RightNow Gets With the Program

Customer service software developer RightNow Technologies (Nasdaq: RNOW  ) is definitely making a big change by switching its business model from upfront licenses to subscriptions. While there will be some short-term pain, it's a smart move that will put the company in line with where the software industry is moving.

In the fiscal fourth quarter, reported last week, revenues increased 17% to $28.8 million. For the year, revenues were $110.4 million, which represented a 27% increase over 2005. In all, RightNow added 500 new customers, to reach a total of about 1,800. Some of the names include IBM (NYSE: IBM  ) , Nokia (NYSE: NOK  ) , Motorola (NYSE: MOT  ) , and Proctor & Gamble (NYSE: PG  ) .

However, the bottom line was lackluster. The fourth quarter saw a net loss of $2.3 million or $0.07 per share, which was down from a profit of $3 million or $0.09 per share in the same period a year ago. The results were affected by continued heavy spending on sales/marketing, as well as R&D.

Background on the switch
RightNow got its start in 1995, which proved to be good timing, as the company got momentum from the Internet revolution. The focus was to build top-notch software to help companies of any size manage customer experiences, such as through call centers, email, chat, and the Web.

However, back then software was still sold on license basis -- that is, the customer had to pay an up-front fee and then annual maintenance charges. RightNow was no different.

But much has changed since then. Companies like Salesforce.com (NYSE: CRM  ) and NetSuite have pushed a new revenue model: selling software on a subscription basis. This means no up-front fee; rather, customers pay every month or every quarter. The amount is often calculated on a per-user basis.

For RightNow, the switch to subscriptions is certainly material and will reduce the revenue and earnings forecast for 2007. Revenues are expected to range from $116 million to $120 million. As for earnings, the guidance is for a loss of $0.56 to $0.64 per share.

Takeaway
The traditional license model can add volatility to quarter-by-quarter results. After all, it's not uncommon for large deals to slip into the next quarter. But, with subscriptions, there is much more predictability to revenues -- so long as there is minimal churn. So far, that's been the case with Salesforce.com, which sports a hefty market cap of $5.3 billion (trading at 10 times revenues).

Something else to keep in mind: RightNow is launching a new product, called RightNow 8. According to the conference call, the early results are promising. It will likely take some time to get a revenue lift from this, but it could be a nice catalyst for the second half of 2007.

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Fool contributor Tom Taulli does not own shares of any company mentioned in this article.


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