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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

000-31321
(Commission File No.)

RIGHTNOW TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

40 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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        The number of shares outstanding of the registrant's common stock, $0.001 par value, as of May 4, 2005 was 30,116,719.

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

For the Quarterly Period Ended March 31, 2005

INDEX

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RightNow Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands) (Unaudited)

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Operations

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

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

See accompanying notes to condensed consolidated financial statements.

RightNow Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)   Business Description and Basis of Presentation

Business Description

        RightNow Technologies, Inc. (the "Company" or "RightNow") provides on-demand customer relationship management software solutions for companies of all sizes. The Company's on-demand software supports multiple customer interaction points in a business's customer service, marketing and sales operations. Founded in 1997, RightNow is headquartered in Bozeman, Montana, with additional offices in Dallas, Texas; San Mateo, California; Princeton, New Jersey; London, England; Sydney, Australia, Munich, Germany; and a liaison office in Tokyo, Japan. The Company operates in one segment, which is the customer relationship management market.

Basis of Presentation

        The accompanying 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, 2004.

        The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the interim 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 and include all adjustments necessary for the fair presentation of the Company's financial position at March 31, 2005, and results of operations and cash flows for the three month periods ended March 31, 2004 and 2005. The interim period results are not necessarily indicative of the results to be expected for the full year.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and assumptions on an on-going basis. Significant estimates and assumptions made by management include estimates and assumptions regarding revenue recognition, valuation allowances for trade receivables and deferred income tax assets, and accounting for equity-based compensation.

(2)   Certain Risks and Concentrations

        The Company's revenue is derived from the license, hosting and support of its software products and provision of related professional services. The market in which the Company operates is highly competitive and rapidly changing. Significant technological changes, changes in customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect the Company's operating results. The Company has historically derived a majority of its revenue from customer service software solutions. These products are expected to continue to account for a significant portion of revenue for the foreseeable future. As a result of this revenue concentration, the Company's business could be harmed by a decline in demand for, or in the prices of, these products or as a result of, among other factors, any change in pricing model, a maturation in the markets for these products, increased price competition or a failure by the Company to keep up with technological change.

        The Company's customers are worldwide with approximately 70% to 75% of sales in the United States. No individual customer accounted for more than 10% of the Company's revenue in 2004 or the first three months of 2005, or represented more than 10% of receivables at December 31, 2004 or March 31, 2005.

        As of December 31, 2004 and March 31, 2005, assets located outside the United States were 7% of total assets. The loss from operations outside of the United States totaled $2.8 million for the year ended December 31, 2004 and $1.6 million for the three months ended March 31, 2005. Revenue by geographical region follows (in thousands):

(3)   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):

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

(4)   Comprehensive Income (Loss)

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

(5)   Equity-Based Compensation

        The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, but applies Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations in accounting for its stock plans. Under APB 25, when the exercise price of an employee stock option equals the estimated market price of the underlying stock on the date of grant, no compensation expense is recognized.

        Pro forma information regarding results of operations has been determined as if the Company had accounted for its stock options under the appropriate minimum value or fair value method. The Company uses the Black-Scholes valuation model to estimate the value of stock options granted under the 2004 Equity Incentive Plan and the Employee Stock Purchase Plan. The estimated weighted average value per share of stock options granted in the three months ended March 31, 2004 and 2005 was $0.53 and $8.01, respectively. The estimated value of shares purchased under the Employee Stock Purchase Plan for the three months ended March 31, 2005 was $5.79. Assumptions used to obtain the estimated values were:

        Had the Company recorded compensation expense in accordance with SFAS No. 123, net income (loss) would have been (in thousands, except per share data):

        From time to time the Company grants to certain of its consultants options to purchase stock. The Company accounts for consultant stock options in accordance with SFAS 123 and Emerging Issues Task Force Consensus Issue No. 96-18 ("EITF 96-18"), Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services. Compensation expense for the grant of stock options to consultants is determined based on the estimated fair value of the stock options at the measurement date as defined in EITF 96-18 and is recognized over the vesting period.

        In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R ("123R"), Share-Based Payment, which replaces SFAS No. 123 and supercedes APB 25. Statement 123R covers a wide range of share-based compensation, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The statement requires the recognition of compensation cost related to share-based payment plans to be recognized in financial statements based on the fair value of the equity or liability instruments issued. The Company expects that this accounting change will materially and adversely affect our reported results of operations because the stock-based compensation expense will be charged directly against earnings. The Company expects to adopt the provisions of 123R beginning January 1, 2006.

(6)   Commitments and Contingencies

Warranties and Indemnification

        The Company's on-demand application service is typically warranted to perform in accordance with its user documentation.

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

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

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

Litigation

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

(7)   Recent Developments

Acquisition of Convergent Voice Assets

        In May 2005, the Company purchased the intellectual property and other assets, and hired certain personnel, of Convergent Voice, Inc. Convergent Voice has developed voice enabled automation technologies that, when combined with the Company's applications, provide for: a) telephone queries of the Company's knowledgebase; b) submission of questions over the phone that can be subsequently answered either electronically or via a return phone call; and c) submission of queries that access back office systems, such as an order processing system, to obtain status of an order. The Company had previously licensed the Convergent Voice technology for approximately two years.

