RightNow Technology (RNOW): Business Optimization a Secular Growth Opportunity

Companies in Online Business Optimization and Data Warehousing/Business Intelligence represents a secular growth opportunity with several point vendors providing different value propositions, but all helping companies improve online businesses and maximize ROI on their online sales, marketing and service initiatives. This includes technologies such as e-Commerce, Web Analytics, Web Content Management, Web Self-Service and Internet/Mobile Test & Measurement. RightNow Technology (RNOW, Hold) appears to have overcome the negative investor sentiment associated with the changes to its business model in 2007, and may be on the cusp of delivering positive results in 2009.

RightNow is a leading provider of hosted customer service & support solutions to customers of all sizes, with a high concentration of enterprise accounts. Its solution features a self-learning knowledge base that supports multiple communications channels, including Web, interactive voice, e-mail, chat, telephone and proactive outbound e-mail communications.

RightNow's final Q4 results and guidance showed meaningful progress, after many quarters of disappointing results. Bookings were impressive and deal metrics were solid. The company is driving at a faster pace towards its longer-term operating-margin goal of 18-22% and could well see a ~700 basis points improvement in margin in 2009.

In an economic environment where most of the companies in our coverage are posting bad results with little top-line growth, RightNow stands out as both a top-line and margin-expansion story. The negatives remain inconsistent execution and uncertainty over cash flow expectations.

Although we would like to get bullish on the shares of RNOW, it appears that deal flow has slowed significantly in Q1, which may create a quick halt to the current momentum. However, we would become more positive once we learn that up-selling is picking up, a potential in Q2/2H:09.

RNOW's recent focus on selling desktop applications to call center agents opens up new opportunities (mostly in displacing legacy technologies such as Vantive/Siebel) with higher ASPs. Further, interest continues to rise for its chat, co-browse, and e-mail marketing modules and the concept of creating an integrated multi-channel support platform.

Finally, RNOW's "land-and-expand" strategy gives the company material up-selling opportunities into the installed base with sizable opportunities in the pipeline, not likely in Q1 though.

We prefer to maintain our Hold rating till we see evidence of earnings growth sustainability in 2009.