income taxes		—		(958	)
Effect of exchange rate changes		—		(283	)

Balance, end of period	$	7,975	$	29,825

Included in net assets assumed was the fair value of cash acquired of $1.8 million. The excess of the purchase price over the estimated fair value of the net assets acquired of $23.1 million was 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. During the quarter ended September 30, 2011, the Company recorded a deferred tax adjustment to goodwill of $958,000. As a result of exchange rate changes since the acquisition date, the amount recorded as goodwill relating to Q-go has declined approximately $283,000. The acquisition has allowed RightNow to offer a natural language search 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 non-compete agreements will be amortized over a period of three years using the straight-line method and 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.

In preparation for the acquisition of Q-go, the Company purchased Euros for settlement of the transaction. As a result of appreciation of the Euro, the Company realized a foreign currency gain of $1.8 million on the date consideration was transferred. The gain was recorded within interest and other income, net on the Condensed Consolidated Statements of Operations.

(15) Subsequent Events

The Company accounts for its subsequent events in accordance with FASB Accounting Standards Codification, Topic 855, Subsequent Events.

Merger Agreement

On October 23, 2011, RightNow, a Delaware corporation, OC Acquisition LLC (“Parent”), a Delaware limited liability company and wholly-owned subsidiary of Oracle Corporation (“Oracle”), and Rhea Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Subsidiary”), entered into a Merger Agreement, pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Subsidiary will merge with and into RightNow (the “Merger”), with RightNow surviving as an indirect wholly-owned subsidiary of Oracle. Under circumstances defined in the Merger Agreement, the Company may be required to pay a termination fee of $59.7 million (the “Termination Fee”) if the Merger Agreement is terminated under certain circumstances, including if the Company accepts a superior acquisition proposal, and, under certain other limited circumstances, the Company may be required to pay Parent a separate fee of $18.3 million, which would be credited against the Termination Fee. The Company may also be required to reimburse Parent for up to $5.0 million of its out-of-pocket expenses in connection with the transaction. A description of the Merger Agreement is contained in the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2011, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.

Concurrently with entering into the Merger Agreement, certain directors, executive officers and stockholders of RightNow, who collectively beneficially own 16.4% of the voting power of RightNow common stock, entered into Voting Agreements with Parent (collectively, the “Voting Agreements”) pursuant to which they agreed, among other things, to vote their shares of RightNow common stock for the adoption of the Merger Agreement and against any alternative proposal and against any action or agreement that would frustrate the purposes of, or prevent or delay the consummation of, the transactions contemplated by the Merger Agreement. A description of the Voting Agreements is contained in the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2011, and a copy of the Voting Agreements is attached thereto as Exhibit 99.1.

Shareholder Lawsuits

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

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

Cautionary Statement

All statements included or incorporated by reference in this report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words, and include, but are not limited to, the proposed acquisition of RightNow by Oracle, statements regarding projected results of operations, management’s future strategic plans, our business, market acceptance and performance of our products, the impact of our technology and products, our ability to pay interest and principal when due on our convertible senior notes or to repurchase such notes in certain circumstances, 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 ability to find suitable acquisitions on favorable terms, if at all, our accounting estimates, and our 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, the risk that our acquisition by Oracle is not consummated; the risk that shareholder litigation seeking to prevent such acquisition is successful; 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; general economic conditions; fluctuations in foreign currency exchange; 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; our ability to protect our intellectual property from infringement, and to avoid infringing on the intellectual property rights of third parties; 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; any unanticipated ambiguities in fair value accounting standards; the amount and timing of any stock repurchases under our stock repurchase program; 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 risks associated with prior and potential future acquisitions, if any; and risks associated with our offering of convertible senior notes including the potential impact on earnings per share calculations; and various other factors. Further information on potential factors that could affect our financial results is included in our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and in other filings with the Securities and Exchange Commission. The forward-looking statements in this release speak only as of the date they are made. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Overview

RightNow Technologies provides RightNow CX^TM, an on-demand (“cloud-based”) suite of customer experience software and services designed to help consumer-centric organizations improve customer experiences, reduce costs and increase revenue. In today’s competitive business environment, we believe providing superior customer experiences can be a powerful way for companies to drive sustainable differentiation. Our technology enables an organization’s 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 believe 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 helping our customers maximize the return on their investment. We distribute our solutions primarily through direct sales efforts and to a lesser extent through indirect channels. 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, and our current product suite includes RightNow Web Experience^TM, RightNow Social Experience^TM, RightNow Contact Center Experience^TM, RightNow Engage^TM and the RightNow CX Cloud Platform^TM. In February 2007, we initiated a quarterly release cycle which allows us to deliver new product capabilities to customers every three months. During the third quarter of 2011, we released RightNow CX^TM August 2011. New with RightNow CX August 2011 is Agent Desktop Twitter Following. This feature allows service agents to “follow” customers directly from within the RightNow Dynamic Agent Desktop, making it unnecessary to launch a separate browser and log onto Twitter. By “following” a customer, agents can transition discussions to direct or private messaging for more insightful interactions. During the first quarter of 2011, we acquired intent guide and natural language search technologies through our acquisition of Q-go. Intent guide has been integrated with the RightNow knowledge foundation in the latest release.

Recent Developments

Merger Agreement

On October 23, 2011, RightNow, a Delaware corporation, OC Acquisition LLC (“Parent”), a Delaware limited liability company and wholly-owned subsidiary of Oracle Corporation (“Oracle”), and Rhea Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Subsidiary”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Subsidiary will merge with and into RightNow (the “Merger”), with RightNow surviving as an indirect wholly-owned subsidiary of Oracle. Under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of $59.7 million (the “Termination Fee”) if the Merger Agreement is terminated under certain circumstances, including if we accept a superior acquisition proposal, and, under certain other limited circumstances, we may be required to pay Parent a separate fee of $18.3 million, which would be credited against the Termination Fee. We may also be required to reimburse Parent for up to $5.0 million of its out-of-pocket expenses in connection with the transaction. A description of the Merger Agreement is contained in the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2011, and a copy of the Merger Agreement is attached thereto as Exhibit 2.1.

Concurrently with entering into the Merger Agreement, certain directors, executive officers and stockholders of RightNow, who collectively beneficially own 16.4% of the voting power of RightNow common stock, entered into Voting Agreements with Parent (collectively, the “Voting Agreements”) pursuant to which they agreed, among other things, to vote their shares of RightNow common stock for the adoption of the Merger Agreement and against any alternative proposal and against any action or agreement that would frustrate the purposes of, or prevent or delay the consummation of, the transactions contemplated by the Merger Agreement. A description of the Voting Agreements is contained in the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2011, and a copy of the Voting Agreements is attached thereto as Exhibit 99.1.

Shareholder Lawsuits

On October 25, 2011, and November 1, 2011, two purported shareholders of RightNow filed putative class action lawsuits in the Court of Chancery in the State of Delaware (Israni v. RightNow Technologies, Inc. et al; and Coyne v. RightNow Technologies, Inc. et al) naming RightNow and its directors, as well as Oracle Corporation, OC Acquisition LLC and Rhea Acquisition Corporation as defendants. The lawsuits concern Oracle’s and Rhea’s proposed acquisition of the RightNow. The complaints allege that RightNow’s directors breached their fiduciary duties by allegedly failing to take steps to maximize the value of RightNow to its shareholders, and that Oracle and Rhea Acquisition allegedly aided and abetted in this breach. The complaints seek various equitable reliefs, including an injunction preventing the proposed acquisition, rescission in the event the acquisition is consummated, and an award of any demands resulting from the alleged breaches of fiduciary duty. We intend to defend these cases vigorously. There can be no assurance, however, that we will be successful in our defense of these actions. It is not known when or on what basis the actions will be resolved.

