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RightNow Technologies 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
e10vq
Table of Contents

 
 
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, 2010
or
     
o   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   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
136 Enterprise Boulevard
Bozeman, Montana 59718-9300
(Address of Principal Executive Offices) (Zip Code)
(406) 522-4200
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (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 o No þ
The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 31, 2010 was 32,342,697
 
 

 


 

RightNow Technologies, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2010
INDEX
         
    Page
       
    3  
    3  
    4  
    5  
    6  
    13  
    26  
    27  
       
    27  
    27  
    39  
    39  
    39  
    39  
    40  
    41  
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1

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Part I. FINANCIAL INFORMATION
Item 1.   Financial Statements
RightNow Technologies, Inc.
Condensed Consolidated Balance Sheets
(In thousands) (Unaudited)
                 
    December 31,     September 30,  
    2009     2010  
Assets
               
Cash and cash equivalents
  $ 41,546     $ 77,728  
Short-term investments
    54,977       31,287  
Accounts receivable
    34,267       36,738  
Allowance for doubtful accounts
    (1,914 )     (1,867 )
 
           
Receivables, net
    32,353       34,871  
Deferred commissions
    6,394       5,215  
Prepaid and other current assets
    2,434       3,601  
 
           
Total current assets
    137,704       152,702  
 
           
Property and equipment, net
    10,122       11,063  
Intangible assets, net
    11,141       13,382  
Deferred commissions, non-current
    3,461       3,917  
Other
    2,007       1,125  
 
           
Total Assets
  $ 164,435     $ 182,189  
 
           
Liabilities and Stockholders’ Equity
               
Accounts payable
  $ 5,427     $ 9,165  
Commissions and bonuses payable
    6,271       6,142  
Other accrued liabilities
    11,146       14,260  
Current portion of long-term debt
    22        
Current portion of deferred revenue
    88,603       88,669  
 
           
Total current liabilities
    111,469       118,236  
 
           
Deferred revenue, net of current portion
    12,724       5,394  
Stockholders’ equity:
               
Common stock
    34       34  
Additional paid-in capital
    112,439       125,416  
Treasury stock
    (15,007 )     (15,007 )
Accumulated other comprehensive income
    1,125       1,581  
Accumulated deficit
    (58,349 )     (53,465 )
 
           
Total stockholders’ equity
    40,242       58,559  
 
           
Total Liabilities and Stockholders’ Equity
  $ 164,435     $ 182,189  
 
           
See accompanying notes to condensed consolidated financial statements.

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RightNow Technologies, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts) (Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2010     2009     2010  
Revenue:
                               
Recurring revenue
  $ 29,754     $ 38,613     $ 83,223     $ 106,368  
Professional services
    8,977       9,980       27,885       27,781  
 
                       
Total revenue
    38,731       48,593       111,108       134,149  
Cost of revenue:
                               
Recurring revenue
    5,232       5,923       15,135       17,754  
Professional services
    6,365       8,395       19,719       23,105  
 
                       
Total cost of revenue
    11,597       14,318       34,854       40,859  
 
                       
Gross profit
    27,134       34,275       76,254       93,290  
Operating expenses:
                               
Sales and marketing
    16,175       20,006       47,046       57,507  
Research and development
    5,100       5,160       14,907       15,089  
General and administrative
    4,018       4,975       11,671       13,598  
 
                       
Total operating expenses
    25,293       30,141       73,624       86,194  
 
                       
Income from operations
    1,841       4,134       2,630       7,096  
Interest and other income, net
    342       454       1,094       656  
 
                       
Income before income taxes
    2,183       4,588       3,724       7,752  
Provision for income taxes
    (218 )     (1,693 )     (460 )     (2,868 )
 
                       
Net income
  $ 1,965     $ 2,895     $ 3,264     $ 4,884  
 
                       
Net income per share:
                               
Basic
  $ 0.06     $ 0.09     $ 0.10     $ 0.15  
Diluted
  $ 0.06     $ 0.09     $ 0.10     $ 0.15  
Shares used in the computation:
                               
Basic
    31,733       32,128       31,731       32,020  
Diluted
    32,424       33,659       32,249       33,515  
See accompanying notes to condensed consolidated financial statements.

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RightNow Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2009     2010  
Operating activities:
               
Net income
  $ 3,264     $ 4,884  
Non-cash adjustments:
               
Depreciation and amortization
    5,410       5,749  
Provisions for uncollectible accounts receivable
    117       131  
Stock-based compensation
    6,104       5,718  
Changes in operating accounts:
               
Receivables
    10,731       (1,424 )
Prepaid expenses and other current assets
    (735 )     (1,316 )
Deferred commissions
    (142 )     726  
Accounts payable
    (567 )     3,710  
Commissions and bonuses payable
    (941 )     (122 )
Other accrued liabilities
    415       2,946  
Deferred revenue
    (12,036 )     (7,661 )
Other
    255       157  
 
           
Cash provided by operating activities
    11,875       13,498  
 
           
Investing activities:
               
Net change in investments
    (21,391 )     23,700  
Acquisition of property and equipment
    (3,665 )     (5,475 )
Intangible asset additions
    (244 )     (3,459 )
Business acquisition
    (5,906 )      
 
           
Cash provided (used) in investing activities
    (31,206 )     14,766  
 
           
Financing activities:
               
Proceeds from issuance of common stock under employee benefit plans
    396       4,636  
Excess tax benefits of stock options exercised
    232       2,621  
Common stock repurchased
    (1,798 )      
Payments on long-term debt
    (34 )     (22 )
 
           
Cash provided (used) by financing activities
    (1,204 )     7,235  
Effect of foreign exchange rates on cash and cash equivalents
    1,518       683  
 
           
Increase (decrease) in cash and cash equivalents
    (19,017 )     36,182  
Cash and cash equivalents at beginning of period
    51,405       41,546  
 
           
Cash and cash equivalents at end of period
  $ 32,388     $ 77,728  
 
           
See accompanying notes to condensed consolidated financial statements.

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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™, 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 condensed interim consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
          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, 2010, results of operations for the three and nine month periods ended September 30, 2009 and 2010 and cash flows for the nine month periods ended September 30, 2009 and 2010. The interim period results are not necessarily indicative of the results to be expected for the full year.
          Current and non-current term receivables as of September 30, 2010 were $371,000 and $82,000, respectively. As these amounts were not significant, current term receivables were classified within accounts receivable and non-current term receivables were classified within other non-current assets as of September 30, 2010. For comparability purposes with September 30, 2010, the Company reclassified $2.4 million of current term receivables to accounts receivable, and $1.1 million of non-current term receivables to other non-current assets in the accompanying December 31, 2009 consolidated balance sheet.
          The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Management evaluates these estimates on an on-going basis using historical experience and other factors, including the current economic environment, and management believes these estimates to be reasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile equity, 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 carrying amount of property and equipment and intangible assets, including internal use software 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.

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(2) Certain Risks and Concentrations
          The Company’s revenue is derived from the subscription, license, hosting and support of its software products and provision of related professional services. The markets in which the Company competes are highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect the Company’s operating results. The Company has historically derived a majority of its revenue from customer 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 harmed by a decline in demand for, or in the prices of, these products or as a result of, among other factors, any change in pricing model, a maturation in the markets for these products, increased price competition or a failure by the Company to keep up with technological change.
          Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts and term receivables. The Company maintains cash, cash equivalents, and short-term investments with various domestic and foreign financial institutions. The 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 70% of total revenue in North America, 19% EMEA and 11% in Asia Pacific on a trailing twelve month basis.
          No individual customer accounted for more than 10% of the Company’s revenue in 2009 or the three and nine months ended September 30, 2010. No individual customer accounted for more than 10% of the Company’s accounts receivable at December 31, 2009, and one individual customer accounted for approximately 11% of the Company’s accounts receivables at September 30, 2010.
          As of December 31, 2009 and September 30, 2010, assets located outside North America were 18% and 22% of total assets, respectively. The income (loss) from operations outside of North America totaled $(688,000) and $1.2 million for the nine months ended September 30, 2009 and 2010, respectively. Revenue by geographical region follows (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2010     2009     2010  
North America
  $ 27,737     $ 33,389     $ 81,120     $ 93,806  
EMEA
    7,441       9,304       20,713       25,678  
Asia Pacific
    3,553       5,900       9,275       14,665  
 
                       
 
  $ 38,731     $ 48,593     $ 111,108     $ 134,149  
 
                       
(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 sold under subscription arrangements and, to a lesser extent, license arrangements. Hosting and support services involve the remote management of the software, technical assistance, and unspecified product upgrades and enhancements on a when and if available basis. Professional services include consulting, training and development services.
          The Company recognizes revenue for subscriptions and licenses when all of the following criteria are met: a) the Company has entered into a legally binding agreement with the customer; b) the software has been made available or delivered to the customer; c) the Company’s fee for providing the software and services is fixed or determinable; and d) collection of the Company’s fee is probable. 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.
          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

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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, and 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 are recognized over the contractual period and professional services are recognized as incurred 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 contracts are non-cancelable, and generally cover a period of two years, but can range from a period of six months to five years. For term contracts, the Company treats the software license, hosting and support services as single element for purposes of allocating revenue. The Company has established vendor specific objective evidence of fair value for the term license bundle based on stand-alone sales of the bundled items. When sold with professional services, revenue is allocated between the software license, hosting and support element and the professional services element using the relative fair value method. Revenue for the term license element is recognized ratably over the period of the arrangement and revenue for professional services in these arrangements is recognized as performed.
          The 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 performed, 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 $4.0 million and $4.6 million for the three months ended September 30, 2009 and 2010, respectively. Sales incentive expense was $10.2 million and $12.8 million for the nine months ended September 30, 2009 and 2010, respectively. Deferred commissions at December 31, 2009 and September 30, 2010 were $9.9 million and $9.1 million, respectively.