        The purchase price of $1 million was paid in cash on May 5, 2005. The Company expects that the substantial majority of the purchase price will be allocated to identifiable intangible assets, which will then be amortized to earnings over their remaining lives of approximately 5 years.

Commitments

        The Company leases its office facilities and certain office equipment under non-cancelable operating lease agreements with various expiration dates through 2011. In March 2005 the Company extended two office lease agreements, and entered into a new office lease agreement, with Genesis Partners, LLC. Annual minimum payments under operating leases are approximately $1.2 million in 2005 through 2009, approximately $750,000 in 2010, and approximately $150,000 thereafter.

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

Cautionary Statement

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those projected in the forward-looking statements as a result of factors, including those discussed under "Risk Factors" and elsewhere in this report. We assume no obligation to update the forward-looking statements or such risk factors.

Overview

        We are a leading provider of on-demand solutions for the customer relationship management ("CRM") market. We offer a broad suite of solutions to address the customer service, sales and marketing requirements of large, medium and small enterprises.

        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, e-mail, chat, telephone and proactive outbound e-mail communications. We have also added several products that are complementary to our RightNow Service solution, including RightNow Metrics and RightNow Locator. In 2003, we introduced an e-mail marketing automation solution, RightNow Outbound. In October 2004, we introduced RightNow CRM, which is comprised of three applications built on a common base: RightNow Service, RightNow Sales, and RightNow Marketing. To date, approximately 90% of our revenue has been generated from sales of RightNow Service.

        Our client base currently consists of more than 1,200 active clients. During the three months ended March 31, 2005, our products served more than 166 million customer interactions, or unique sessions hosted by our solutions. Our solutions, whether sold pursuant to term or perpetual licenses, are available either on a hosted basis, where they are deployed in our co-location facilities and accessed on-demand by our clients, or on a non-hosted basis, where our clients deploy them in their own facilities. Approximately 86% of our clients have elected the hosted option as of March 31, 2005. We distribute our solutions primarily through direct sales efforts and to a lesser extent through indirect channels.

Sources of Revenue

        Our revenue is comprised of fees for term and perpetual licenses of our software, fees for hosting and support related to our licenses, and fees for professional services. Our term license agreements, which are generally two years in length but can range from six months to four years, include our software and related upgrades, hosting and support for the term of the agreement. The majority of our revenue in each of our last three years and the three months ended March 31, 2005 was derived from two-year term license agreements. We also offer monthly term license agreements that contain a minimum commitment period of at least 12 months and include our software and related upgrades, hosting and support. Perpetual licenses are typically sold with annual maintenance contracts that include upgrades, hosting and support.

        Hosting and support agreements provide maintenance and management of our software at a third party facility, technical support for our software products, and unspecified product upgrades on a when and if available basis.

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

        Our software license agreements generally include capacity-based fees, which are measured primarily by web pages served, user seats, outgoing email transactions, or minutes used, and certain fixed fees. A number of our agreements provide for additional fees for usage above established levels, which are billed and recognized into revenue when earned.

        Professional services, consisting of consulting, education and development services, are sold with initial license agreements and periodically over the client engagement. The average deployment time for our clients is approximately 50 days. We typically invoice clients for the entire amount at the beginning of the agreement with payment generally due within 30 days for our term and perpetual license agreements, or due monthly for our monthly agreements. Our typical education courses are billed on a per person, per class basis.

        Depending on the size and complexity of the client project, our consulting or development services contracts are either fixed price/fixed scope or, less frequently, billed on a time and materials basis. We have determined that the professional services element of our software arrangements is not essential to the functionality of the software. We have also determined that our professional services: a) are available from other vendors; b) do not involve a significant degree of risk or unique acceptance criteria; and c) qualify for separate accounting as we have sufficient experience in providing such services.

Cost of Revenue and Operating Expenses

        Cost of Revenue.    Cost of revenue consists primarily of salaries and related expenses for our hosting, support and professional services organizations, third-party costs and equipment depreciation relating to our hosting services, third-party costs for interactive voice self-service applications, travel expenses related to providing professional services to our clients, amortization of acquired intangible assets and allocated overhead. We allocate most overhead expenses, such as office supplies, computer supplies, utilities, rent, depreciation for furniture and equipment, payroll taxes and employee benefits, based on headcount. As a result, overhead expenses are reflected in each cost of revenue and operating expense category.

        Our hosting costs are affected by the percentage of clients who license our products on a hosted basis and the number of times our clients and their customers use our solutions, which we refer to as customer interactions. As a result of economies of scale in our hosting infrastructure and declines in computer hardware and telecommunications costs, we were able to reduce hosting costs as a percentage of total revenue in 2003, and 2004, despite significant increases in the number of hosted clients and the level of customer interactions. Software, hosting and support costs as a percent of total revenue increased slightly in the first three months of 2005 due to additions of technical support personnel.