Sources of Revenue

Our revenue is derived from 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 subscription agreements and term licenses.

Recurring 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. Through our hosting services, we provide remote management and maintenance of our software and customers’ data. 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.

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

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

Professional services are typically sold with initial sales arrangements and then periodically over the client engagement. Our typical education courses are billed on a per person, per class basis.

Depending on the size and complexity of the client project, our consulting or development services contracts are either billed on a time and materials basis or, less frequently, on a fixed price/fixed scope basis. We have determined that the professional services element of our software and subscription arrangements is not essential to the functionality of the software.

Cost of Revenue and Operating Expenses

Cost of Revenue. Cost of revenue consists primarily of salaries and related expenses (such as employee benefits and payroll taxes) for our hosting, support and professional services organizations, third-party costs and equipment depreciation relating to our hosting services, third-party costs for voice enabled customer relationship management (“CRM”) applications, travel expenses related to providing professional services to our clients, amortization of acquired intangible assets, amortization of capitalized internally developed computer software and allocated overhead. We allocate most overhead expenses, such as office supplies, computer supplies, utilities, rent, and depreciation for furniture and equipment, based on headcount. As a result, overhead expenses are reflected in each cost of revenue and operating expense category. We anticipate that we will incur additional hosting, support, employee salaries and related expenses, to support delivery of our solutions in the future.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, product management expenses, travel costs and allocated overhead. For subscription arrangements, we expense the related sales commission in proportion to the revenue recognized. We expense our sales commissions on license and professional service arrangements when earned, which is typically at the time the related sale is invoiced to the client. Since the majority of our historical revenue has been from recurring revenue recognized over time, we have experienced a delay between increasing sales and marketing expenses and the recognition of the 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 in the future.

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. In 2009, we began to capitalize costs of internally developed computer software to be sold as a service, which were incurred during the application development stage. We capitalized approximately $4.7 million and $7.6 million of net cost of internally developed computer software as of December 31, 2010 and September 30, 2011, respectively. 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 net capitalized cost of internally developed computer software will increase as we continue to sell and deliver our solution as a service in the future.

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 in the future.

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, fluctuations in foreign currency exchange rates, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. These assumptions are affected by management’s application of accounting policies. Our critical accounting policies include revenue recognition, valuation of receivables and deferred tax assets, accounting for share-based compensation, and internal use software 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 recoverability of our property and equipment and intangible assets; valuation allowances for receivables and deferred income tax assets; estimates of expected term and volatility in determining share based compensation expense; and internal use software 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.

In the first quarter of 2010, we elected early adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2009-13, “Revenue Arrangements with Multiple Deliverables” (“ASU 2009-13”). ASU 2009-13, which amended FASB Topic 605-25, “Multiple-Element Arrangements,” changes the level of evidence of fair value of an element to allow an estimated selling price which represents management’s best estimate of the stand-alone selling price of deliverables when vendor specific objective evidence or third-party evidence of selling price is not available and requires that revenue be allocated among the elements on a relative fair value basis. The adoption of ASU 2009-13 did not have a material impact on the timing or amount of revenue recognized as we had established fair value for all elements in the vast majority of our historical subscription arrangements.

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, but not limited to, vendor specific objective evidence (“VSOE”) of fair value, for some or all elements. Changes to the elements in our sales arrangements, or our ability to establish VSOE or fair value for those elements, may result in a material change to the amount of revenue recorded in a given period.

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

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

Allowance for doubtful accounts

We regularly assess the collectability of outstanding customer invoices and, in so doing, we maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as: historical collection experience; a customer’s current creditworthiness; customer concentration; age of the receivable balance; and general economic conditions that may affect a customer’s ability to pay. Actual customer collections could differ from our estimates and 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 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 adopted Topic 740, Income Taxes, and its adoption 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, if any, may result in a significant change to our recorded tax assets and liabilities.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions are not more-likely-than-not to be sustained despite our belief that the tax return provisions are reasonable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

Share-Based Compensation

We record share-based payment arrangements in accordance with Topic 718, Compensation-Stock Compensation, which requires the cost of share-based payment arrangements to be recorded in the statement of operations. 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

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 recurring 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 Condensed Consolidated Balance Sheets.

Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a fair value measurement. The standard is effective for interim and annual periods beginning after December 15, 2011. We do not expect the adoption of this accounting guidance to have a material impact on its consolidated financial statements and related disclosures.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We are currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income. Other than the change in presentation, we do not expect the adoption of this accounting guidance to have a material impact on its consolidated financial statements and related disclosures.

Results of Operations

The following table sets forth certain Condensed Consolidated Statements of Operations data for each of the periods indicated, expressed as a percentage of total revenue:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
Revenue:
Recurring revenue		79	%		83	%		79	%		82	%
Professional services		21			17			21			18

Total revenue		100			100			100			100

Cost of revenue:
Recurring revenue		12			16			13			14
Professional services		17			15			17			17

Total cost of revenue		29			31			30			31

Gross profit		71			69			70			69
Operating expenses:
Sales and marketing		41			43			43			44
Research and development		11			9			11			10
General and administrative		10			10			10			11

Total operating expenses		62			62			64			65

Income from operations		9			7			6			4
Interest and other income, net		—			(2	)		—			(1	)

Income before income taxes		9			5			6			3
Provision for income taxes		(3	)		(2	)		(2	)		(1	)

Net income		6	%		3	%		4	%		2	%

The following table sets forth our revenue by type and geography expressed as a percentage of total revenue for each of the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
Revenue by geography in:
North America		69	%		65	%		70	%		65	%
EMEA		19			20			19			20
Asia Pacific		12			15			11			15

Quarter Overview

Total revenue for the third quarter of 2011 increased 19% over the third quarter of 2010, driven by our growth in recurring revenue. Recurring revenue increased 24% in the third quarter of 2011 compared to the third quarter of 2010, due to expansion within the current customer base, new customer acquisitions and addition of Q-go revenue. Professional services revenue during the third quarter of 2011 decreased 2% compared to the third quarter of 2010, due primarily to a decrease in the need for our professional services work as a result of increasing traction with partners who are performing more professional services work as well as solution innovation that helps simplify the implementation and configuration processes.

During the third quarter of 2011, as compared to the third quarter of 2010, we continued to direct our investments to expand distribution by adding sales and marketing personnel to increase sales and by increasing headcount to assist with delivering our solutions and technical support. We realigned resources within our professional services organization to better serve our shift in revenue mix and demand for professional services work. The increase in headcount during the third quarter of 2011 over the third quarter of 2010 also included staff additions related to our first quarter 2011 acquisition of Q-go. General and administrative expenses increased during the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010 primarily due to growth in headcount and related expenses and annual salary and incentive increases. Operating income as a percentage of revenue was 7% during the quarter ended September 30, 2011 compared to 9% during the quarter ended September 30, 2010 primarily due to increases in cost of revenue and operating expenses during the third quarter ended September 30, 2011, as compared to the third quarter ended September 30, 2010. For the quarter ended September 30, 2011, we generated $11.3 million of cash from operations compared to $6.0 million in the quarter ended September 30, 2010. Our cash and investment balances decreased to $241.5 million at September 30, 2011 from $276.7 million at December 31, 2010, primarily due to the use of $33.8 million for the acquisition of Q-go, which occurred during the first quarter of 2011 and $25.9 million for common stock repurchases under our stock repurchase program, offset by $21.2 million of cash generated from operations through the nine months ended September 30, 2011.