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(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 software, hosting and support revenue, on a straight-line basis, over the estimated useful lives of the related applications which is approximately three years. Capitalized cost of internally developed computer software was approximately $550,000 and approximately $4.0 million as of December 31, 2009 and September 30, 2010, respectively. The capitalized costs are included in intangible assets, net on the Company’s Consolidated Balance Sheets.
(6) 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   Nine Months Ended
    September 30,   September 30,
    2009   2010   2009   2010
Weighted average common shares outstanding for basic net income per share
    31,733       32,128       31,731       32,020  
Effect of dilutive securities:
                               
Employee stock awards
    691       1,531       518       1,495  
 
                               
Weighted average shares outstanding for dilutive net income per share
    32,424       33,659       32,249       33,515  
 
                               
          The following common stock equivalents were excluded from the computation of diluted earnings per share because their impact was anti-dilutive (in thousands):
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2010   2009   2010
Employee stock options
    5,393       4,878       5,566       4,914  
(7) Comprehensive Income
          Comprehensive income for the comparative periods was as follows (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2010     2009     2010  
Net income
  $ 1,965     $ 2,895     $ 3,264     $ 4,884  
Other comprehensive income:
                               
Unrealized gain (loss) on short-term investments
    (36 )     (20 )     158       22  
Foreign currency translation adjustments
    171       488       (679 )     434  
 
                       
Comprehensive income
  $ 2,100     $ 3,363     $ 2,743     $ 5,340  
 
                       
(8) 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

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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, 2010 (in thousands):
                                 
    Level 1     Level 2     Level 3     Total  
Cash
  $ 67,345     $     $     $ 67,345  
Money Market funds
    10,896                   10,896  
Corporate notes and bonds
          4,825             4,825  
U.S. Government agency securities
          25,005             25,005  
State and Municipal securities
          944             944  
 
                       
 
  $ 78,241     $ 30,774     $     $ 109,015  
 
                       
          During the second quarter of 2010, the Company’s remaining $2.85 million of auction rate securities (“ARS”) were redeemed by the issuers in addition to $950,000 redeemed during the first quarter of 2010. The redemption during the second quarter was at par. The following table illustrates the activity of “level 3” assets from December 31, 2009 to September 30, 2010 and comparative activity of “level 3” assets from December 31, 2008 to September 30, 2009 (in thousands):
         
Fair value at December 31, 2009
  $ 3,797  
Unrealized gain adjustment—ARS
    109  
Unrealized loss adjustment—put option
    (106 )
Redemptions
    (3,800 )
 
     
Fair value at September 30, 2010
  $  
 
     
 
       
Fair value at December 31, 2008
  $ 4,963  
Unrealized gain adjustment—ARS
    428  
Unrealized loss adjustment—put option
    (397 )
Redemptions
    (598 )
 
     
Fair value at September 30, 2009
  $ 4,396  
 
     
(9) 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

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the life of the award and the stock price volatility over the term of the award. The Company records compensation cost of stock-based awards using the straight line method, which is recorded into earnings over the vesting period of the award.
          The following table illustrates the stock-based compensation expense resulting from stock-based awards included in the condensed consolidated statement of operations (amounts in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
Stock-based compensation expense:   2009     2010     2009     2010  
Cost of recurring revenue
  $ 120     $ 127     $ 358     $ 357  
Cost of professional services
    138       128       480       364  
Sales and marketing expenses
    761       818       2,335       2,295  
Research and development expenses
    285       254       924       751  
General and administrative expenses
    548       875       2,007       1,951  
 
                       
Stock-based compensation expense
  $ 1,852     $ 2,202     $ 6,104     $ 5,718  
          Stock-based compensation expense capitalized during the nine months ended September 30, 2009 and September 30, 2010 was insignificant.
          Unrecognized compensation expense of outstanding equity awards at September 30, 2010 was approximately $15.3 million, which is expected to be recognized over a weighted average period of 2.5 years.
          Information regarding the fair value of stock options granted, and the weighted-average assumptions used to obtain the fair values, for the respective periods follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2010   2009   2010
Fair value per share
  $ 6.60     $ 7.69     $ 4.66     $ 7.80  
Risk free rate
    2.21 %     1.6 %     1.71 %     1.9 %
Expected term
  4.4 yrs   4.5 yrs   4.4 yrs   4.5 yrs
Volatility
    66 %     63 %     67 %     64 %
Dividend yield
    0 %     0 %     0 %     0 %
          Key assumptions used to estimate the fair value of stock awards are as follows:
          Risk Free Rate: The risk-free rate is determined by reference to the U.S. Treasury yield curve in effect at or near the time of grant for the expected term of the award.
          Expected Term: The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual term of the awards, vesting schedules and expectations of employee exercise behavior.
          Volatility: The Company’s estimate of expected volatility is based on the historical volatility of the Company’s common stock over the expected life of the options as this represents the Company’s best estimate of future volatility.
          Dividend Yield: The dividend yield assumption is based on the Company’s history and expectation of not paying dividends.

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          Activity under the Company’s stock option plans for the nine months ended September 30, 2010 was as follows (option shares in thousands):
                                         
                    Weighted             Weighted  
                    average     Aggregate     average  
    Shares             exercise     intrinsic     remaining  
    available     Outstanding     price per     value (in     contractual  
    for grant     options     share     thousands)     life (in years)  
Balance at December 31, 2009
    2,774       5,947     $ 10.96               7.2  
Annual reserve addition (1)
    1,000                              
Granted
    (1,299 )     1,281       14.89                  
Exercised
          (436 )     10.50                  
Forfeited, expired, exchanged or canceled (2)
    184       (181 )     13.32                  
 
                                   
Balance at September 30, 2010
    2,659       6,611     $ 11.69     $ 92,950       7.1  
 
                               
Vested or expected to vest at September 30, 2010
            6,409     $ 11.66     $ 90,310       7.0  
 
                                 
Exercisable at September 30, 2010
            3,783     $ 11.45     $ 54,099       6.0  
 
                                 
 
(1)   The 2004 Equity Incentive Plan provides for an automatic, annual increase on the first of each year in an amount equal to the lesser of: a) 1,000,000 shares; b) 4% of the number of outstanding common shares on the last day of the previous fiscal year; or c) such lesser amount as determined by the board of directors. The annual automatic increase has been approved by shareholders through December 31, 2014.
 
(2)   Shares forfeited, expired, exchanged or canceled under the 1998 Long-Term Equity Incentive and Stock Option Plan are not available for re-grant under the 2004 Equity Incentive Plan.
          The total intrinsic value of options exercised during the nine months ended September 30, 2009 and 2010 was $888,000 and $2.9 million, respectively.
(10) Common Stock Repurchase Program
          On July 28, 2010, the Company announced that its Board of Directors had authorized a stock repurchase program under which up to $10 million of RightNow’s common stock may be repurchased. 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. The repurchase program became effective on August 2, 2010 and will expire in two years. Any shares repurchased will be held in treasury. RightNow expects to fund such repurchases through its cash and short-term investments, which as of September 30, 2010 were $109.0 million. The Company cannot assure any repurchases will be made under this program. If any repurchases are made, the Company cannot assure as to the amount or frequency of repurchases RightNow may make under this program.
          As of September 30, 2010, the Company had not repurchased any common stock under this program.
(11) 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 liabilities related to such obligations in the accompanying consolidated financial statements.
          The Company has entered into service level agreements with a number of its customers warranting certain levels of uptime reliability and permitting those customers to receive credits or terminate their 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.