        As our client base and solutions usage grows, we intend to continue to invest additional resources in our hosting services, technical support and professional services. We expect our professional services costs to increase in absolute dollars as we increase our professional services as a percentage of total revenue. Because cost as a percentage of revenue is higher for professional services revenue than for software, hosting and support revenue, an increase in professional services as a percentage of total revenue reduces gross profit as a percentage of total revenue. During the first three months of 2005, gross profit as a percentage of total revenue declined to 74% from 78% in 2004 primarily due to an increase in professional services as a percentage of total revenue.

        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. We expense our sales commissions at the time the related sale is invoiced to the client and we recognize the majority of our revenue from our agreements ratably over the terms of the licenses. Accordingly, we generally experience a delay between increasing sales and marketing expenses and the recognition of corresponding revenue. We expect significant additional increases in sales and marketing expenses in absolute dollars as we continue to hire additional sales and marketing personnel and increase the level of marketing activities.

        Research and Development Expenses.    Research and development expenses consist primarily of salary and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, translation fees, quality assurance, testing and allocated overhead. To date, we have not capitalized any software development costs because the timing of the commercial releases of our products has substantially coincided with the attainment of technological feasibility. As a result, research and development costs have been expensed as incurred. We intend to continue to expand and enhance our product offerings. To accomplish this, we plan to 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.

        General and Administrative Expenses.    General and administrative expenses consist primarily of salary and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate expenses and allocated overhead. We anticipate that we will incur additional employee salaries and related expenses, professional service fees and insurance costs related to the growth of our business and operations.

Critical Accounting Policies and Estimates

        Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These assumptions are affected by management's application of accounting policies. Our critical accounting policies include: revenue recognition; valuation of receivables and deferred tax assets; and accounting for equity-based compensation.

        We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

Revenue Recognition

        Software, hosting and support revenue is comprised of fees from term and perpetual licenses of the Company's software, hosting and support. To date we have not entered into an arrangement solely for the license of products and, therefore we have not demonstrated vendor specific objective evidence (VSOE) of fair value for the license element. Consequently, we recognize revenue for the fees associated with the term license and the related hosting and support ratably over the term of the agreement, which is generally two years, but can range between six months and four years. We have established VSOE for the annual hosting and support elements sold with each perpetual license based on the price paid when sold separately. Accordingly, we recognize revenue for each perpetual license using the residual method in accordance with Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions.

        We begin to recognize revenue from the licensing, hosting and support of our products when all the following criteria are met: a) we have entered into a legally binding agreement with the client; b) our products and services have been delivered or made available to the client; c) our fee for providing the products and services is determinable; and d) we believe collection of our fee is reasonably probable.

        Amounts that have been invoiced to clients are recorded to accounts or term receivables and deferred revenue. Deferred revenue is then recognized into revenue when earned.

Allowance for doubtful accounts

        We regularly assess the collectibility of outstanding customer invoices and, in so doing, we maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as: historical collection experience; a customer's current creditworthiness; customer concentration; age of the receivable balance; and general economic conditions that may affect a customer's ability to pay. Actual customer collections could differ from our estimates and exceed our related loss allowance.

Income Taxes

        We record income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. When applicable, a valuation allowance is established to reduce any deferred tax asset when it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

        We have established a valuation allowance equal to our net deferred tax assets due to uncertainties regarding the realization of our net operating loss carryforwards, tax credits, and deductible timing differences. The uncertainty of realizing these benefits is based primarily on our lack of historical earnings.

Equity-Based Compensation

        We account for our employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Option ("APB") No. 25, Accounting for Stock Issued to Employees. We make disclosure regarding employee stock-based compensation using the fair value method in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. We have calculated the fair value of options granted and have determined the pro forma impact on net income (loss). We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.

        In measuring the cost of equity-based compensation, we make assumptions regarding our stock price volatility and the average expected life of our outstanding stock options. Our assumptions are based on our historical information, some of which was developed when we were a private company, which are then compared with other like companies for reasonableness. Actual results could differ from our estimates.

Recently Issued Accounting Standards

        In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R ("SFAS 123R"), Share-Based Payment, which replaces SFAS 123 and supercedes APB No. 25. The statement's effective date was amended in April 2005 to apply to certain public companies beginning with their first fiscal year beginning after June 15, 2005. SFAS 123R covers a wide range of share-based compensation, including share options, restricted share plans, performance- based awards, share appreciation rights, and employee share purchase plans. The statement requires the recognition of compensation cost related to share-based payment plans to be recognized in financial statements based on the fair value of the equity or liability instruments issued. We expect that adoption of the provisions of SFAS 123R in our 2006 fiscal year beginning January 1, 2006 will materially and adversely affect our reported results of operations because the stock-based compensation expense will be charged directly against reported earnings. We do not expect the accounting change to materially affect our liquidity because stock-based compensation is a non-cash expense.

Results of Operations

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

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

Overview of Current Period and Outlook

        The quarter ended March 31, 2005 represented our 29^th consecutive quarter of revenue growth. Total revenue for the quarter ended March 31, 2005 increased 43% over the comparable period in 2004 from growth in our average number of customers and growth in our average selling prices. Gross profit for the three months ended March 31, 2005 was 4 percentage points lower than the comparable period in 2004 due to an increased mix of professional services revenue. Operating expenses for the three months ended March 31, 2005, in total, increased 33% over the three months ended March 31, 2004 due to our investment in personnel to support our overall growth. Operating income for the first quarter of 2005 was 3% of revenue as compared to 2% of revenue in the first quarter of 2004.