During the three and nine months ended September 30, 2011, foreign currency fluctuations had a significant impact on our financial results on a constant currency basis when comparing the weighted-average exchange rates during the three and nine months ended September 30, 2010 to the weighted-average exchange rates during the three and nine months ended September 30, 2011.

When compared to the three months ended September 30, 2010, our revenue was favorably impacted, and our cost of revenue and operating expenses were unfavorably impacted, by the relative strength of the U.S. dollar in the three months ended September 30, 2011 relative to the Australian dollar, British pound, Euro and Yen. 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 quarter ended September 30, 2011 increased $9.1 million, or 19%, over total revenue reported in the same period of 2010. If weighted-average currency exchange rates in the quarter ended September 30, 2011 had remained constant with the quarter ended September 30, 2010, revenue for the quarter ended September 30, 2011 would have increased by approximately $7.6 million, which is $1.5 million less than the actual increase. In other words, the change in weighted-average currency exchange rates between the quarters ended September 30, 2010 and 2011 had a favorable impact to revenue of $1.5 million.

Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to partially offset the revenue impact. Total cost of revenue and operating expenses in the three months ended September 30, 2011 increased by $9.1 million, or 20%, over total cost of revenue and operating expenses in the three months ended September 30, 2010. If weighted-average currency exchange rates in the three months ended September 30, 2011 had remained constant with the same period of 2010, these total expenses in the three months ended September 30, 2011 would have increased by approximately $8.2 million, which is $918,000 less than the actual increase. In other words, the change in weighted-average currency exchange rates between the three months ended September 30, 2010 and the three months ended September 30, 2011 increased these total expenses by approximately $918,000. The expenses most significantly exposed to currency exchange fluctuations are generally within sales and marketing and professional services cost of revenue.

When compared to the nine months ended September 30, 2010, our revenue was favorably impacted, and our cost of revenue and operating expenses were unfavorably impacted, by the relative strength of the U.S. dollar in the nine months ended September 30, 2011 relative to the Australian dollar, British pound, Euro and Yen. Total revenue in the nine months ended September 30, 2011 increased $30.7 million, or 23%, over total revenue reported in the same period of 2010. If weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the nine months ended September 30, 2010, revenue for the nine months ended September 30, 2011 would have increased by approximately $26.1 million, which is $4.6 million less than the actual increase. In other words, the change in weighted-average currency exchange rates between the nine months ended September 30, 2010 and 2011 had a favorable impact to revenue of $4.6 million.

Total cost of revenue and operating expenses in the nine months ended September 30, 2011 increased by $31.6 million, or 25%, over total cost of revenue and operating expenses in the nine months ended September 30, 2010. If weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the same period of 2010, these total expenses in the nine months ended September 30, 2011 would have increased by approximately $28.7 million, which is $2.9 million less than the actual increase. In other words, the change in weighted-average currency exchange rates between the nine months ended September 30, 2010 and the nine months ended September 30, 2011 increased these total expenses by approximately $2.9 million. The expenses most significantly exposed to currency exchange fluctuations are generally within sales and marketing and professional services cost of revenue.

Using similar methodology, the change in period-end exchange rates between the year ended December 31, 2010 and quarter ended September 30, 2011 did not have a significant impact on deferred revenue.

As of September 30, 2011, we had an accumulated deficit of $26.8 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.

Backlog

Total backlog is as follows:

		000000000		000000000		000000000		000000000		000000000		000000000
	December 31, 2010,						September 30, 2011
(Amounts in thousands)	Current		Non-Current		Total		Current		Non-Current		Total
Committed backlog	$	126,860	$	27,314	$	154,174	$	130,795	$	21,506	$	152,301
Backlog subject to termination		21,759		119,897		141,656		43,241		153,572		196,813

Total backlog	$	148,619	$	147,211	$	295,830	$	174,036	$	175,078	$	349,114

Total backlog, which represents total invoiced and uninvoiced deferred revenue, was approximately $295.8 million and $349.1 million as of December 31, 2010 and September 30, 2011, respectively. The increase in backlog was primarily due to expansion sales within our existing customer base, new customer acquisitions and the addition of backlog as a result of the acquisition of Q-go during the first quarter of 2011. Current total backlog, which is the portion of backlog expected to be recognized as revenue within the next twelve months, was approximately $148.6 million and approximately $174.0 million as of December 31, 2010 and September 30, 2011. We treat backlog that is subject to termination as uncommitted backlog and we treat backlog that is not subject to termination as committed backlog.

Beginning January 2010, we introduced our Cloud Services Agreement (CSA), which includes longer terms and annual customer termination for convenience provisions. Due to our introduction of the CSA, our uncommitted backlog increased during the quarter ended September 30, 2011 as compared to the year ended December 31, 2010. In addition, certain of our arrangements with the federal government include multi-year awards from the federal government. We include within uncommitted backlog unexercised options in our multi-year award contracts with the federal government. Due in part to including unexercised options under various multi-year customer expansion arrangements and new customer acquisitions within backlog, our uncommitted backlog increased during the quarter ended September 30, 2011 as compared to the year ended December 31, 2010.

During the third quarter of 2011, our cancellations under the CSA were less than 1% of our total backlog. Based on cancellations to date, and the potential for future cancellations, we cannot provide assurance that termination for convenience will not be exercised in the future. Based on our past experience with the federal government, future year options are generally exercised if funds are appropriated. However, we cannot assure this outcome. As a result of the CSA and multi-year award contracts with the federal government, we expect the proportion of total backlog that falls under the termination for convenience to continue to increase in the future.

Additionally, a right to terminate for convenience exists in certain of our business contracted with the federal government, and with some commercial customers that have non-CSA agreements. In the case of federal government customers, while the majority of our business is sold through reseller arrangements that do not include termination for convenience provisions, some of the business that is contracted with this group is subject to termination for convenience as set forth in the Federal Acquisition Regulations (FARs). The FARs allow the federal government to terminate these arrangements at its option.

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 and quarter-to-quarter for several reasons, including the specific timing and duration of large customer subscription agreements, varying billing cycles of noncancelable subscription agreements, the specific timing of customer renewals, fluctuations in foreign currency exchange rates, 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 or if customers made additional purchases during the contract period. 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 backlog revenue may change from year-to-year and quarter-to-quarter 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.

Three and Nine Months Ended September 30, 2010 and 2011

Revenue

		$0,000,000		$0,000,000		$0,000,000			$0,000,000		$0,000,000		$0,000,000
	Three Months Ended September 30,							Nine Months Ended September 30,
(Amounts in thousands)	2010		2011		Percent Change			2010		2011		Percent Change
Recurring revenue	$	38,613	$	47,924		24	%	$	106,368	$	135,246		27	%
Professional services		9,980		9,749		(2	)		27,781		29,572		6

Total revenue	$	48,593	$	57,673		19	%	$	134,149	$	164,818		23	%

Total revenue for the three months ended September 30, 2011 was $57.7 million, an increase of $9.1 million, or 19%, over total revenue of $48.6 million for the three months ended September 30, 2010. During the third quarter of 2011, recurring revenue increased primarily due to expansion sales within our existing customer base, new customer acquisitions, and addition of Q-go revenue. At the same time, professional services revenue decreased from the third quarter of 2010 as a result of increasing traction with partners who are performing more professional services work as well as solution innovation that helps simplify the implementation and configuration processes. If weighted-average currency exchange rates in the three months ended September 30, 2011 had remained constant with the weighted-average currency exchange rates in the three months ended September 30, 2010, revenue during the third quarter of 2011 would have increased by approximately $7.6 million, which is $1.5 million less than the actual increase with the majority of the currency rate impact within recurring revenue.

