RightNow Tech -- Software Firming Up?

RightNow Technologies, Inc. (RNOW) reported better-than-expected results for Q4:FY08 with slightly lower revenue and GAAP earnings exceeding our estimates. License revenues were slightly below our estimates with recurring revenues growing 9.9% year over year. Service revenues grew 46.2% year-over-year.

RNOW has recently switched to a subscription-based model, which appears to be paying dividends. The net gain for the quarter was $0.7 million or $0.02 per diluted share on a GAAP basis, which was higher than our estimates and a profit of $2 million or $0.06 per share on a pro-forma basis after backing out stock-based compensation expenses. This compares to a loss of $0.10 in the year-ago quarter and a loss of $0.04 in the prior quarter on a GAAP basis.

Forward guidance has led us to reduce our revenue estimates while also reducing our GAAP loss estimates in 2009. We are projecting Q1:FY09 revenue target of $37.0 million and now project revenues for the full-year 2009 to be $156 million. On a proforma basis, we now expect the company to post a profit of $5.91 million or $0.18 per share in FY09, and do not anticipate the company to reach quarterly break-even on a US GAAP basis before Q4 of 2009.

Although sell-side estimates are being revised upwards for several software companies, including Redhat (RHAT) and Progress Software (PRGS), reflecting higher-than-expected reported earnings and similar guidance, we are a bit cautious to be so bullish just as yet for the sector as a whole. Forward guidance for most software companies indicate declining revenues for 2009, while higher expected earnings are being pinned to cost-control measures mostly.

Keep in mind that software companies typically have higher operating expense-to-sales ratios and curtailing opex only may not lead to sustained earnings growth when the sector picks up steam beyond 2009.

We have a Hold rating on shares of RNOW with a target price of $8.75.