        Our revenue growth in 2004 and the first quarter of 2005 resulted from the release of broader product offerings, a corresponding increase in service offerings, and the addition of sales personnel focused on new client acquisition. In the first quarter of 2005 we signed 60 new customers to bring our total active client base to 1,273, or 17% more than the 1,089 active clients at March 31, 2004. On a sequential quarterly basis, our growth, as measured by the number of new clients acquired, declined in the first quarter ended March 31, 2005. We believe the lower client acquisitions may be the result of seasonal buying patterns of our customers.

        For the three months ended March 31, 2005, we generated $3.2 million of cash from operations compared to $0.3 million of cash in the comparable 2004 quarter, and increased our deferred revenue to $52.8 million at March 31, 2005 from $36.7 million one year earlier.

        As of March 31, 2005 we had an accumulated deficit of $40.2 million. This deficit resulted primarily from costs incurred in the development, sales and marketing of our products and for general and administrative purposes. We intend to continue to invest in our sales and marketing activities, product development and business infrastructure. During periods of investment and growth, because the majority of expenses are recorded as incurred and the majority of revenue is deferred, we anticipate that any growth in revenue will be largely offset by an increase in cost of revenue and operating expenses.

Three Months Ended March 31, 2004 and 2005

Revenue

Software, hosting and support

        For the quarter ended March 31, 2005, software, hosting and support revenue increased $3.2 million, or 29%, over the first quarter of 2004. The increase resulted primarily from a 10% increase in average revenue per client and an 18% increase in the average number of clients. Average revenue per client has grown from additional usage capacity and upgrades and enhancements purchased by clients. Additional usage capacity purchased by clients is reflected by customer interactions, which grew to 166 million for the quarter ended March 31, 2005 from 102 million in the comparable 2004 quarter. The increase in the average number of clients was primarily due to the addition of sales representatives focused on new client acquisition. Recurring software, hosting and support revenue was $10.6 million in the quarter ended March 31, 2005, or 25% more than the comparable 2004 quarter.

        Perpetual license fee revenue represented 18% of total revenue in the quarter ended March 31, 2005 compared to 17% in the quarter ended March 31, 2004. The mix of perpetual license revenue affects our overall profitability in any given period since it is recorded into revenue in full upon delivery instead of being ratably recognized into revenue, as is the case with term licenses. Over the previous eight quarters, perpetual license revenue has ranged between 12% and 26% of total revenue. We believe there are many factors that cause our perpetual license revenue to fluctuate as a percentage of total revenue, including the strategic importance of our products in client organizations, client planning horizons, and client purchasing preferences and patterns. For these reasons, we expect perpetual license revenue to continue to fluctuate in future periods.

Professional services

        For the quarter ended March 31, 2005, professional services revenue increased $2.3 million, or 109%, over the first quarter of 2004. Average professional services revenue per client increased 77% in the first quarter of 2005 compared to the first quarter of 2004, and average number of clients increased 18%. Revenue per client increased from higher utilization in the first quarter of 2005, and from our focus on expanding service offerings provided in conjunction with our broader product offerings. We increased our capacity to deliver professional services by increasing our average employee count to 77 employees at March 31, 2005 from 40 employees one year earlier.

        The mix of professional services revenue to total revenue will also affect our operating results from period-to-period, due to the lower gross profit earned on professional services revenue as compared to software, hosting and support revenue. We expect professional services revenue to range between 20% and 25% of total revenue in future periods.

Cost of Revenue

Software, hosting and support

        For the quarter ended March 31, 2005, cost of software, hosting and support revenue increased $485,000, or 31%, over the comparable 2004 quarter mostly due to the addition of staff to support new product offerings. Staff additions in our software, hosting and support organizations increased salaries and related employee costs by $255,000 in the first quarter of 2005 over the first quarter of 2004, and equipment depreciation expenses and third-party hosting service costs increased $149,000. Average employee count in our hosting and support organization was 52 in the first quarter of 2005 compared to 41 in the first quarter of 2004. As a percent of the associated revenue, cost of software, hosting and support remained constant at 15% in the first quarter of 2005 and 2004.

Professional services

        For the quarter ended March 31, 2005, professional services costs increased $1.4 million, or 106%, over the comparable 2004 quarter. As a percent of the associated revenue, professional services costs were 60% in the 2005 quarter as compared to 61% in the 2004 quarter. The growth in absolute dollars in the first quarter of 2005 resulted from staff additions and associated travel and living expenses. Average employee count in our professional services group was 77 in the first quarter of 2005 compared to 40 in the first quarter of 2004.