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          The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request.
Litigation
          From time to time, the Company is involved in legal proceedings arising in the normal course of business. The Company believes that the resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of operations or liquidity.
(12) Income Taxes
          The Company computes its provision for income taxes on a quarterly basis by applying the estimated annual effective tax rate to income from recurring operations and other taxable items. The provision for income taxes of $1.7 million and $2.9 million in the three and nine months ended September 30, 2010, respectively, consists primarily of U.S. federal taxes, foreign tax withholdings and various state income taxes. The Company’s effective tax rate differs from the federal statutory rate primarily due to the utilization of net operating loss carryforwards, state and foreign taxes, 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, 2010. As of December 31, 2009 and September 30, 2010, the Company had an insignificant amount of unrecognized tax benefits associated with uncertain tax positions, none of which would materially affect its effective tax rate if recognized. The Company does not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits as interest expense and other expense, respectively, in its Consolidated Statements of Operations. The amount of interest and penalties for the three and nine months ended September 30, 2010 was insignificant. Tax years beginning in 2005 are subject to examination by taxing authorities, although net operating loss and credit carry forwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. The jurisdictions which could be subject to examination include the U.S., Montana, Illinois, California, Massachusetts, New York, United Kingdom, Germany, Australia, Japan, Canada and the Netherlands.
(13) Subsequent Events
          The Company accounts for its subsequent events in accordance with FASB Accounting Standards Codification, Topic 855, Subsequent Events.
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
          In this report, the terms “RightNow Technologies,” “RightNow,” “Company,” “we,” “us” and “our” refer to RightNow Technologies, Inc. and its subsidiaries.
Cautionary Statement
          All statements included or incorporated by reference in this report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words, and include, but are not limited to, statements regarding projected results of operations, management’s future strategic plans, market acceptance and performance of our products, our ability to retain and hire key executives, sales and technical personnel and other employees in the

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numbers, with the capabilities, and at the compensation levels needed to implement our business and product plans, the competitive nature of and anticipated growth in our markets, our accounting estimates, and 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, general economic conditions; fluctuations in foreign currency exchange rates; our business model; our ability to develop or acquire and gain market acceptance for new products and enhancements to existing products in a cost-effective and timely manner; fluctuations in our earnings as a result of potential changes to our valuation allowance(s) on our deferred tax assets; competitive pressures and other similar factors such as the availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; our ability to expand or contract operations, manage expenses and grow profitability; the rate at which our present and future customers adopt our existing and future products and services; fluctuations in our operating results including our revenue mix and our rate of growth; fluctuations in backlog; the risk that our investments in partner relationships and additional employees will not achieve expected results; interruptions or delays in our hosting operations; breaches of our security measures; our ability to protect our intellectual property from infringement, and to avoid infringing on the intellectual property rights of third parties; 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 impact of potential future acquisitions, if any; and various other factors, some of which are described under the section below entitled “Risk Factors,” in Item 1A of this report. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
Overview
          RightNow Technologies (“we,” “us,” “our,” the “Company” or “RightNow”) provides RightNow CX, an on-demand (“cloud-based”) suite of customer experience software and services that helps consumer-centric organizations improve customer experiences, reduce costs and increase revenue. In today’s competitive business environment, we believe providing superior customer experiences can be a powerful way for companies to drive sustainable differentiation. We help organizations deliver exceptional customer experiences across the web, social networks and contact centers. 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 cloud-based delivery approach, we are able to eliminate much of the complexity associated with traditional on premise solutions, implement rapidly, and price our solutions at a level that results in a lower cost of ownership compared to on premise solutions. Our value-added services, including business process optimization and product tune-ups, are directed toward improving our customers’ efficiency, increasing user adoption and assisting our customers to maximize the return on their investment. Approximately 1,900 corporations and government agencies worldwide depend on RightNow to help them achieve their strategic objectives and better meet the needs of those they serve.
          We released our initial version of RightNow Service™ in 1997. This product addressed the new customer service needs resulting from the increasing use of the Internet as a customer service channel. Since then, we have significantly enhanced product features and functionality to address customer service needs across multiple communication channels, including web, interactive voice, email, chat, telephone, proactive outbound email communications, and social interactions. We have also added several products that are complementary to our RightNow Service solution, including RightNow Marketing™, RightNow Sales™, RightNow Feedback™, RightNow Cloud Monitor™ and RightNow Social™, which automate aspects of marketing campaigns, sales operations, customer monitoring, and customer conversations within the cloud. These solutions have culminated in RightNow CX, a fully integrated customer experience platform, which includes and integrates web, social and contact center experiences. We believe RightNow CX helps consumer-centric organizations deliver customer experiences that build loyalty, drive revenue, reduce costs and increase efficiency. We have a release cycle which allows us to deliver new product capabilities to customers every three months. During the third quarter of 2010, we released RightNow CX August 2010, with such features as Cloud Services Portal, which provides IT departments with up-to-the-moment, 24x7 detailed visibility into key operation metrics about their RightNow Cloud Platform operations; enhanced translation services via partner Language Weaver; chat, email, and guided assistance for mobile consumers; Cisco UCCE (Unified Contact Center Enterprise) integration; enhanced community moderation features and topic monitoring for Cloud Monitor; and recurring marketing campaigns in our marketing automation solution.

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          Our products served more than 780 million customer interactions, or unique sessions hosted by our solutions, during the three months ended September 30, 2010. We sell our solutions primarily through direct sales efforts and to a lesser extent through indirect channels.
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 which is physically located in third party facilities. Customers’ access hosted software and data through a secure Internet connection. Support services include technical assistance for our software products and unspecified product upgrades and enhancements on a when and if available basis.
          License arrangements are also for a fixed term (a “term” license). For term licenses, software, hosting and support revenue is recognized ratably over the length of the agreement.
          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 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.
          Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, product management expenses, travel costs and allocated overhead. For subscription arrangements, we expense the related sales commission in proportion to the revenue recognized. We expense our sales commissions on license and professional service arrangements when earned, which is typically at the time the related sale is invoiced to the client.
          Research and Development Expenses. Research and development expenses consist primarily of salary and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, translation fees, quality assurance, testing and allocated overhead. 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 $550,000 and $4.0

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million of cost of internally developed computer software as of December 31, 2009, and September 30, 2010, 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 capitalized cost of internally developed computer software will increase as we continue to sell and deliver our solution as a service.
          General and Administrative Expenses. General and administrative expenses consist primarily of salary and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate expenses and allocated overhead.
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 carrying amount of 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.

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          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 have established a valuation allowance equal to our net deferred tax assets due to uncertainties regarding the realization of our net operating loss carryforwards, tax credits, and deductible timing differences. The uncertainty of realizing these benefits has been based primarily on our lack of taxable earnings. We continue to monitor the necessity for a full or partial valuation allowance against our deferred tax assets.
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 Consolidated Balance Sheets.

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          Industry Topic 985, Software, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. We establish technological feasibility upon completion of a working model. Historically, the period between achieving technological feasibility and general availability of such software has been short and software development costs qualifying for capitalization have been immaterial. Accordingly, we have not capitalized any software development costs under this standard.
Recently Issued Accounting Standards
          Not applicable.
Results of Operations
          The following table sets forth certain consolidated statements of operations data for each of the periods indicated, expressed as a percentage of total revenue:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2010   2009   2010
Revenue:
                               
Recurring revenue
    77 %     79 %     75 %     79 %
Professional services
    23       21       25       21  
 
                               
Total revenue
    100       100       100       100  
 
                               
Cost of revenue:
                               
Recurring revenue
    14       12       14       13  
Professional services
    16       17       18       17  
 
                               
Total cost of revenue
    30       29       32       30  
 
                               
Gross profit
    70       71       68       70  
Operating expenses:
                               
Sales and marketing
    42       41       42       43  
Research and development
    13       11       13       11  
General and administrative
    10       10       11       10  
 
                               
Total operating expenses
    65       62       66       64  
 
                               
Income from operations
    5       9       2       6  
Interest and other income, net
    1             1        
 
                               
Income before income taxes
    6       9       3       6  
Provision for income taxes
    (1 )     (3 )     (— )     (2 )
 
                               
Net income
    5 %     6 %     3 %     4 %
 
                               
          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     Nine Months Ended  
    September 30,     September 30,  
    2009     2010     2009     2010  
Revenue by type:
                               
Recurring (subscriptions, term licenses, hosting and support)
    77 %     79 %     75 %     79 %
Professional services
    23       21       25       21  
Revenue by geography:
                               
North America
    72 %     69 %     73 %     70 %
EMEA
    19       19       19       19  
Asia Pacific
    9       12       8       11  
Quarter Overview
          Total revenue for the third quarter of 2010 increased 25% over the third quarter of 2009, driven by our growth in recurring revenue. Recurring revenue increased 30% compared to the third quarter of 2009, due to expansion within the current customer base, new customer acquisitions, timing of contracts signed in quarter and more usage fees in quarter. Professional services revenue during