Total revenue for the nine months ended September 30, 2011 was $164.8 million, an increase of $30.7 million, or 23%, over total revenue of $134.1 million for the nine months ended September 30, 2010. If weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the weighted-average currency exchange rates in the nine months ended September 30, 2010, revenue during the first nine months of 2011 would have increased by approximately $26.1 million, which is $4.6 million less than the actual increase with the majority of the currency rate impact within recurring revenue.

Recurring revenue for the three months ended September 30, 2011 was $47.9 million, an increase of $9.3 million, or 24%, over recurring revenue of $38.6 million for the three months ended September 30, 2010. If weighted-average currency exchange rates in the third quarter of 2011 had remained constant with weighted-average currency exchange rates in the third quarter of 2010, recurring revenue for the three months ended September 30, 2011 would have increased by approximately $8.1 million, which is $1.2 million less than the actual increase. Recurring revenue increased primarily due to expansion sales within our existing customer base, new customer acquisitions, and addition of Q-go revenue. We believe our multi-channel solution, RightNow CX^TM, 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 within the existing customer base increased as a result of sales capacity additions, contract renewals and new products.

For the nine months ended September 30, 2011, recurring revenue increased $28.9 million, or 27%, over recurring revenue of $106.4 million for the nine months ended September 30, 2010. If weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the weighted-average currency exchange rates in the nine months ended September 30, 2010, recurring revenue during the first nine months of 2011 would have increased by $25.4 million, which is $3.5 million less than the actual increase. Recurring revenue increased due to expansion sales within our existing customer base, new customer acquisitions and the addition of Q-go revenue over the comparable period.

Professional services revenue decreased $231,000, or 2%, in the quarter ended September 30, 2011 over the comparable 2010 quarter. If weighted-average currency exchange rates in the third quarter of 2011 had remained constant with the weighted-average currency exchange rates in the third quarter of 2010, professional services revenue as of September 30, 2011 would have decreased $564,000, which is $333,000 more than the actual decrease. We believe our solution innovation is driving the acceleration in our recurring revenue and at the same time reducing the need for internal professional services work. Professional services revenue represented 17% and 21% of total revenue in the three months ended September 30, 2011 and 2010, respectively.

Professional services revenue for the nine months ended September 30, 2011 increased $1.8 million over the nine months ended September 30, 2010. If weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the weighted-average currency exchange rates in the nine months ended September 30, 2010, professional services revenue during the first nine months of 2011 would have increased by approximately $600,000, which is $1.2 million less than the actual increase. The professional services revenue increase was primarily due to the number of hours delivered and the timing of the mix of projects delivered during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. Professional services revenue represented 18% and 21% of total revenue in the nine months ended September 30, 2011 and 2010, respectively.

Customers generally purchase professional services with initial subscription or license arrangements, and periodically over the life of the contract.

Revenue from EMEA customers increased to 20% of total revenue in the quarter ended September 30, 2011 from 19% of total revenue in the quarter ended September 30, 2010, while revenue from Asia Pacific clients increased to 15% of total revenue in the quarter ended September 30, 2011 compared to 12% of total revenue in the quarter ended September 30, 2010. Revenue outside North America increased to 35% of total revenue in the three months ended September 30, 2011, compared to 31% for the three months ended September 30, 2010, due to sales expansion in these regions, including Q-go revenue, and favorable foreign currency exchange rate impact. Revenue outside North America increased to represent 35% of total revenue for the nine months ended September 30, 2011 from 30% for the nine months ended September 30, 2010, due to sales expansion in these regions, including Q-go revenue, and favorable foreign currency exchange rate impact.

Cost of Revenue

		000000		000000		000000			000000		000000		000000
	Three Months Ended September 30,							Nine Months Ended September 30,
(Amounts in thousands)	2010		2011		Percent Change			2010		2011		Percent Change
Recurring revenue	$	5,923	$	9,042		53	%	$	17,754	$	24,114		36	%
Professional services		8,395		8,679		3			23,105		27,500		19

Total cost of revenue	$	14,318	$	17,721		24	%	$	40,859	$	51,614		26	%

Total cost of revenue for the quarter ended September 30, 2011 was $17.7 million, an increase of $3.4 million, or 24%, over total cost of revenue of $14.3 million for the quarter ended September 30, 2010. Total cost of revenue for the nine months ended September 30, 2011 was $51.6 million, an increase of $10.8 million, or 26%, over total cost of revenue of $40.9 million for the nine months ended September 30, 2010.

Cost of recurring revenue increased $3.1 million, or 53%, during the quarter ended September 30, 2011 over the quarter ended September 30, 2010. Cost of recurring revenue increased primarily due to an increase in amortization of internally developed computer software of approximately $1.2 million which includes $809,000 for an impairment to internally developed computer software for projects primarily related to the voice product because we will transition to partners for our voice applications in the future. In addition, increases in salaries and related expenses as well as common expense allocation (such as payroll taxes, benefits, office rent, supplies and other overhead expenses), resulted in a combined increase of $831,000 primarily due to increased headcount to assist with technical support and delivering our solutions, increased expenses from Q-go and annual merit increases. Amortization as a result of the Q-go acquisition also increased cost of recurring revenue approximately $619,000 over the comparable 2010 period.

Average employee count in our recurring revenue support operations was 126 during the third quarter of 2011 as compared to 116 during the third quarter of 2010. As a percent of the associated revenue, recurring revenue costs were 19% in the three months ended September 30, 2011 as compared to 15% of associated revenue in the three months ended September 30, 2010.

For the nine months ended September 30, 2011, cost of recurring revenue increased $6.4 million, or 36%, from the comparable 2010 period due to an increase in amortization of internally developed computer software of approximately $1.8 million which includes $809,000 for an impairment to internally developed computer software for projects primarily related to the voice product because we will transition to partners for our voice applications in the future. In addition, cost of recurring revenue increased due to increased headcount to assist with technical support and delivering our solutions, increased expenses from Q-go, and annual merit increases, which increased salaries and related expenses as well as common expense allocation (such as payroll taxes, benefits, office rent, supplies and other overhead expenses), resulting in a combined expense increase of $2.1 million. Amortization expense resulting from the acquisition of Q-go also increased cost of recurring revenue approximately $1.7 million over the comparable 2010 period. As a percent of the associated revenue, recurring revenue costs were 18% in the nine months ended September 30, 2011 as compared to 17% of associated revenue in the nine months ended September 30, 2010.

Cost of professional services increased $284,000, or 3%, in the quarter ended September 30, 2011 over the quarter ended September 30, 2010. If the weighted-average currency exchange rates in the third quarter of 2011 had remained constant with weighted-average currency exchange rates in the third quarter of 2010, cost of professional services in the quarter ended September 30,

2011 would have decreased $27,000, which is $311,000 less than the actual increase. Absent exchange rate impact, cost of professional services increased primarily due to increased headcount, which increased salaries and related expenses as well as common expense allocation, resulting in a combined increase of approximately $708,000 offset by decreases in travel and travel related expenses of $258,000 and expenses relating to third-party professional service expenses of $233,000 as a result of the professional service realignment.

Average employee count in our professional service operations was 239 during the third quarter of 2011 compared to 183 during the third quarter of 2010, which was partially due to the addition of 20 employees from the Q-go acquisition. Although headcount has grown, we have reduced the size of our professional services organization to meet the decline in demand for professional service work during the second and third quarters of 2011 and have engaged more with partners and other third-party contractors. As a percent of the associated revenue, professional services costs were 89% in the three months ended September 30, 2011, compared to 84% in the three months ended September 30, 2010. The increase in the professional service costs as a percentage of the associated revenue was primarily due to increased headcount and related expenses and unfavorable foreign currency exchange rate impact. Employee training, customer scheduling requirements, and use of third-party resources can also cause fluctuation in professional service costs as a percentage of revenue.