Operating Expenses

Sales and Marketing Expenses

        For the quarter ended March 31, 2005, sales and marketing expense increased $2.6 million, or 38%, over the comparable 2004 quarter primarily due to the addition of employees to our sales and marketing group. Average employee count in our sales and marketing group was 188 for the first quarter of 2005 compared to 140 for the first quarter of 2004, which increased salaries and related costs by approximately $1.4 million. In addition, we incurred incremental sales incentive costs of $0.7 million in the 2005 quarter due to growth in new contracts signed. As a percent of total revenue, sales and marketing expenses declined to 51% in the first quarter of 2005 from 53% in the first quarter of 2004.

Research and Development Expenses

        For the quarter ended March 31, 2005, research and development expenses increased $356,000, or 20%, over the comparable 2004 quarter due to higher salaries and related costs. Average employee count in our research and development organization grew to 89 employees in the first quarter of 2005 from 70 employees in the first quarter of 2004.

General and Administrative Expenses

        For the quarter ended March 31, 2005, general and administrative expenses increased $257,000, or 22%, over the first quarter of 2004 primarily due to employee growth. Average employees in our general and administrative organization were 37 in the first quarter of 2005 and 27 in the first quarter of 2004, which increased payroll and related costs by approximately $229,000.

Recent Development

        As discussed in Note 7, in May 2005 we purchased the assets and hired certain employees of Convergent Voice, Inc. We expect that the addition of Convergent Voice assets and employees will increase cost of software, hosting and support by approximately $150,000 per quarter, and increase research and development expenses by approximately $200,000 per quarter.

Interest and Other Income (Expenses), Net

        Interest income of $303,000 in the quarter ended March 31, 2005 consisted of earnings on our cash equivalent and short-term investment portfolio, and to a lesser extent, interest earned on long-term customer receivables. In August 2004, we completed our initial public offering of common stock and received net proceeds of approximately $40 million, most of which was invested in short-term, interest-bearing securities. Interest expense in the first quarter of 2004 consisted primarily of amounts paid or accrued under our outstanding long-term debt at that time. We paid down all of our long-term debt of in the second half of 2004.

Provision for Income Taxes

        Our provision for income taxes was 5% of pre-tax income for the three months ended March 31, 2005 as compared to 18% in the first quarter of 2004. The provision for both periods consists primarily of foreign withholdings for which net operating losses are not available. Our provision for income taxes is less than the statutory rate mostly due to the utilization of U.S. net operating loss carryforwards.

        At March 31, 2005, we had $21.7 million of net deferred income tax assets that have been reserved in full by a valuation allowance. In the future, if available evidence indicates that it is more likely than not that we will be able to utilize some or all of our deferred tax assets, we will record an income tax benefit in the amount of the asset recognized. At that time, we expect that our effective tax rate would likely increase.

Liquidity and Capital Resources

        Information regarding deferred revenue and cash provided by operating activities follows (in thousands):

        We have historically funded our operations with cash from operations, equity financings and debt borrowings. In August 2004 we completed our initial public offering of 6.4 million shares of common stock and received net proceeds of approximately $40 million. The offering proceeds are invested in short-term, interest-bearing securities. During the second half of 2004 we paid down all of our then outstanding long-term debt.

        At March 31, 2005 cash and cash equivalents, and short-term investments, totaled $52.9 million. In addition to our cash and short-term investments, other sources of liquidity at March 31, 2005 included a $3.0 million bank line of credit facility under which there have been no borrowings.

        Operating activities provided $3.2 million of cash during the three months ended March 31, 2005, as compared to $0.3 million of cash from operations in the corresponding period of the prior year. The majority of our cash from operations in the first quarter of 2005 was from growth in deferred revenue and collections of accounts receivable. We typically bill customers on net 30-day terms at the beginning of the license period, which is reflected in accounts receivable and deferred revenue. Customers may elect a monthly payment option, or in certain circumstances, installment payments, which are reflected in current and non-current term receivables. Our new business in the first quarter of 2005 included a higher dollar volume of monthly payment options and, consequently, we expect collections of receivables to be slightly lower in our second quarter ending June 30, 2005.

        Cash required for income taxes has not been significant historically and is not expected to be significant for the remainder of 2005.

        Investing activities provided $10.4 million in cash during the three months ended March 31, 2005 due to the liquidation of short-term investments and re-investment of proceeds in cash equivalents. Other investing activities included $1.1 million of equipment acquisitions for our hosting operations and employee growth.

        As discussed in recent developments, in May 2005 we acquired the intellectual property and other assets of Convergent Voice, Inc. for $1 million, which was paid in cash upon closing. In addition to the asset purchase, we agreed to hire certain personnel of Convergent Voice. The asset acquisition and additional employees are not expected to have a material effect on the Company's liquidity or financial condition.

        Financing activities provided $0.6 million in the three months ended March 31, 2005 from the exercise of employee stock options.

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

Contractual Obligations and Commitments

        During the quarter ended March 31, 2005, we entered into a new office lease agreement, and extended two existing office lease agreements, with Genesis Partners LLC. As a result, our contractual obligations under operating lease agreements will increase by approximately $250,000 in 2005, and approximately $360,000 in 2006 through 2009.

Risk Factors

        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 Registration Statement on Form S-1 and subsequent reports on Forms 10-Q, 10-K 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.