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the third quarter of 2010 increased 11%, due to greater billable utilization and several projects with higher rates per hour delivered during the quarter ended September 30, 2010 as compared to the quarter ended September 30, 2009.
          During the third quarter of 2010, we continued to invest in our operations by adding sales and marketing personnel to increase sales, and by increasing headcount to assist with delivering our solutions and technical support. We invested in our research and development group to continue to enhance and expand RightNow CX, however research and development expense increases were offset primarily due to capitalized cost of internal use computer software. These factors increased total expenses in absolute dollars, but total expenses were reduced as a percentage of revenue during the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 due to the accelerated growth in recurring revenue. Consequently, our operating income as a percentage of revenue improved to 9% during the quarter ended September 30, 2010 compared to 5% during the quarter ended September 30, 2009.
          For the quarter ended September 30, 2010, we generated $6.0 million of cash from operations compared to $4.9 million of cash from operations in the quarter ended September 30, 2009. Our cash and investment balances increased to $109.0 million at September 30, 2010 from $96.5 million at December 31, 2009, partially due to $13.5 million of cash generated from operations year to date and $7.3 million of proceeds from stock option exercises and excess tax benefits of stock options exercised, offset by the use of $5.5 million for capital asset additions and $3.5 million for intangible asset additions through the nine months ended September 30, 2010.
          During the quarter ended September 30, 2010, foreign currency fluctuations did not have a significant impact on our financial results on a constant currency basis, when comparing the average exchange rates during the quarter ended September 30, 2009 to the average exchange rates during the quarter ended September 30, 2010. However, during the nine months ended September 30, 2010, foreign currency rate fluctuations did have a significant impact on our financial results on a constant currency basis, when comparing the average exchange rates during the nine months ended September 30, 2009 to the average exchange rates during the nine months ending September 30, 2010.
          When compared to the nine months ended September 30, 2009, 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, 2010 relative to the British pound, Australian dollar and Euro. Therefore, we discuss constant currency information for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, 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 nine months ended September 30, 2010 increased by $23.0 million, or 21%, over total revenue reported in the same period of 2009. If average currency exchange rates in the nine months ended September 30, 2010 had remained constant with the nine months ended September 30, 2009, revenue for the nine months ended September 30, 2010 would have increased by approximately $21.9 million, which is $1.1 million less than the actual increase. In other words, the change in exchange rates between the nine months ended September 30, 2009 and 2010 had a favorable impact on revenue of approximately $1.1 million, or 1%. The revenue most significantly exposed to currency exchange fluctuations is within recurring revenue.
          Using similar methodology, the change in period-end exchange rates between the year ended December 31, 2009 and quarter ended September 30, 2010 had a favorable impact on deferred revenue of approximately $470,000.
          Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to offset the revenue impact. Total cost of revenue and operating expenses in the nine months ended September 30, 2010 increased by $18.6 million, or 17%, over total cost of revenue and operating expenses in the nine months ended September 30, 2009. If currency exchange rates in the nine months ended September 30, 2010 had remained constant with the same period of 2009, these total expenses in the nine months ended September 30, 2010 would have increased by approximately $18.0 million, which is $600,000 less than the actual increase. In other words, the change in average exchange rates between the nine months ended September 30, 2009 and the nine months ended September 30, 2010 increased these total expenses by approximately $600,000. The expenses most significantly exposed to currency exchange fluctuations are generally within sales and marketing and professional services cost of revenue.
          As of September 30, 2010, we had an accumulated deficit of $53.5 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.

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Backlog
          Total backlog is as follows (in thousands):
                 
    December 31     September 30,  
    2009     2010  
Current committed backlog
  $ 117,600     $ 122,273  
Non-current committed backlog
    57,020       34,848  
 
           
Total firm committed backlog
    174,620       157,121  
Current backlog subject to termination for convenience
    3,400       11,900  
Non-current backlog subject to termination for convenience
    1,980       83,313  
 
           
Total backlog
  $ 180,000     $ 252,334  
 
           
          Total backlog, which represents total invoiced and uninvoiced deferred revenue, was approximately $180.0 million and approximately $252.3 million as of December 31, 2009 and September 30, 2010, respectively. Current total backlog, which is the portion of backlog expected to be recognized as revenue within the next twelve months, was approximately $121.0 million and approximately $134.2 million as of December 31, 2009 and September 30, 2010, respectively.
          In January 2010, we introduced the Cloud Services Agreement (CSA), which includes longer terms and annual customer termination for convenience provisions. As expected, due to the introduction of the CSA, our uncommitted backlog increased during the quarter ended September 30, 2010 as compared to the year ended December 31, 2009. 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. As expected, due in part to including unexercised options under the federal government multi-year award contracts within backlog, our uncommitted backlog increased during the quarter ended September 30, 2010 as compared to the year ended December 31, 2009.
          We have not had specific experience with the CSA to estimate a percentage of customers that may exercise the right to annual termination for convenience, and therefore we can provide no 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. As a result of the CSA and multi-year award contracts with the federal government, we expect the proportion of total backlog that is uncommitted 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 (non-CSA agreements). In the case of federal government customers, some of the business that is contracted with this group falls under the termination for convenience guidelines as set forth in the Federal Acquisition Regulations (FARs). The FARs allow the federal government at its option to terminate these arrangements. The majority of our business with the federal government is sold through reseller arrangements that do not include termination for convenience provision(s). A minority of our arrangements are sold either directly to the federal government or through resellers under contracts that do include a right of termination for convenience in accordance with the applicable FARs. We treat this backlog as uncommitted.
          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. 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.

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Three and Nine Months Ended September 30, 2010 and 2009
Revenue
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
                    Percent                     Percent  
(Amounts in thousands)   2009     2010     Change     2009     2010     Change  
Recurring revenue:
  $ 29,754     $ 38,613       30 %   $ 83,223     $ 106,368       28 %
Professional services
    8,977       9,980       11       27,885       27,781       0  
 
                                       
Total revenue
  $ 38,731     $ 48,593       25 %   $ 111,108     $ 134,149       21 %
 
                                       
          Total revenue for the three months ended September 30, 2010 was $48.6 million, an increase of $9.9 million, or 25%, over total revenue of $38.7 million for the three months ended September 30, 2009. Total revenue for the nine months ended September 30, 2010 was $134.1 million, an increase of $23.0 million, or 21%, over total revenue of $111.1 million for the nine months ended September 30, 2009. If average currency exchange rates in the nine months ended September 30, 2010 had remained constant with the average currency exchange rates in the nine months ended September 30, 2009, revenue during the first nine months of 2010 would have increased by approximately $21.9 million, which is $1.1 million less than the actual increase, with the majority of the currency rate impact within recurring revenue.
          Recurring revenue, which is comprised of subscriptions, term licenses, hosting and support revenue for the three months ended September 30, 2010, increased 30% over recurring revenue of $29.8 million for the three months ended September 30, 2009. Recurring revenue increased primarily due to expansion within the current customer base, new customer acquisitions, timing of contracts signed in quarter and more usage fees in quarter. We believe our latest product, RightNow CX, 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 generally 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. Customer interactions, a measure of unique customer sessions hosted in our data centers and customer usage, was 786 million in the quarter ended September 30, 2010 as compared to 620 million in the quarter ended September 30, 2009.
          For the nine months ended September 30, 2010, recurring revenue increased $23.1 million, or 28%, over recurring revenue of $83.2 million for the nine months ended September 30, 2009. If average currency exchange rates in the nine months ended September 30, 2010 had remained constant with the average currency exchange rates in the nine months ended September 30, 2009, recurring revenue during the first nine months of 2010 would have increased by $22.3 million, which is $800,000 less than the actual increase. Recurring revenue increased due to expansion sales within our existing customer base and new customer acquisitions over the comparable period.
          Professional services revenue increased $1.0 million, or 11%, in the quarter ended September 30, 2010 over the comparable 2009 quarter. The professional services revenue increase was primarily due to greater billable utilization and several projects with higher rates per hour delivered during the period ended September 30, 2010 as compared to the period ended September 30, 2009. Professional services revenue represented 21% and 23% of total revenue in the three months ended September 30, 2010 and 2009, respectively. Professional services revenue represented 21% and 25% of total revenue in the nine months ended September 30, 2010 and 2009, respectively. The decline in professional services as a percentage of total revenue was due to the growth in recurring revenue in the nine months ended September 30, 2010 over September 30, 2009.
          Professional services revenue for the nine months ended September 30, 2010 decreased $104,000 over the nine months ended September 30, 2009. If average currency exchange rates in the nine months ended September 30, 2010 had remained constant with the average currency exchange rates in the nine months ended September 30, 2009, professional services revenue during the first nine months of 2010 would have decreased by approximately $444,000, which is a $340,000 greater decline than the actual decrease. The professional services revenue decline was primarily due to the timing of the mix of projects being delivered and several projects with lower rates per hour delivered during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009.
          Customers generally purchase professional services with initial subscription or license arrangements, and periodically over the life of the contract.
          Revenue from EMEA customers remained constant at 19% of total revenue in the quarters ended September 30, 2010 and September 30, 2009, while revenue from Asia Pacific clients increased to 12% of total revenue in the quarter ended September 30,

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2010 compared to 9% of total revenue in the quarter ended September 30, 2009. Total revenue outside North America increased to represent 31% of total revenue for the three months ended September 30, 2010 from 28% for the three months ended September 30, 2009, due primarily to sales expansion in the Asia Pacific region during the third quarter of 2010. Total revenue outside North America increased to represent 30% of total revenue for the nine months ended September 30, 2010 from 27% for the nine months ended September 30, 2009, due to favorable foreign currency exchange rate impact and sales expansion in these regions during the first nine months of 2010.
Cost of Revenue
                                         