For the nine months ended September 30, 2011, cost of professional services increased $4.4 million, or 19%, from the comparable 2010 period. If the weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the nine months ended September 30, 2010, cost of professional services in the nine months ended September 30, 2011 would have increased $3.3 million, which is $1.1 million less than the actual increase. In other words, the change in weighted-average exchange rates between the nine months ended September 30, 2010 and the nine months ended September 30, 2011 increased these total expenses by approximately $1.1 million. Absent exchange rate impact, the increase in the professional service costs from the comparable 2010 period was primarily due to increased headcount, which increased salaries and related expenses as well as common expense allocation resulting in a combined increase of approximately $4.2 million, including employee incentives and one-time severance payments as a result of staff realignment.

Operating Expenses

		0000000		0000000		0000000			0000000		0000000		0000000
	Three Months Ended September 30,							Nine Months Ended September 30,
(Amounts in thousands)	2010		2011		Percent Change			2010		2011		Percent Change
Sales and marketing	$	20,006	$	24,685		23	%	$	57,507	$	72,148		25	%
Research and development		5,160		5,143		—			15,089		16,320		8
General and administrative		4,975		5,986		20			13,598		18,534		36

Total operating expenses	$	30,141	$	35,814		19	%	$	86,194	$	107,002		24	%

Sales and Marketing Expenses

Sales and marketing expenses were $24.7 million in the third quarter of 2011, an increase of $4.7 million, or 23%, over sales and marketing expenses of $20.0 million in the third quarter of 2010. If weighted-average currency exchange rates in the third quarter of 2011 had remained constant with weighted-average currency exchange rates in the third quarter of 2010, sales and marketing expenses in the quarter ended September 30, 2011 would have increased approximately $4.2 million, which is $469,000 less than the actual increase. Absent exchange rate impact, the increase was due primarily to an increase in average employee count in our sales and marketing organization to 335 during the third quarter of 2011 from 292 during the third quarter of 2010. The personnel additions combined with annual merit increases, commission and bonus expenses and common expense allocation increased sales and marketing expenses by approximately $3.4 million. Additionally, travel related expenses increased $429,000 in the quarter ended September 30, 2011 over the quarter ended September 30, 2010 as we continued to focus on increasing sales and brand awareness.

Sales and marketing expenses were $72.1 million for the nine months ended September 30, 2011, an increase of $14.6 million, or 25%, over sales and marketing expense of $57.5 million for the nine months ended September 30, 2010. If weighted-average currency exchange rates in the nine months ended September 30, 2011 had remained constant with the weighted-average currency exchange rates in the nine months ended September 30, 2010, sales and marketing expenses during the first nine months in 2011 would have increased by approximately $13.2 million, which is $1.4 million less than the actual increase. Absent exchange rate impact, the sales and marketing expenses increase was primarily due to personnel additions combined with annual merit increases, commission and bonus expenses and common expense allocation increasing by $9.3 million and stock based compensation expense increasing by $1.8 million during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. Additionally,

travel related expenses increased approximately $1.3 million and marketing related efforts increased approximately $522,000 as we continued to focus on increasing sales and brand awareness during the nine months ended September 30, 2011 over the nine months ended September 30, 2010.

Under subscription arrangements, we defer the related sales incentive costs and expense them in proportion to the revenue recognized. Under license arrangements, we expense sales incentives when earned, which is typically upon contract signing. Net sales incentive expense was $5.0 million and $4.6 million for the three months ended September 30, 2011 and September 30, 2010, respectively. Net sales incentive expense was $13.7 million and 12.8 million for the nine months ended September 30, 2011 and September 30, 2010, respectively. Our deferred commissions were $10.2 million and $11.2 million at December 31, 2010 and September 30, 2011, respectively.

Research and Development Expenses

Research and development expenses were $5.1 million and $5.2 million in the three months ended September 30, 2011 and September 30, 2010, respectively. The decrease was primarily due to an increase in capitalized cost of internally developed computer software of $681,000 over the same period last year and a decrease in third-party professional services work of $237,000 primarily related to a decrease in language translation services. These decreases were offset by an increase in salaries and related expenses of $535,000 and common expense allocation of $313,000 due to growth in headcount. The capitalized costs of internally developed computer software are included in intangible assets, net on our Condensed Consolidated Balance Sheets and are amortized to cost of recurring revenue on our Condensed Consolidated Statements of Operations. Average employee count in our research and development organization was 224 during the third quarter of 2011 compared to 180 during the third quarter of 2010, which was primarily due to the addition of headcount to enhance and expand RightNow CX^TM, including the addition of 22 employees from our first quarter 2011 acquisition of Q-go.

Research and development expenses for the nine months ended September 30, 2011 increased $1.2 million, or 8%, over the comparable 2010 period primarily due to an increase in salaries and related expenses of $1.8 million and common expense allocation of $1.0 million due to growth in headcount pertaining to enhancing and expanding RightNow CX^TM. The increase in these costs was offset by a $1.4 million increase in capitalized cost of internally developed computer software over the same period of 2010.

General and Administrative Expenses

General and administrative expenses were $6.0 million in the third quarter of 2011, an increase of $1.0 million, or 20%, over the third quarter of 2010, primarily due to growth in headcount and annual salary and incentive increases, which increased salaries and related expenses by $332,000 and increased common expense allocation by $191,000. Additionally, legal costs increased $249,000 and accounting and payroll services increased $164,000. Average employees in our general and administrative organization were 109 during the third quarter of 2011 compared to 97 during the third quarter of 2010.

General and administrative expenses for the nine months ended September 30, 2011 were $18.5 million, an increase of $4.9 million, or 36%, over the comparable period in 2010, which was primarily due to growth in headcount and annual salary and incentive increases, which increased salaries and related expenses by $1.3 million, increased stock based compensation expense by $1.5 million and increased common expense allocation by $546,000. Additionally, legal costs increased $557,000, accounting and payroll services increased $439,000 and acquisition costs increased $415,000 related to the Q-go acquisition during the first quarter of 2011.

Stock-Based Compensation Expense

Total stock-based compensation expense for the three months ended September 30, 2011 was $3.9 million compared to $2.2 million for the three months ended September 30, 2010. The increase in stock-based compensation expense was primarily due to an increase in the number of awards granted and an increase in the underlying stock price during the third quarter of 2011 over the third quarter of 2010. Stock-based compensation was $10.6 million for the nine months ended September 30, 2011 as compared to $5.7 million for the nine months ended September 30, 2010. Stock-based compensation was higher for the nine months ended September 30, 2011 primarily due to an increase in the number of awards granted and an increase in the underlying stock price during the first nine months of 2011 over the first nine months of 2010. Additionally, a portion of overachievement of employee bonuses was recorded to stock-based compensation expense during the second quarter of 2011 and was paid in stock issued during the third quarter of 2011. Stock-based compensation expense varies from period-to-period because of the number of option shares that are expected to vest, forfeiture rates, and changes in our underlying stock price and valuation assumptions.

Interest and Other Income (Expense), Net


	Three Months Ended September 30,								Nine Months Ended September 30,
(Amounts in thousands)	2010		2011			Percent Change			2010		2011			Percent Change
Interest income	$	111	$	165			49	%	$	425	$	616			45	%
Interest expense		—		(1,099	)		—			—		(3,296	)		—
Other income (expense), net		343		(319	)		193			231		1,079			367

Total interest and other income, net	$	454	$	(1,253	)		(376	)%	$	656	$	(1,601	)		(344	)%

Interest income increased 49% and 45% in the three and nine months ended September 30, 2011, respectively, due to increased cash balances available to invest. Our investment portfolio consists primarily of short-term investment-grade interest-bearing government securities and corporate debt instruments.