Risks Related to Our Business

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

        We may not be able to sustain or increase our profitability in the future. Prior to 2004, we incurred significant operating losses of approximately $4.1 million in 2003, $2.7 million in 2002 and $15.3 million in 2001. As of March 31, 2005, we had an accumulated deficit of approximately $40.2 million. We expect to continue to incur significant 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 maintain profitability. Even if we continue to achieve profitability, we may not be able to increase profitability on a quarterly or annual basis in the future, which may cause the price of our stock to decline.

Our quarterly results of operations may fluctuate in the future.

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

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our ability to retain and increase sales to existing clients, attract new clients and satisfy our clients' requirements;



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changes in the volume and mix of term and perpetual licenses sold in a particular quarter, because perpetual license revenue is recorded in full into revenue upon delivery whereas term licenses are recorded into revenue ratably over the period of license;



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our policy of expensing sales commissions at the time of invoice, while the majority of our revenue is recognized ratably over future periods;



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changes in the mix of revenue between professional services and software, hosting and support;



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changes in the mix of voice self service applications sold and/or usage volume, and the corresponding third party hosting fees;



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the timing and success of new product introductions or upgrades by us or our competitors;



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changes in our pricing policies or those of our competitors;



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the amount and timing of expenditures related to expanding our operations;



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changes in the payment terms for our products and services;



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the purchasing and budgeting cycles of our clients; and

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general economic, industry and market conditions.

        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 the majority of our clients purchase term licenses, and we recognize revenue from these licenses over the term of the agreement, downturns or upturns in sales may not be immediately reflected in our operating results. 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.

        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.

        More than 85% of our revenue is derived from RightNow Service, a suite of solutions used to optimize customer service operations. If we are unable to successfully develop and sell new and enhanced versions of RightNow Service, or introduce new products and solutions for the customer service market, our financial performance will suffer. Although to date we have focused our business on providing solutions for customer service operations, we recently introduced RightNow Sales and RightNow Marketing to expand our solution offerings to the sales and marketing segments of the CRM market. Our efforts to expand beyond the customer service market may not be successful because certain of our competitors have far greater experience and brand recognition in the broader segments of the CRM market. In addition, our efforts to expand our on-demand software solutions beyond the customer service market may divert management resources from our existing operations and require us to commit significant financial resources to a market where we are unproven, which may harm our business, financial condition and results of operations.

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

        The market for customer relationship management 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. Competition has intensified with our most recent product releases. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to add and retain clients, and our business, financial condition and results of operations will be seriously harmed.

        We face competition from:

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companies currently providing customer service solutions, some of whom offer hosted services, including Amdocs Limited, BMC Software Corporation, E.piphany, Inc., eGain Communications Corporation, FrontRange Solutions, Inc., IBM Corporation, Kana Software, Inc., Microsoft Corporation, Oracle Corporation, SAP AG, salesforce.com, inc. and Siebel Systems, Inc.;



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CRM systems that are developed and maintained internally by businesses;



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CRM products or services that are developed, or bundled with other products or services, and installed on a client's premises by software vendors;

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outsourced contact center providers who bundle solutions and agent labor in their service offerings; and



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new companies entering the CRM software market, the on-demand applications market and the on-demand CRM market, or expanding from any one of these markets to the others.

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

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

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

        The market for on-demand application services is at an early stage of development, and it is uncertain whether these application services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand application services in general and for on-demand customer relationship management applications in particular. 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 and continue to support traditional on-site deployment of our software applications, widespread market acceptance of our on-demand software solutions is critical to the success of our business. Other factors that may affect the market acceptance of our solutions include:

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on-demand security capabilities and reliability;



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concerns with entrusting a third party to store and manage critical customer data;



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our ability to meet the needs of broader segments of the CRM market or other on-demand markets;



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the level of customization we offer;



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our ability to continue to achieve and maintain high levels of client satisfaction;



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concerns with purchasing critical CRM solutions from a company with a history of operating losses that only recently turned profitable; and



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

        If businesses do not perceive the benefits of our on-demand solutions, 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.

        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 will depend to a significant extent on our ability to expand our sales and marketing operations. We plan to continue to expand our direct sales force and engage additional third-party channel partners, both domestically and internationally. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our existing direct sales personnel. We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated channel partners, if any existing or future channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services.

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

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

        We have experienced rapid 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.

        We have substantially expanded our overall business, headcount and operations in recent periods. We have increased our total number of full-time employees to 438 at March 31, 2005 from 403 at December 31, 2004. To achieve our business objectives, we will need to continue to expand our business at a rapid pace. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We anticipate that this expansion will require substantial management effort and significant additional investment in our infrastructure. If we are unable to successfully manage our growth, our business, financial condition and results of operations will be adversely affected.

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

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

        As of March 31, 2005, over 85% of our clients were using our hosting services for deployment of our software applications. We provide our hosting services through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in California and New Jersey. We do not maintain long-term supply contracts with either of our co-location providers, and neither provider guarantees that our clients' access to hosted solutions will be uninterrupted, error-free or secure. Our operations depend on our co-location 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 located in our Montana headquarters 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 both the California and New Jersey co-location facilities. In the event that our co-location 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 co-location facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations.