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
                    Percent                   Percent
(Amounts in thousands)   2009     2010     Change   2009     2010     Change
Recurring revenue
  $ 5,232     $ 5,923     13%   $ 15,135     $ 17,754     17%
Professional services
    6,365       8,395     32     19,719       23,105     17
 
                               
Total cost of revenue
  $ 11,597     $ 14,318     23%   $ 34,854     $ 40,859     17%
 
                               
          Total cost of revenue for the quarter ended September 30, 2010 was $14.3 million, an increase of $2.7 million, or 23%, over total cost of revenue of $11.6 million for the quarter ended September 30, 2009. Total cost of revenue for the nine months ended September 30, 2010 was $40.9 million, an increase of $6.0 million, or 17%, over total cost of revenue of $34.9 million for the nine months ended September 30, 2009.
          Cost of recurring revenue increased $691,000, or 13%, in the third quarter of 2010 over the third quarter of 2009, primarily due to increased headcount to assist with technical support and delivering our solutions and annual merit increases, which increased salaries and related expenses (such as bonuses and stock-based compensation) by $196,000. We incurred $149,000 of third-party contractor expenses to assist our upgrade team, and intangible asset amortization of $131,000 associated with the HiveLive acquisition and capitalized cost of internally developed computer software.
          Average employee count in our hosting and technical support operations was 116 during the third quarter of 2010 as compared to 102 during the third quarter of 2009. As a percent of the associated revenue, recurring revenue costs were 15% in the three months ended September 30, 2010 as compared to 18% of associated revenue in the three months ended September 30, 2009. The reduction in the cost of recurring revenue as a percentage of associated revenue was due to our growth in recurring revenue.
          For the nine months ended September 30, 2010, cost of recurring revenue increased $2.6 million, or 17%, from the comparable 2009 period due to increased hosting and telecom maintenance, headcount and amortization expense. As a percent of the associated revenue, recurring revenue costs were 17% in the nine months ended September 30, 2010 as compared to 18% of associated revenue in the nine months ended September 30, 2009. The reduction in the cost of recurring revenue as a percentage of associated revenue was due to our growth in recurring revenue.
          Cost of professional services increased $2.0 million, or 32%, in the quarter ended September 30, 2010 over the quarter ended September 30, 2009. The increased expense was due to increased headcount to assist with professional service implementations, annual merit increases, bonus achievement and increases in common expense allocation (such as payroll taxes, benefits, office rent, supplies and other overhead expenses), which increased expenses by $1.0 million. Additionally, expenses increased $704,000 as we utilized third-party professional services to assist with delivering our solution, and travel related expenses increased $228,000 to assist with delivering our solutions. Average employee count in our professional services organization increased to 183 during the third quarter of 2010 from 164 during the third quarter of 2009. As a percent of the associated revenue, professional services costs increased to 84% and 83% in the three and nine months ended September 30, 2010, respectively, from 71% in the three and nine months ended September 30, 2009, respectively. The increase in the professional service costs as a percentage of associated revenue was primarily due to increased costs due to increased headcount during the nine months ended September 30, 2010, annual merit increases, third-party professional service costs, and increased travel and travel related expenses. Employee training, customer scheduling requirements, and use of third-party resources can cause fluctuation in professional service costs as a percentage of associated revenue.
          For the nine months ended September 30, 2010, cost of professional services increased $3.4 million, or 17%, from the comparable 2009 period, of which $240,000 was attributable to unfavorable foreign currency exchange rate impact. If average

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currency exchange rates in the nine months ended September 30, 2010 had remained constant with the nine months ended September 30, 2009, cost of professional services in the nine months ended September 30, 2010 would have increased $3.2 million, which is $240,000 less than the actual increase. In other words, the change in average exchange rates between the year ended September 30, 2009 and the year ended September 30, 2010 increased these total expenses by approximately $240,000, or 1%. The increase in the professional service costs from the comparable 2009 period was primarily due to unfavorable foreign currency exchange rate impact, increased staffing costs, and annual merit increases.
Operating Expenses
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
                    Percent                     Percent  
(Amounts in thousands)   2009     2010     Change     2009     2010     Change  
Sales and marketing
  $ 16,175     $ 20,006       24 %   $ 47,046     $ 57,507       22 %
Research and development
    5,100       5,160       1       14,907       15,089       1  
General and administrative
    4,018       4,975       24       11,671       13,598       17  
 
                                       
Total operating expenses
  $ 25,293     $ 30,141       19 %   $ 73,624     $ 86,194       17 %
 
                                       
Sales and Marketing Expenses
          Sales and marketing expenses were $20.0 million in the third quarter of 2010, an increase of $3.8 million, or 24%, over sales and marketing expenses of $16.2 million in the third quarter of 2009. The increase was due to growth in headcount and annual merit increases, which increased salaries and related expenses by $1.1 million. The increase in headcount also increased common expense allocation by $425,000 during the third quarter of 2010. Additionally, the increase was due to commission expense growth from associated revenue growth over the past six quarters including the quarter ended September 30, 2010, which increased net sales incentive expense by approximately $582,000. Average employee count in our sales and marketing organization increased to 292 during the third quarter of 2010 from 261 during the third quarter of 2009. RightNow and RightNow CX related marketing efforts, including RightNow customer service video week contest, increased expenses approximately $707,000, as we have focused on building greater brand awareness during 2010. Travel and travel related expenses increased approximately $516,000 as sales increased in the quarter ended September 30, 2010 over the quarter ended September 30, 2009.
          Sales and marketing expenses were $57.5 million for the nine months ended September 30, 2010, an increase of $10.5 million, or 22%, over sales and marketing expense of $47.0 million for the nine months ended September 30, 2009. Unfavorable foreign currency exchange rate impact increased sales and marketing expense by $366,000. If average currency exchange rates in the nine months ended September 30, 2010 had remained constant with the average currency exchange rates in the nine months ended September 30, 2009, sales and marketing expenses during the nine months in 2010 would have increased by approximately $10.1 million, or 1%. The sales and marketing expense increase was primarily due to increased headcount and growth in commission expense, which increased salaries, related expenses, allocations and commission expense by $6.1 million, during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. Additionally, travel and travel related expenses increased approximately $1.0 million as sales increased during the nine months ended September 30, 2010 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 $4.0 million and $4.6 million for the three months ended September 30, 2009 and 2010, respectively. Net sales incentive expense was $10.2 million and $12.8 million for the nine months ended September 30, 2009 and 2010, respectively. Our deferred commissions were $9.9 million and $9.1 million at December 31, 2009 and September 30, 2010, respectively.
Research and Development Expenses
          Research and development expenses were $5.2 million in the three months ended September 30, 2010, an increase of approximately $60,000, or 1%, over research and development expenses of $5.1 million in the three months ended September 30, 2009. The increase was primarily due to growth in headcount to continue to enhance and expand RightNow CX, which increased salaries and related expenses by $703,000 and increased common expense allocation by $223,000 during the third quarter of 2010. These costs were primarily offset by capitalized cost of internally developed computer software, which increased $977,000 over the

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same period last year. Average employee count in our research and development organization was 180 during the third quarter of 2010 compared to 158 during the third quarter of 2009. Research and development expenses for the nine months ended September 30, 2010 increased $182,000, or 1%, over the comparable 2009 period primarily due to growth in headcount and expenditures pertaining to enhancing and expanding RightNow CX. These costs were offset by capitalized cost of internally developed computer software, which increased $3.3 million over the same period last year.
General and Administrative Expenses
          General and administrative expenses were $5.0 million in the third quarter of 2010, an increase of approximately $1.0 million, or 24%, over general and administrative expenses of $4.0 million in the third quarter of 2009. The increase was primarily due to growth in headcount and annual merit increases, which increased salaries and related expenses by $746,000 and increased common expense allocation by $101,000. Additionally charitable contributions increased $300,000 in the third quarter of 2010 as compared to the third quarter of 2009. Average employees in our general and administrative organization were 97 during the third quarter of 2010 compared to 86 during the third quarter of 2009. General and administrative expenses for the nine months ended September 30, 2010 were $13.6 million, or 17% over the comparable 2009, which was primarily due to growth in headcount and annual merit increases.
Stock-Based Compensation Expense
          Total stock-based compensation expense for the three months ended September 30, 2010 was $2.2 million as compared to $1.9 million for the three months ended September 30, 2009. Stock-based compensation was higher for the three months ended September 30, 2010 primarily due to the difference in the timing of the vesting of director stock option grants as compared to the quarter ended September 30, 2009. Stock-based compensation was $5.7 million for the nine months ended September 30, 2010 as compared to $6.1 million for the nine months ended September 30, 2009. Stock-based compensation was higher for the nine months ended September 30, 2009 primarily due to a change in estimate associated with forfeiture rates during the third quarter of 2009, combined with additional stock option grants made to directors during the first quarter of 2009. Stock-based compensation expense varies from period-to-period because of the number of option shares that are expected to vest, forfeiture rates, and changes in our underlying stock price and valuation assumptions.