Interest expense increased $1.1 million and $3.3 million in the three and nine months ended September 30, 2011, respectively, due to interest expense on our convertible senior notes that were issued in November 2010. The notes bear interest at a rate of 2.50% per annum, are payable semi-annually, and mature on November 15, 2030, unless earlier redeemed, repurchased or converted. Please refer to Note 6 in our Notes to Condensed Consolidated Financial Statements for further discussion.

The change in other income (expense), net during the third quarter of 2011 from the third quarter of 2010 resulted in a net expense increase of $662,000 primarily due to an increase in unrealized exchange loss of $392,000 and the amortization of debt issuance costs of $253,000 third quarter of 2011.

The change in other income (expense), net during the first nine months of 2011 from the first nine months of 2010 resulted in a net income increase of $848,000 primarily due to our purchases of Euros in advance of closing the acquisition of Q-go. As a result of appreciation of the Euro, we realized a foreign currency gain of $1.8 million, which was partially offset by amortization of debt issuance costs of $761,000 during the first nine months of 2011. Please refer to Note 13 in our Notes to Condensed Consolidated Financial Statements for further discussion related to the acquisition of Q-go and associated foreign currency gain.

Provision for Income Taxes

Liquidity and Capital Resources


	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2010		2011		Percent Change		2010		2011		Percent Change
Cash, cash equivalents and short-term investments	$	109,015	$	241,451		121%	$	109,015	$	241,451	121%
Cash provided by operating activities		5,973		11,307		90%		13,498		21,226	57%

We have historically funded our operations with cash from operations, equity and convertible debt financings and debt borrowings. At September 30, 2011, cash, cash equivalents, and short-term investments totaled $241.5 million. In addition to our cash and short-term investments, other sources of liquidity at September 30, 2011 included a $3.0 million bank line of credit facility, under which there have been no borrowings.

Operating activities provided $11.3 million and $21.2 million of cash during the three and nine months ended September 30, 2011, respectively, as compared to $6.0 million and $13.5 million of cash during the three and nine months ended September 30, 2010. Cash flow from operations can vary significantly from quarter-to-quarter for many reasons, including the timing of business in a given period, and customer payment preferences and patterns. Deferred revenue is not recorded for subscriptions with 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 4% of current accounts receivable at September 30, 2011 and 5% of current accounts receivable at December 31, 2010. Accounts receivable written off in the third quarter of 2011 were comparable to the accounts receivable written off in the fourth quarter of 2010. As of September 30, 2011, we experienced an improvement in our aged receivables as compared to December 31, 2010. We regularly assess the adequacy of the allowance for doubtful accounts. Actual write-offs could exceed our estimates and materially adversely affect operating cash flows in the future.

Investing activities used $3.3 million and $84.7 million in the three and nine months ended September 30, 2011, respectively. Third quarter 2011 investing activities consisted primarily of $2.5 million of purchased capital expenditures and $1.8 million of capitalized cost of internally developed computer software to be sold as a service offset by a $971,000 net change in short-term investments. Capital asset additions consisted primarily of equipment acquisitions for employee growth and our hosting operations and purchases related to leasehold improvements. During the nine months ended September 30, 2011, investing activities consisted primarily of $38.3 million of net purchases of short-term investments, $33.8 million of business acquisition costs related to the acquisition of Q-go, $7.6 million of purchased capital expenditures and $4.9 million of capitalized cost of internally developed computer software to be sold as a service.

Financing activities used $20.6 million and $12.0 million in the three and nine months ended September 30, 2011, respectively. Third quarter 2011 financing activities consisted primarily of $25.9 million of common stock repurchases under our stock repurchase program offset by $4.4 million in cash generated from exercises of common stock options issued under our employee equity incentive plan. During the nine months ended September 30, 2011, financing activities consisted primarily of $25.9 million of common stock repurchases under our stock repurchase program offset by $12.8 million in cash generated from exercises of common stock options issued under our employee equity incentive plan and tax benefits related to stock-based compensation of $1.3 million.

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 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 September 30, 2011, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations or commitments since December 31, 2010.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuation due to changes in foreign currency exchange rates, particularly changes in the Australian dollar, British pound, Euro and Yen, because our contracts are frequently denominated in local currency. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures. We do not currently have any such contracts in place, nor did we enter into any such contracts during the quarters ended September 30, 2011 or September 30, 2010.

During the three and nine months ended September 30, 2011, foreign currency fluctuations had a significant impact on our financial results on a constant currency basis, when comparing the weighted-average exchange rates during the three and nine months ended September 30, 2010 to the weighted-average exchange rates during the three and nine months ended September 30, 2011.

When compared to the three months ended September 30, 2010, our revenue was favorably impacted, and our cost of revenue and operating expenses were unfavorably impacted, by the relative strength of the U.S. dollar in the three months ended September 30, 2011 relative to the Australian dollar, British pound, Euro and Yen. The change in weighted-average currency exchange rates between the three months ended September 30, 2010 and 2011 had a favorable impact to revenue of $1.5 million. Additionally, the increase in deferred revenue when comparing the change in period-end weighted-average currency exchange rates between the year ended December 31, 2010 and quarter ended September 30, 2011 was insignificant. Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to partially offset the revenue impact. These expenses in the three months ended September 30, 2011 had an unfavorable impact of approximately $918,000 when comparing the change in weighted-average currency exchange rates between the three months ended September 30, 2010 and 2011.

When compared to the nine months ended September 30, 2010, our revenue was favorably impacted, and our cost of revenue and operating expenses were unfavorably impacted, by the relative strength of the U.S. dollar in the quarter ended September 30, 2011 relative to the Australian dollar, British pound, Euro and Yen. The change in weighted-average currency exchange rates between the nine months ended September 30, 2010 and 2011 had a favorable impact to revenue of $4.6 million. Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to partially offset the revenue impact. These expenses in the nine months ended September 30, 2011 had an unfavorable impact of approximately $2.9 million when comparing the change in weighted-average currency exchange rates between the nine months ended September 30, 2010 and 2011.

Interest Rate Sensitivity

Our investments consist of short-term, interest-bearing securities, which are subject to credit and interest rate risk. Our portfolio is investment-grade and diversified among issuers and security types to reduce credit risk. We manage our interest rate risk by maintaining a large portion of our investment portfolio in instruments with short maturities or frequent interest rate resets. We also manage interest rate risk by maintaining sufficient cash and cash equivalents such that we are able to hold investments until maturity. If market interest rates were to increase by 100 basis points from the level at September 30, 2011, the fair value of our portfolio would decline by approximately $807,000.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, 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.

Part II. Other Information

Item 1. Legal Proceedings

On October 25, 2011, and November 1, 2011, two purported shareholders of RightNow filed putative class action lawsuits in the Court of Chancery in the State of Delaware (Israni v. RightNow Technologies, Inc. et al; and Coyne v. RightNow Technologies, Inc. et al) naming RightNow and its directors, as well as Oracle Corporation, OC Acquisition LLC and Rhea Acquisition Corporation as defendants. The lawsuits concern Oracle’s and Rhea’s proposed acquisition of the RightNow. The complaints allege that RightNow’s directors breached their fiduciary duties by allegedly failing to take steps to maximize the value of RightNow to its shareholders, and that Oracle and Rhea Acquisition allegedly aided and abetted in this breach. The complaints seek various equitable reliefs, including an injunction preventing the proposed acquisition, rescission in the event the acquisition is consummated, and an award of any demands resulting from the alleged breaches of fiduciary duty. We intend to defend these cases vigorously. There can be no assurance, however, that we will be successful in our defense of these actions. It is not known when or on what basis the actions will be resolved.