        We architect the system infrastructure and procure and own the computer hardware used at our hosting co-location facilities. 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, 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.

        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.

        We have significant international sales and are subject to risks associated with operating in international markets.

        International sales comprised 25% of our revenue for the three-month period ended March 31, 2005, and comprised 27% of our revenue in the year ended December 31, 2004. We intend to continue to pursue and expand our international business activities. Adverse political and economic conditions could make it difficult for us to increase our international sales or to operate abroad. International operations are subject to many inherent risks, including:

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political, social and economic instability, including conflicts in the Middle East and elsewhere abroad, terrorist attacks and security concerns in general;



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adverse changes in tariffs and other protectionist laws and business practices that favor local competitors;



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fluctuations in currency exchange rates;



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longer collection periods and difficulties in collecting receivables from foreign entities;



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exposure to different legal standards and burdens of complying with a variety of foreign laws, including employment, tax, privacy and data protection laws and regulations;



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reduced protection for our intellectual property in some countries;



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expenses associated with localizing products for foreign countries, including translation into foreign languages; and



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import and export license requirements and restrictions of the United States and each other country in which we operate.

        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. We typically do not engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations. Any of these factors may adversely affect our future international sales and, consequently, affect our business, financial condition and results of operations.

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

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

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

        Our success and future growth depends to a significant degree upon the skills, experience, performance and continued service of our senior management, engineering, sales, marketing, service, support and other key personnel. Specifically, we believe that our future success is highly dependent on Greg Gianforte, our founder, Chairman and Chief Executive Officer. In addition, we do not have employment agreements with any of our senior management or key personnel that require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty. If we lose the services of Mr. Gianforte or any of our other key personnel, our business will be severely disrupted and we may be unable to operate effectively. We do not maintain "key person" life insurance policies on any of our key employees except Mr. Gianforte. This life insurance policy would not be sufficient to compensate us for the loss of his services. Our future success also depends in large part upon our ability to attract, train, integrate, motivate and retain highly skilled employees, particularly sales, marketing and professional services personnel, software engineers, product trainers, and senior personnel. Competition for these personnel is intense, especially for engineers with high levels of expertise in designing and developing software and for senior sales executives.

        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 claims against us, which could result in the expense and risk of litigation. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources. If one or more of our products fails to perform or contains a technical defect, a client may assert a claim against us for substantial damages, whether or not we are responsible for the product failure or defect. We do not currently maintain any warranty reserves.

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

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

        Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws, patents and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. We may not be able to obtain any further patents or trademarks, and our pending applications may not result in the issuance of patents or trademarks. Any of our issued patents may not be broad enough to protect our proprietary rights or could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

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

        The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. As we seek to extend our CRM product and service offerings, we may be constrained by the intellectual property 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 many of our license agreements 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, such as the GNU General Public License. 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.

        Future acquisitions could disrupt our business and harm our financial condition and results of operations.

        In order to expand our addressable market, we may decide to acquire additional businesses, products and technologies. In May 2005, we acquired the intellectual property and other assets of Convergent Voice, Inc., our first acquisition since becoming a public company. Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following:

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an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;

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we may encounter difficulties in assimilating and integrating the business, technologies, products, personnel or operations of companies that we acquire, particularly if key personnel of the acquired company decide not to work for us;



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our existing and potential clients and the customers of the acquired company may delay purchases due to uncertainty related to an acquisition;



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an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;



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the acquired businesses, products or technologies may not generate sufficient revenue to offset acquisition costs;



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we may have to issue equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock; and



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acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience.

        We cannot assure you that we will be able to identify or consummate any future acquisitions on favorable terms, or at all. If we do pursue any 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 in the accounting treatment of stock options will adversely affect our results of operations.

        The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment ("SFAS 123R"). The statement requires that the compensation cost relating to share-based payment transactions be recognized in financial statement based on the fair value of the equity or liability instruments issued, and is effective for annual periods beginning after June 15, 2005. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). SFAS 123R requires us to value our employee stock option grants, transactions under our Employee Stock Purchase Plan, and other possible equity-based transactions, pursuant to a fair value formula, and then amortize that value against our reported earnings over the vesting period in effect for those transactions. We currently account for stock-based awards to employees in accordance with APB 25, and have adopted the disclosure-only alternative of SFAS 123. This change in accounting treatment will materially and adversely affect our reported results of operations as the stock-based compensation expense would be charged directly against our reported earnings.

        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.

Risks Related to Our Industry

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

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

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

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

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

        Businesses using our solutions collect personal information regarding their customers when those customers contact them with customer service inquiries. A valuable component of our solutions is their ability to allow our clients to use and analyze their customers' information to increase sales, marketing and up-sell or cross-sell opportunities. Federal, state and foreign government bodies and agencies, however, have adopted and are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our clients may limit the use and adoption of this component of our solutions and reduce overall demand for our solutions. Furthermore, even where a client desires to make full use of these features in our solutions, privacy concerns may cause our clients' customers to resist providing the personal data necessary to allow our clients to use our solutions most effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market acceptance of our products. For example, regulations such as the Gramm-Leach-Bliley Act, which protects and restricts the use of consumer credit and financial information, and the Children's Online Privacy Protection Act of 1998, which restricts the ability of companies to collect personal information online from children under the age of 13 without their parents' consent, impose significant requirements and obligations on businesses that may affect the use and adoption of our solutions by existing and potential clients.