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Interest and Other Income, Net
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
                    Percent                     Percent  
(Amounts in thousands)   2009     2010     Change     2009     2010     Change  
Interest income
  $ 248     $ 111       (55 )%   $ 866     $ 425       (51 )%
Interest expense
    (1 )           n/m       (6 )           n/m  
Other income (expense)
    95       343       261       234       231       (1 )
 
                                       
Total interest and other income , net
  $ 342     $ 454       33 %   $ 1,094     $ 656       (40 )%
 
                                       
          Interest income decreased 55% in the third quarter of 2010 from the third quarter of 2009 due to declining investment yields. Our investment portfolio consists primarily of short-term investment-grade interest-bearing government securities, and corporate debt instruments.
          Other income consists primarily of a gain on currency exchange rates in the third quarter of 2010.
Provision for Income Taxes
          The provision for income taxes of $1.7 million and $2.9 million in the three and nine months ended September 30, 2010, respectively, consists primarily of U.S. federal taxes, foreign tax withholdings and various state income taxes. Our effective tax rate differs from the federal statutory rate primarily due to the utilization of net operating loss carryforwards, state and foreign taxes, 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 we do not have significant income taxes payable at September 30, 2010. Our effective tax rate in 2010 will depend on a number of factors, such as the amount and mix of stock-based compensation expense to be recorded under Topic 718, the level of business in state and foreign tax jurisdictions, management’s expectation of the realization of deferred tax assets and the associated valuation allowance, and other factors.
Liquidity and Capital Resources
                                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
                    Percent                   Percent
(Amounts in thousands)   2009   2010   Change   2009   2010   Change
Cash, cash equivalents and short-term investments
  $ 93,022     $ 109,015       17 %   $ 93,022     $ 109,015       17 %
Cash provided by operating activities
    4,909       5,973       22 %     11,875       13,498       14 %
          At September 30, 2010, cash, cash equivalents and short-term investments totaled $109.0 million. In addition to our cash and short-term investments, other sources of liquidity at September 30, 2010 included a $3.0 million bank line of credit facility, under which there have been no borrowings.
          Operating activities provided $6.0 million and $13.5 million of cash during the three and nine months ended September 30, 2010, respectively, as compared to $4.9 and $11.9 million of cash during the three and nine months ended September 30, 2009, respectively. Cash flow from operations can vary significantly from quarter-to-quarter for many reasons, including the timing of business in a given period, and customer payment preferences and patterns. The percentage of business signed, but not invoiced due to future billing terms was approximately 63% as of September 30, 2010 as compared to approximately 39% as of September 30, 2009. Accounts receivable and the corresponding deferred revenue are not recorded for subscriptions 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 5% of current accounts and term receivables at September 30, 2010 and 6% of current accounts and term receivables at December 31, 2009, respectively. Accounts receivable written off in the third quarter of 2010 were relatively consistent with the fourth quarter of 2009. We regularly assess the adequacy of the allowance for doubtful accounts. Actual write-offs could exceed our estimates and adversely affect operating cash flows in the future.

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          Investing activities provided $4.2 million and $14.8 million in the three and nine months ended September 30, 2010, respectively. Third quarter 2010 investing activities consisted of $6.9 million of net purchases of short-term investments, $1.6 million of capital expenditures, and $1.1 million of capitalized cost of internally developed computer software to be sold as a service. Capital asset additions consisted primarily of equipment acquisitions for our hosting operations and employee growth.
          Financing activities provided $4.6 million and $7.2 million in the three and nine months ended September 30, 2010, respectively, which was primarily due to cash generated from exercises of common stock options issued under our employee incentive plan.
          We believe our existing cash and short-term investments, together with funds generated from operations, should be sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth and expansion of our sales and marketing activities, the possible acquisition of complementary products or businesses, the timing and extent of spending required for research and development efforts, and the continuing market acceptance of our products. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financings. 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. Additional equity or debt financing may not be available on terms favorable to us or at all.
Off-Balance Sheet Arrangements
          As of September 30, 2010, 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, 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
          Our results of operations and cash flows are subject to fluctuation due to changes in foreign currency exchange rates, particularly changes in the British pound, Australian dollar and Euro, because our contracts are frequently denominated in local currency. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures. We do not currently have any such contracts in place, nor did we enter into any such contracts during the quarters ended September 30, 2010 or September 30, 2009. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures.
          During the quarter ended September 30, 2010, foreign currency fluctuations did not have a significant impact on our financial results on a constant currency basis, when comparing the average exchange rates during the quarter ended September 30, 2009 to the average exchange rates during the quarter ended September 30, 2010. However, during the nine months ended September 30, 2010, foreign currency rate fluctuations did have a significant impact on our financial results on a constant currency basis, when comparing the average exchange rates during the nine months ended September 30, 2009 to the average exchange rates during the nine months ending September 30, 2010.
          When compared to the nine months ended September 30, 2009, 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, 2010 relative to the British pound, Australian dollar and Euro. The change in average exchange rates between the nine months ended September 30, 2009 and 2010 had a favorable impact to revenue of $1.1 million. Additionally, deferred revenue increased by approximately $470,000 when comparing the change in period-end exchange rates between the year ended December 31, 2009 and quarter ended September 30, 2010. Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to offset the revenue impact. These expenses in the nine months ended September 30, 2010 had an unfavorable impact of approximately $600,000 when comparing the change in average exchange rates between the nine months ended September 30, 2009 and 2010.
          Continued changes in the dollar relative to other currencies may cause us to experience further impact to our financial results.

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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, 2010, the fair value of our portfolio would decline by approximately $172,000.
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) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes to Internal Control over Financial Reporting
          During the most recent completed fiscal quarter covered by this report, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
          From time to time, we are involved in legal proceedings in the ordinary course of business. We believe that the resolution of these matters will not have a material effect on our consolidated financial position, results of operations or liquidity.
Item 1A. Risk Factors
          A restated description of the risk factors associated with our business is set forth below. This description includes any and all changes (whether or not material) to, and supersedes, the description of the risk factors associated with our business previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
          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.
          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.

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          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.
          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 28% and 31% of our revenue for the quarters ended September 30, 2009 and 2010, 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;
 
    political, social and economic instability, including, terrorist attacks and security concerns in general;
 
    adverse changes in tariffs and other protectionist laws and business practices that favor local competitors;
 
    longer collection periods and difficulties in collecting receivables from foreign entities;
 
    exposure to different legal standards and burdens of complying with a variety of foreign laws, including employment, tax, privacy and data protection laws and regulations;
 
    reduced protection for our intellectual property in some countries;
 
    expenses associated with localizing products for foreign countries, including translation into foreign languages; and
 
    import and export license requirements and restrictions of the United States and each other country in which we operate.
          We believe that international sales will continue to represent a significant portion of our revenue for the foreseeable future, and that continued growth will require further expansion of our international operations. A substantial percentage of our international sales are denominated in the local currency. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets.
          Margins on sales of our products and services in foreign countries, and on sales of products and services that include costs from foreign based employees or foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations.
          During the nine months ended September 30, 2010, foreign currency rate fluctuations had a significant impact on our financial results on a constant currency basis, when comparing the average exchange rates during the nine months ended September 30, 2009 to the average exchange rates during the nine months ending September 30, 2010.
          When compared to the nine months ended September 30, 2009, 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, 2010 relative to the British pound, Australian dollar and Euro. The change in average exchange rates between the nine months ended September 30, 2009 and 2010 had a favorable impact to revenue of $1.1 million. Additionally, deferred revenue increased by

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approximately $470,000 when comparing the change in period-end exchange rates between the year ended December 31, 2009 and quarter ended September 30, 2010. Expenses associated with international revenue are generally paid in local currency, which generally provides a natural hedge to offset the revenue impact. These expenses in the nine months ended September 30, 2010 had an unfavorable impact of approximately $600,000 when comparing the change in average exchange rates between the nine months ended September 30, 2009 and 2010.
          We may not be able to sustain or increase profitability in the future.
          We had an accumulated deficit of $53.5 million as of September 30, 2010. We expect to continue to incur significant professional services, sales and marketing, research and development and general and administrative expenses as we expand our operations and, as a result, we will need to generate significant revenue to sustain or increase profitability. We may not be able to continue to improve our operating results at the rate that has occurred in the past or at all. Even though we were profitable during the three and nine months ended September 30, 2010, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future, which may cause the price of our stock to decline.
          We face intense competition, and our failure to compete successfully could make it difficult for us to add and retain clients and could reduce or impede the growth of our business.
          The market for CRM solutions is highly competitive and fragmented, and is subject to rapidly changing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of other industry participants. Increased competition could result in commoditization, pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients, and our business, financial condition and results of operations will be seriously harmed.
          We face competition from:
    Companies currently providing customer service solutions, some of whom offer hosted services, including ATG, BMC Software Corporation, Inc., eGain Communications Corporation, Inquira Software, Inc., Kana Software, Inc., Liveperson, Microsoft Corporation, Netsuite, nGenera, Oracle Corporation, Parature, SAP AG, and salesforce.com;
 