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

Item 1A. Risk Factors

A restated description of the risk factors associated with our business is set forth below. This description includes any and all changes (whether or not material) to, and supersedes, the description of the risk factors associated with our business previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

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-K, 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.

The announcement and pendency of our agreement to be acquired by Oracle could adversely affect our business.

On October 23, 2011, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OC Acquisition LLC (“Parent”), a Delaware limited liability company and wholly-owned subsidiary of Oracle Corporation (“Oracle”), and Rhea Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Subsidiary”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Subsidiary will merge with and into us (the “Merger”) with RightNow Technologies, Inc. surviving as an indirect wholly-owned subsidiary of Oracle. Subject to the terms of the Merger Agreement, which has been unanimously approved by our board of directors, at the effective time of the Merger (the “Effective Time”), each share of our common stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $43.00 in cash, without interest. The Merger is conditioned upon, among other things, stockholder approval of the transaction, certain regulatory approvals and other customary closing conditions. We will continue to operate as a separate entity until the transaction closes. The announcement and pendency of the Merger, or any significant delay in the consummation of the Merger, could cause disruptions in our business, including affecting our relationship with our customers, vendors and employees, which could have a material adverse effect on our business, financial results and operations.

The failure to complete the Merger could materially adversely affect our business.

There is no assurance that our acquisition by Parent or any other transaction will occur. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of $59.7 million (the “Termination Fee”) if the Merger Agreement is terminated under certain circumstances, including if we accept a superior acquisition proposal, and, under certain other limited circumstances, we may be required to pay Parent a separate fee of $18.3 million, which would be credited against the Termination Fee. The payment of a Termination Fee may have a material adverse impact on our financial condition. We may also be required to reimburse Parent for up to $5.0 million of its out-of-pocket expenses in connection with the transaction. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community.

Pending litigation against us could result in an injunction preventing the completion of the Merger or a judgment resulting in the payment of damages in the event the Merger is completed.

We are aware of two purported class action lawsuits that plaintiffs have filed against us, each member of our board of directors, Oracle Corporation, OC Acquisition LLC and Rhea Acquisition Corporation, in connection with the Merger. The complaints seek various equitable reliefs, including an injunction preventing the proposed acquisition, rescission in the event the acquisition is consummated, and an award of damages. The outcome of any such litigation is uncertain. If a dismissal is not granted or a settlement is not reached, these lawsuits could prevent or delay completion of the Merger and result in substantial costs to us, including any costs associated with the indemnification of our directors and officers. Plaintiffs may also file additional lawsuits against us, Oracle, and/or our directors and officers in connection with the Merger.

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 35% of our revenue for the quarters ended September 30, 2010 and 2011, 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:

•

fluctuations in foreign currency exchange rates;

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political, social and economic instability, including 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;

•

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.

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.

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

We had an accumulated deficit of $26.8 million as of September 30, 2011. We expect to continue to incur significant sales and marketing, professional services, research and development and general and administrative expenses as we expand our operations and, as a result, we will need to generate significant revenue to sustain or increase profitability. We may not be able to continue to improve our operating results at the rate that has occurred in the past or at all. Even though we were profitable during the nine months ended September 30, 2011, 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 customer relationship management (“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 BMC Software Corporation, Inc., eGain Communications Corporation, Inquira Software, Inc., Kana Software, Inc., Liveperson, Microsoft Corporation, Moxie Software, Inc., 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 client’s 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; and

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social CRM providers, such as Lithium and other niche social CRM providers.

Some 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. 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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fluctuations in foreign currency exchange rates;

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the mix of revenue between subscription arrangements, professional services and license 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 recurring revenue and professional services revenue, because the gross margin on professional services is typically lower than the gross margin on recurring revenue;

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changes in the mix of products sold with managed services and/or usage volume, because the gross margins on voice self-service applications and intent guide is typically lower than the gross margin on our sales, marketing, feedback and service applications;

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the timing of contracts signed and amount of usage fees;

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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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stock price volatility, employee exercise behaviors, and stock option or restricted stock unit forfeiture rates, or changes in the number of stock options or restricted stock units granted and vesting requirements in any particular period, which affects 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; and

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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.

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 only on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

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

Increasing our client base and achieving broader market acceptance of our solutions may depend to a significant extent on the effectiveness of our sales and marketing programs/operations. Our business will be seriously harmed if our efforts do not maximize revenue per sales and marketing headcount. We may not effectively develop and maintain awareness of our CX brand 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.

Prior to January 2010, our solutions had primarily been sold pursuant to time-based agreements that had been typically subject to renewal every two years or less and our clients have no obligation to renew. Beginning January 2010, we introduced the Cloud Services Agreement (CSA), which includes longer terms and annual customer termination for convenience provisions. If cancellations increase as a result of the CSA, our business, financial condition and results of operations will be materially adversely affected. Additionally, certain of our time-based agreements with the federal government are subject to annual appropriated funding. Because our clients may elect not to renew, or the federal government may not appropriate funding, 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, 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 materially 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.

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, 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.

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 may not be able to identify and prevent all potential and threatened intellectual property infringement or violations of third-party

license rights. We have in the past been named as a defendant in a lawsuit alleging intellectual property infringement, and we may again in the future have to defend against intellectual property lawsuits. We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Claims, regardless of their merit, are often 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. There is little or no case law governing the interpretation of many of the terms of certain of the licenses we use for open source software 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.

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

As of September 30, 2011, over 98% 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 or lease and that is currently located in third-party web hosting co-location facilities maintained and operated in California, Illinois, New Jersey, the Netherlands and England. Some of our Canadian customers are hosted on equipment that is owned and operated by a Canadian partner, and some of our U.S. Department of Defense customers are hosted on equipment that is owned by the Defense Information Services Agency. With our recent acquisition of Q-go we also have the use of a data center in the Netherlands through a managed service contract, using equipment that is leased from a third party. In addition, 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 other 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, beginning the first quarter of 2009, we have a service level credit program, which provides for a partial rebate if we fall short of our system availability objective. If we fail to meet this objective for one or all of our customers, we may have to pay a substantial amount of money, which may impact cash reserves, revenue recognition, and our reputation.

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

Our hosting systems and our software store and transmit proprietary information and critical data belonging to our clients and their customers. Any accidental or willful security breaches or other unauthorized access could expose us to a risk of information loss, litigation and other possible liabilities. If security measures are breached because of third-party action, employee error, malfeasance or

otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our clients’ data, our relationships with clients and our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we and our third-party hosting co-location facilities may be unable to anticipate these techniques or to implement adequate preventative measures.

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

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

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, and senior personnel.

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

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

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

Our software products may contain undetected errors or defects that may result in product failures, slow response times, or otherwise cause our products to fail to perform in accordance with client expectations. Because our clients use our products for important aspects of their business, any errors or defects in, or other performance problems with, our products could hurt our reputation and may damage our clients’ businesses.

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

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

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

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

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. These perceptions may differ among countries and between industries. 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. 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; and

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the price, performance and availability of competing products and services.

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

If our efforts to enhance existing solutions, introduce new solutions or expand the applications for our products and solutions to broader CRM markets do not succeed, our ability to grow our business will be adversely affected.

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, natural language 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 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 January 2011, we acquired Q-go.com B.V. The acquisition of Q-go.com and any potential future 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.

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, internal use software capitalization, unanticipated ambiguities in fair value accounting standards and income tax uncertainties, are complex and involve subjective judgments by management. Changes to generally accepted accounting principles, their interpretation, or changes in our products or business could significantly change our reported earnings and financial condition and could add significant volatility to those measures.

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.