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

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

        Non-solicitation concerns, laws or regulations may adversely affect our clients' ability to perform outbound marketing and other e-mail 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 e-mails and, among other things, obligates the sender of such e-mails to provide recipients with the ability to opt-out of receiving future e-mails from the sender, and establishes penalties for the transmission of e-mail 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 e-mail, and laws that regulate commercial e-mail practices are being developed or adopted in many of the international jurisdictions in which we do business, including Europe and Australia. 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 e-mail, without any common protocol to determine whether the recipient desired to receive the e-mail being blocked. As a result, it is difficult for us to determine in advance whether or not e-mails generated by our clients using our solutions will be permitted by spam filters to reach the intended recipients.

        Our RightNow Marketing solution specifically serves the market for mass distribution marketing and other e-mail communications. The increasing regulation of e-mail delivery, both domestically and internationally, and the spam filtering practices of Internet service providers and e-mail users generally, will place significant additional burdens on our clients who have outbound communication programs, and may cause those clients to substantially change their outbound communications programs or abandon them altogether. The concerns and legal requirements surrounding non-solicitation and compliance with the CAN-SPAM Act and other laws may reduce 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 the CAN-SPAM Act and other 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.

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

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

Risks Related to Ownership of Our Common Stock

        The significant control 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.

        Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, together beneficially own approximately 43% of our currently outstanding common stock and, together with our other officers and directors, beneficially own approximately 64% of our currently outstanding common stock. In addition, none of the shares of common stock held by Mr. Gianforte and Mrs. Gianforte are subject to vesting restrictions. As a result, Mr. Gianforte and Mrs. Gianforte, acting alone or together with some of our other officers and directors, will be able to control all matters requiring stockholder approval, including the election of directors, management changes and approval of significant corporate transactions. This concentration of ownership 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 control 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.

        Our management has broad discretion over the use of the proceeds from our initial public offering and might not apply the proceeds of our initial public offering in ways that enhance our results of operations.

        Our management has broad discretion to use the net proceeds from our initial public offering. We expect to use the net proceeds from our initial public offering for general corporate purposes, including working capital and capital expenditures, and for possible investments in, or acquisitions of, complementary businesses, services or technologies. We have not allocated these net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

        Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound, Australian dollar, and Japanese yen, because our contracts are frequently denominated in local currency. To date, we have not entered into any hedge transactions since exchange rate fluctuations have had little impact on our operating results and cash flows. In the future, we may utilize foreign currency forward and option contracts to manage currency exposures.

Interest Rate Sensitivity

        Interest income and expense are sensitive to changes in the general level of U.S. interest rates. Net proceeds of our initial public offering of common stock are invested in short-term, interest-bearing securities, which are subject to credit and interest rate risk. Our investment portfolio is investment-grade and diversified among issuers and types to reduce credit risk. The average maturity of our investment portfolio is less than 90 days and we intend to hold the investments until maturity. If market interest rates were to increase by 100 basis points from the level at March 31, 2005, the fair value of our investment portfolio would decline by approximately $117,000.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

        Our management, 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 timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Securities Exchange Act of 1934.

(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 the Company's consolidated financial position, results of operations or liquidity.

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

(a)

Sales of Unregistered Securities

        During the three months ended March 31, 2005, we issued and sold 26,709 shares of our common stock to one of our lenders upon its exercise of certain warrants, previously issued in connection with our equipment and commercial bank financing arrangements, pursuant to the net exercise provision of such warrants. The sale and issuance of these shares of our common stock were determined to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering, where the purchaser was sophisticated and represented its intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof, and where the purchaser received or had access to adequate information about us.

(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. Of the 7,245,000 shares registered under the registration statement for an aggregate offering price of $50,715,000, we sold 6,416,961 shares, including shares sold upon exercise of the underwriters' over-allotment option, for an aggregate offering price of $44,918,727, 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 $2,253,615. 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. We currently intend to use the offering net proceeds for general corporate purposes as described in the prospectus for the offering. We are currently assessing the specific uses and allocations for these net proceeds. Pending these uses, the net proceeds from the offering are invested in short-term, interest-bearing, investment-grade securities. 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.

(c)

Not applicable.

Item 3. Defaults Upon Senior Securities

        None.

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

        None.

Item 5. Other Information

        None.

Item 6. Exhibits

Exhibits

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

†

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

*

Incorporated by reference to the exhibit of the same number from the Company's registration statement of Form S-1 (File No. 333-115331) initially filed with the Securities and Exchange Commission on May 10, 2004, as amended.

**

Incorporated by reference to the exhibit of the same number from the Company's current report on Form 8-K (File No. 000-31321) filed with the Securities and Exchange Commission on April 1, 2005.

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: May 13, 2005

RightNow Technologies, Inc.
(Registrant)