    CRM systems that are developed and maintained internally by businesses;
 
    CRM products or services that are developed, or bundled with other products or services, and installed on a client’s premises by software vendors;
 
    Outsourced contact center providers that bundle solutions and agent labor in their service offerings;
 
    New companies entering the CRM software market, the on demand applications market and the on demand CRM market, or expanding from any one of these markets to the others;
 
    Voice system integrators and voice-enabled IVR technology providers, such as Microsoft, TuVox, and Voxify; and
 
    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

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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:
    our ability to retain and increase sales to existing clients, attract new clients and satisfy our clients’ requirements;
 
    general economic, industry and market conditions;
 
    fluctuations in foreign currency exchange rates;
 
    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;
 
    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;
 
    changes in the mix of voice self service applications sold and/or usage volume, because the gross margin on voice self service applications is typically lower than the gross margin on our sales, marketing, feedback and service applications;
 
    the timing of contracts signed and amount of usage fees;
 
    the timing and success of new product introductions or upgrades by us or our competitors;
 
    the timing of professional service sales and our ability to appropriately staff and train professional service resources without negatively impacting professional service margins;
 
    changes in our pricing policies or those of our competitors;
 
    the amount and timing of expenditures related to expanding our operations;
 
    stock price volatility, employee exercise behaviors, and option forfeiture rates, or changes in the number of stock options granted and vesting requirements in any particular period, which effects the amount of stock-based compensation expense;
 
    changes in the payment terms for our products and services, including changes in the mix of payment options chosen by our customers;
 
    the purchasing and budgeting cycles of our clients; and
 
    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

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requirements for new professional service resources and/or customer scheduling issues. Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.
          Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.
          Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our client base and achieve broader market acceptance of our solutions.
          Increasing our client base and achieving broader market acceptance of our solutions may depend to a significant extent on the effectiveness of our sales and marketing programs/operations. Our business will be seriously harmed if our efforts do not maximize revenue per sales and marketing headcount. We 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. In January 2010, we introduced the Cloud Services Agreement (CSA), which includes longer terms and annual customer termination for convenience provisions. We have not had enough specific experience with the CSA to estimate a percentage of customers that may exercise the right to annual termination for convenience. 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 adversely affected.
          We have experienced growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.
          To achieve our business objectives, we will need to continue to expand our business at an appropriate pace. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We anticipate that expansion will require substantial management effort and significant additional investment in our infrastructure. If we are unable to successfully manage our growth, our business, financial condition and results of operations will be adversely affected.
          Part of the challenge that we expect to face in the course of our expansion is to maintain the high level of customer service to which our clients have become accustomed. To date, we have focused on providing personalized account management and customer service on a frequent basis to ensure our clients are effectively leveraging the capabilities of our solution. We believe that much of our success to date has been the result of high client satisfaction, attributable in part to this focus on client service. To the extent our client base grows, we will need to expand our account management, client service and other personnel, and third-party channel partners, in order to enable us to continue to maintain high levels of client service and satisfaction. If we are not able to continue to provide high levels of client service, our reputation, as well as our business, financial condition and results of operations, could be harmed.

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          If there are interruptions or delays in our hosting services through third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with clients and subject us to liability.
          As of September 30, 2010, over 95% of our clients were using our hosting services for deployment of our software applications. We generally provide our hosting services for our applications through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in California, Illinois, New Jersey and London, England. Some of our Canadian customers are hosted on equipment that is owned and operated by a Canadian partner. 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 similar events. Our back-up computer hardware and systems have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring simultaneously at all hosting facilities. In the event that our hosting facility arrangements were terminated, or there was a lapse of service or accidental or willful damage to such facilities, we could experience lengthy interruptions in our hosting service as well as delays and/or additional expense in arranging new facilities and services. Any or all of these events could cause our clients to lose access to their important data. In addition, the failure by our third-party hosting facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.
          Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our clients’ service to their customers. Any interruptions or delays in our hosting services, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with clients and our reputation. This in turn could reduce our revenue, subject us to liability, and cause us to issue credits or pay penalties or cause clients to fail to renew their licenses, any of which could adversely affect our business, financial condition and results of operations. In the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Additionally, during the first quarter of 2009, we announced a SaaS service level credit program, which provides for a partial rebate if we fall short of our system availability objective. If we fail to meet this objective for one or all of our customers, we may have to pay a substantial amount of money, which may impact cash reserves, revenue recognition, and our reputation.
          If the security of our clients’ confidential information contained in our systems or stored by use of our software is breached or otherwise subjected to unauthorized access, our hosting service or our software may be perceived as not being secure and clients may curtail or stop using our hosting service and our solutions.
          Our hosting systems and our software store and transmit proprietary information and critical data belonging to our clients and their customers. Any accidental or willful security breaches or other unauthorized access could expose us to a risk of information loss, litigation and other possible liabilities. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our clients’ data, our relationships with clients and our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we and our third-party hosting co-location facilities may be unable to anticipate these techniques or to implement adequate preventative measures.
          If we fail to respond effectively to rapidly changing technology and evolving industry standards, particularly in the on demand CRM industry, our solutions may become less competitive or obsolete.
          The CRM industry is characterized by rapid technological advances, changes in client requirements, frequent new product and service introductions and enhancements, changes in protocols and evolving industry standards. Our hosted business model and the on demand CRM market are relatively new and may evolve even more rapidly than the rest of the CRM market. Competing products and services based on new technologies or new industry standards may perform better or cost less than our solutions and could render our solutions less competitive or obsolete. In addition, because our solutions are designed to operate on a variety of network hardware and software platforms using a standard Internet web browser, we will need to continuously modify and enhance our solutions to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies and to integrate with our

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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, product trainers, and senior personnel.
          Our failure to attract, manage, support and retain qualified partners may prevent us from effectively deploying product and professional services.
          Our success and future growth depends in part upon the skills, experience, performance and continued service of our partners. We engage with partners in a number of ways, including assisting us to identify prospective customers, to distribute our solutions, to develop complementary solutions, and to help us to fulfill professional services engagements. We believe that our future success depends in part upon our ability to develop strategic, long term and profitable partnerships. If we do not acquire and retain the right partners, our products might become uncompetitive, we may be unable to take full advantage of the potential demand for our solutions, or our ability to rapidly deliver our solutions may be impaired. The use of partners to fulfill customer requirements may impact our normal margins, and affect the profitability of customer transactions.
          If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims.
          Our software products may contain undetected errors or defects that may result in product failures, slow response times, or otherwise cause our products to fail to perform in accordance with client expectations. Because our clients use our products for important aspects of their business, any errors or defects in, or other performance problems with, our products could hurt our reputation and may damage our clients’ businesses.
          If that occurs, we could lose future sales, or our existing clients could elect to not renew or to delay or withhold payment to us, which could result in an increase in our provision for doubtful accounts and an increase in collection cycles for accounts receivable. Clients also may make warranty or other claims against us, which could result in the expense and risk of litigation. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our products fails to perform or contains a technical defect, a client may assert a claim against us for substantial damages, whether or not we are responsible for the product failure or defect. We do not currently maintain any warranty reserves.
          Product liability claims could require us to spend significant time and money in litigation or to pay significant settlements or damages. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims. Also, our insurer may disclaim coverage. Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all. Any product liability claims successfully brought against us would cause our business to suffer.

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          If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
          Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws, patents and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. We may not be able to obtain any further patents or trademarks, and our pending applications may not result in the issuance of patents or trademarks. Any of our issued patents may not be broad enough to protect our proprietary rights or could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
          Our product development efforts may be constrained by the intellectual property of others, and we may become subject to claims of intellectual property infringement, which could be costly and time-consuming.
          The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. As we seek to extend our customer experience product and service offerings, we may be constrained by the intellectual property rights of others. We have in the past been named as a defendant in a lawsuit alleging intellectual property infringement, and we may again in the future have to defend against intellectual property lawsuits. We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements. If any of our products violate third-party proprietary rights, we may be required to re-engineer our products or seek to obtain licenses from third parties, which may not be available on reasonable terms or at all. Because our sales agreements typically require us to indemnify our clients from any claim or finding of intellectual property infringement, any such litigation or successful infringement claims could adversely affect our business, financial condition and results of operations. Any efforts to re-engineer our products, obtain licenses from third parties on favorable terms or license a substitute technology may not be successful and, in any case, may substantially increase our costs and harm our business, financial condition and results of operations.
          Further, our software products contain open source software components that are licensed to us under various public domain licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown. Use of open source standards also may make us more vulnerable to competition because the public availability of open source software could make it easier for new market entrants and existing competitors to introduce similar competing products quickly and cheaply.
          The market for our on demand application services is not at the same stage of development as traditional on premise enterprise software, and if it does not develop or develops more slowly than we expect, our business will be harmed.
          The market for on demand application services is not as mature as the market for traditional on-premise enterprise software, and it is uncertain whether these application services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of companies to increase their use of on demand application services in general and for on demand RightNow CX applications in particular. The willingness of companies to increase their use of any on demand application services is in part dependent on the actual and perceived reliability of hosted solutions. In addition, many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on demand application services. While we have supported traditional on site