Our debt service obligations may adversely affect our financial condition and cash flows from operations.

As a result of our sale of $175.0 million of 2.50% convertible senior notes in November 2010 (the “Notes”), we now have long-term debt that we have not had to maintain in the past.

Our maintenance of indebtedness could have important consequences because:

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it may impair our ability to obtain additional financing in the future;

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an increased portion of our cash flows from operations may have to be dedicated towards making semi-annual interest payments and repaying the principal in 2015;

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it may make us more vulnerable to downturns in our business, our industry or the economy in general.

Our ability to generate sufficient cash to pay our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulations. If we are at any time unable to generate sufficient cash to pay our debt obligations, we may be required to attempt to renegotiate the terms of our debt obligations, seek to refinance all or a portion of our debt obligations or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. Failure to make a payment on our debt obligations could also result in acceleration of all of our debt obligations, including the Notes, which would materially adversely affect our business, financial condition and results of operations.

We may issue additional shares of our common stock or instruments convertible into shares of our common stock, including additional shares associated with the potential conversion of the Notes, and thereby materially and adversely affect the market price of our common stock and the trading price of the Notes and cause dilution to existing stockholders.

We are not restricted from issuing additional shares of our common stock or other instruments convertible into, or exchangeable or exercisable for, shares of our common stock. If we issue additional shares of our common stock or instruments convertible into shares of our common stock, it may materially and adversely affect the market price of our common stock.

Because the Notes are convertible into shares of our common stock, volatility or depressed prices of our common stock could have a similar effect on the trading price of the Notes. In addition, the existence of the Notes may encourage short selling in our common stock by market participants because the conversion of the Notes could depress the price of our common stock. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur, could cause the market price of our common stock to decline. The issuance of additional shares of our common stock, including upon conversion of some or all of the Notes, will also dilute the ownership interests of existing holders of our common stock. Dilution will be greater if the conversion rate of the Notes is adjusted upon the occurrence of certain events.

We may not have the ability to raise the funds necessary to repurchase the Notes upon a fundamental change or at the option of the holders of the Notes on certain dates.

There can be no assurance that we will have sufficient financial resources, or will be able to arrange financing, to pay the fundamental change repurchase price if holders submit their Notes for repurchase by us upon the occurrence of fundamental change or at the option of the holders of the Notes on certain dates. If we fail to repurchase the Notes that are tendered for repurchase, we will be in default under the indenture governing the Notes. Our inability to pay for the Notes that are tendered for repurchase could materially and adversely affect our business, financial condition and results of operations.

The fundamental change provisions in the Notes may delay or prevent an otherwise beneficial takeover attempt of us.

The fundamental change purchase rights in the Notes, which allow Note holders to require us to purchase all or a portion of their Notes upon the occurrence of a fundamental change and the provisions requiring an increase to the conversion rate for conversions in connection with a make-whole fundamental change could make it more difficult or expensive for a third party to acquire us, which could discourage transactions that might otherwise be beneficial to investors.

We cannot assure our stockholders that our stock repurchase program will enhance long-term stockholder value and stock repurchases, if any, could increase the volatility of the price of our common stock and will diminish our cash reserves.

On August 8 and August 31, 2011, our Board of Directors authorized increases of $15 million and $25 million, respectively (for a total of $65 million), to our common stock repurchase program. The stock repurchase program was initially authorized for $10 million, as announced on July 28, 2010 and subsequently increased by $15 million, as announced on November 17, 2010. The additional increases will stay in place until August 2013. The timing and actual number of shares repurchased, if any, depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements, and other market conditions. The program may be suspended or discontinued at any time without prior notice and we do not intend to make any further repurchases during the pendency of the Merger. Repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, repurchases under our stock repurchase program will diminish our cash reserves, which could impact our ability to pursue possible future strategic opportunities and acquisitions and could result in lower overall returns on our cash balances. There can be no assurance that any further stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of stock. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness. As of September 30, 2011, a total of $40.0 million has been repurchased, leaving $25.0 million remaining available to be repurchased pursuant to this program.

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 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. 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.

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. A number of countries, including Australia, Canada, European Union members and Japan, have imposed restrictions, more stringent than those in the U.S., on the collection and use of personal data that impose significant burdens on subject businesses. If we fail to comply with those more stringent requirements or there is a perception in those countries that we are non-compliant our sales in those countries may be adversely affected.

In addition to government activity, privacy advocacy groups and the technology and direct marketing industries may implement new 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 may be less effective, which would reduce demand for our solutions and harm our business.

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

At September 30, 2011, Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, have voting power over approximately 16% of our outstanding common stock and, together with other executive officers and directors, have voting power over approximately 19% 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, directors and other members of senior management, 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.

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

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

(a) Sales of Unregistered Securities

Not applicable.

(b) Use of Proceeds from Sales of Registered Securities

On August 5, 2004, the Securities and Exchange Commission declared effective our Registration Statement on 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.

(c) Purchases of Equity Securities.

On August 8 and August 31, 2011, the Board of Directors authorized increases of $15 million and $25 million, respectively, (for a total of $65 million) to our common stock repurchase program. The stock repurchase program was initially authorized for $10 million, as announced on July 28, 2010 and subsequently increased by $15 million, as announced on November 17, 2010. The additional increases will stay in place until August 2013. The shares may be purchased 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.

During the third quarter ended September 30, 2011, we repurchased 912,784 shares of common stock under this program. As of September 30, 2011, a total of $40.0 million has been repurchased, leaving $25.0 million remaining available to be repurchased pursuant to this program. We cannot assure any further repurchases will be made under this program and we do not intend to make any further repurchases during the pendency of the Merger. If any repurchases are made, we cannot assure as to the amount or frequency of repurchases we may make under this program.

The table below summarizes the current quarter repurchase history under the share repurchase program (in thousands, except average price paid per share):

		Total Number of Shares		Total Number of Shares		Total Number of Shares		Total Number of Shares
Third Quarter 2011	Total Number of Shares Purchased		Avg. Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Repurchase Program		Approximate Dollar Value of Shares that may Yet be Purchased Under the Repurchase Program
July 1-31		115	$	29.05		115	$	7,506
August 1-31		797		28.22		797		25,004
September 1-30		1		29.48		1		24,992

Total Third Quarter 2011		913	$	28.32		913

In addition to the shares repurchased under the share repurchase program, we withheld 10,742 shares of restricted stock to pay for employee taxes due upon vesting of the restricted stock units during the quarter ended September 30, 2011.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibits

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


Exhibit 2.1		Agreement and Plan of Merger dated as of October 24, 2011, by and among RightNow Technologies, Inc., OC Acquisition LLC and Rhea Acquisition Corporation (1)

Exhibit 3.1		Amended and Restated Certificate of Incorporation of the Registrant. (2)

Exhibit 3.2		Amended and Restated Bylaws of the Registrant. (3)

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 99.1		Form of Voting Agreement and schedule of signatories thereto. (4)

Exhibit 101		The following materials from the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2011, filed with the SEC on November 4, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements. (5)

(1)	Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 000-31321) filed with the Securities and Exchange Commission on October 24, 2011.

(2)	Incorporated by reference to Exhibit 4.2 to the Company’s registration statement on Form S-8 (File No. 333-118515) filed with the Securities and Exchange Commission on August 24, 2004.

(3)	Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 000-31321) filed with the Securities and Exchange Commission on January 25, 2006.

(4)	Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K (File No. 000-31321) filed with the Securities and Exchange Commission on October 24, 2011.

(5)

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURE

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

Dated: November 4, 2011


RightNow Technologies, Inc.
(Registrant)

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

RIGHTNOW TECHNOLOGIES INC - FORM 10-Q - November 4, 2011

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