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deployment of our software applications, widespread market acceptance of our on demand software solutions is critical to the success of our business. Other factors that may affect the market acceptance of our solutions include:
    on demand security capabilities and reliability;
 
    concerns with entrusting a third party to store and manage critical customer data;
 
    the level of customization we offer;
 
    our ability to continue to achieve and maintain high levels of client satisfaction; and
 
    the price, performance and availability of competing products and services.
          If businesses do not perceive the benefits of on demand solutions in general, or our on demand solutions in particular, then the market for these solutions may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations.
          If our efforts to enhance existing solutions, introduce new solutions or expand the applications for our products and solutions to broader CRM markets do not succeed, our ability to grow our business will be adversely affected.
          If we are unable to successfully develop and sell new and enhanced versions of our solutions, or introduce new solutions for the customer service market, our financial performance will suffer. In recent years, we have expanded our CRM solution offering to include sales, marketing, feedback, social and voice-enabled applications. Additionally, we have focused on eService solutions to call centers. Our efforts to expand our solution in order to improve the customer experience may not be successful in part because certain of our competitors may have 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. Acquisitions could require significant capital infusions into the acquired business and could involve many risks, including, but not limited to, the following:
    an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;
 
    we may encounter difficulties in assimilating and integrating the business, technologies, products, personnel or operations of companies that we acquire, particularly if key personnel of the acquired company decide not to work for us;
 
    our existing and potential clients and the customers of the acquired company may delay purchases due to uncertainty related to an acquisition;
 
    an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;
 
    the acquired businesses, products or technologies may not generate sufficient revenue to offset acquisition costs and could result in material asset impairment charges;
 
    we may 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.
          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 July 28, 2010, we announced that our Board of Directors had approved a stock repurchase program. Under the program, we are authorized to repurchase up to $10 million of our outstanding shares of common stock from time to time at prevailing prices in the open market or otherwise over the next two years. 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. 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 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.
          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”

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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.
          European Union members have imposed stringent restrictions on the collection and use of personal data that impose significant burdens on subject businesses. Domestic and international laws and regulations, and legislative and regulatory initiatives, may adversely affect our clients’ ability to collect and/or use demographic and personal information from their customers, which could reduce demand for our solutions.
          In addition to government activity, privacy advocacy groups and the technology and direct marketing industries 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.
          Non-solicitation concerns, laws or regulations may adversely affect our clients’ ability to perform outbound marketing and other email communications, which could reduce sales of our solutions.
          In January 2004, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, became effective. The CAN-SPAM Act regulates the transmission and content of commercial emails and, among other things, obligates the sender of such emails to provide recipients with the ability to opt-out of receiving future emails from the sender, and establishes penalties for the transmission of email messages which are intended to deceive the recipient as to source or content. Many state legislatures also have adopted laws that impact the delivery of commercial email, and laws that regulate commercial email practices have been enacted in many of the international jurisdictions in which we do business, including Europe, Australia, Japan, and Canada. In addition, Internet service providers and licensors of software products have introduced a variety of systems and products to filter out certain types of commercial email, without any common protocol to determine whether the recipient desired to receive the email being blocked. As a result, it is difficult for us to determine in advance whether or not emails generated by our clients using our solutions will be permitted by spam filters to reach the intended recipients.

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          Our RightNow Marketing solution specifically serves the market for mass distribution marketing and other email communications. The increasing regulation of email delivery, both domestically and internationally, and the spam filtering practices of Internet service providers and email users generally, will place significant additional burdens on our clients who have outbound communication programs, and may cause those clients to substantially change their outbound communications programs. These factors may lead to a reduction in sales of our RightNow Marketing solution, may make it necessary to redesign our RightNow Marketing solution to make it easier for our clients to conform to the requirements of such laws and standards, which would increase our expenses, or may make it necessary for us to redefine the market for and use of our RightNow Marketing solution, which could reduce our revenue.
          The significant influence over stockholder voting matters and our office leases that may be exercised by our founder and Chief Executive Officer will limit your ability to influence corporate actions and may require us to find alternative office space to lease or buy in the future.
          At September 30, 2010, Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, have voting power over approximately 25% of our outstanding common stock and, together with other officers and directors, have voting power over approximately 31% of our outstanding common stock. In addition, none of the shares of common stock over which Mr. Gianforte and Mrs. Gianforte have voting power are subject to vesting restrictions. As a result, Mr. Gianforte and Mrs. Gianforte, acting together with some of our other officers and directors, may be able to influence matters requiring stockholder approval, including the election of directors, management changes and approval of significant corporate transactions. This concentration of voting power may have the effect of delaying, preventing or deterring a change in control of RightNow, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of RightNow and might reduce the market price of our common stock.
          In addition, Mr. Gianforte beneficially owns, directly or indirectly, a 50% membership interest in Genesis Partners, LLC, our landlord from whom we lease our principal offices in Bozeman, Montana. Consequently, Mr. Gianforte has significant influence over any decisions by Genesis Partners regarding renewal, modification or termination of our Bozeman, Montana leases. In the event that our current leases with Genesis Partners were terminated or otherwise could not be renewed, or came up for renewal on commercially unreasonable terms, we would be required to find alternative office space to lease or buy.
          Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.
          Provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable and may limit the market price of our common stock. These provisions include the following:
    establishing a classified board in which only a portion of the total board members will be elected at each annual meeting;
 
    authorizing the board to issue preferred stock;
 
    providing the board with sole authority to set the number of authorized directors and to fill vacancies on the board;
 
    limiting the persons who may call special meetings of stockholders;
 
    prohibiting certain transactions under certain circumstances with interested stockholders;
 
    requiring supermajority approval to amend certain provisions of the certificate of incorporation; and
 
    prohibiting stockholder action by written consent.
          It is possible that the provisions contained in our certificate of incorporation and bylaws, the voting rights held by insiders and the ability of our board of directors to issue preferred stock without stockholder action may have the effect of delaying, deferring or preventing a change in control of our Company without further action by the stockholders, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
          Not applicable.
(b) Use of Proceeds from Sales of Registered Securities
          On August 5, 2004, the Securities and Exchange Commission declared effective our Registration Statement on From S-1 (Reg. File No. 333-115331) under the Securities Act of 1933, as amended, in connection with the initial public offering of our common stock, par value $.0001 per share. We sold 6.4 million shares, including shares sold upon exercise of the underwriters’ over-allotment option, for an aggregate offering price of $44.9 million, and 321,945 shares, including shares sold upon exercise of the underwriters’ over-allotment option, were sold by a selling stockholder for an aggregate offering price of $2.3 million. After deducting $3.3 million in underwriting discounts and commissions and $1.8 million in other offering costs, we received net proceeds from the offering of approximately $40 million. None of the expenses and none of our net proceeds from the offering were paid directly or indirectly to any director, officer, general partner of RightNow or their associates, persons owning 10% or more of any class of equity securities of RightNow, or an affiliate of RightNow.
          In May 2005, we spent $1 million of the offering proceeds for the acquisition of the assets of Convergent Voice. In May 2006, we spent $8.7 million of the offering proceeds to acquire Salesnet, Inc. In September 2009, we spent $5.9 million of the offering proceeds to acquire HiveLive, Inc. We currently intend to use the remaining proceeds for general corporate purposes as described in the prospectus for the offering. Pending these uses, the net proceeds from the offering are invested in short-term, interest-bearing, investment-grade securities.
(c) Purchases of Equity Securities
          On July 28, 2010, we announced a stock repurchase program, effective August 2, 2010, under which our board of directors authorized the repurchase of up to $10.0 million of our common stock over the next two years. 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. Any shares repurchased will be held in treasury. As of September 30, 2010, we have not repurchased any common stock under this program. We cannot assure you that any repurchases will be made under this program. If any repurchases are made, we also cannot assure you as to the amount or frequency of repurchases we may make under this program.
Item 3. Defaults Upon Senior Securities.
          None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
          None.

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Item 6. Exhibits
Exhibits
The exhibits listed below are part of this Form 10-Q, unless otherwise indicated.
     
Exhibit 3.1
  Amended and Restated Certificate of Incorporation of the Registrant. (1)
 
   
Exhibit 3.2
  Amended and Restated Bylaws of the Registrant. (2)
 
   
Exhibit 31.1
  Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 31.2
  Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32.1
  Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
   
 
(1)   Incorporated by reference to Exhibit 4.2 to the Company’s registration statement on Form S-8 (File No. 333-118515) filed with the Securities and Exchange Commission on August 24, 2004.
 
(2)   Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 000-31321) filed with the Securities and Exchange Commission on January 25, 2006.

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SIGNATURE
Pursuant to 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 5, 2010
         
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)
   

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