RightNow got a bit of rough time when it released its quarterly results last week. For the full year, it now expects losses in the range of $0.65 (£0.32) to $0.70 (£0.34) per share with full-year revenue in the range of $108 million (£53.15m) to $110m (354.13m). Previously, RightNow expected full-year losses of $0.51 (£0.25) to $0.59 (£0.29) per share on sales of $116m (£57.09m) to $120m (£59.05m)
Second-quarter losses widened as a shift in the firm’s business model caused a sales decline. This shift has seen the transference of revenue from being booked in the current quarter to being booked as deferred revenue on the balance sheet. But expenses incurred in installed new clients are still booked in the current quarter. The knock-on effect is sharply dropping revenue growth trends (on the income statement) while increasing the losses incurred by the company.
CFO Susan Carstensen explained: “Last quarter, I detailed our plans to change some elements of the business model in order to reflect the current state of the on-demand market and to better align our financial statements with our business success. At that time, we said, we would continue to offer perpetual licences as an option to customers. And we forecasted revenue from those licences while continuing to decline as a percentage of revenue but stay flat in total dollars. We now know that the market is moving away from perpetual licences, even faster than we had anticipated. We’ve seen it in our results and in our pipeline. To give you a good idea of how fast it is happening, compare the full year 2005 to 2006. While our bookings grew 50 per cent and recurring revenue grew 38 per cent, perpetual sales were flat.”
Now none of this should have come as any surprise to Wall Street, but for some reason it seemed to. The firm’s stock collapsed 20 per cent on the announcement of the results. Questioning from analysts on the conference call after the results news was decidedly sceptical, bordering on the hostile. For example, “how much confidence do you have in your ability to set numbers and then beat them?” and “is your lower growth a result of market issues or execution issues?”.
Carstensen was as bullish as she could be. “We believe the true sign of success in any business is the ability to generate cash. That has been a constant in our business model. And as we work through this transition in 2007, cash will be the clearest sign of success. We continue to expect to grow cash from operations approximately 30 per cent in 2007. Many of you have asked that we provide some continued visibility on bookings especially during this transition period. The reality is that with the elimination of perpetuals, even the gross bookings number is not meaningful for year-over-year comparison. What is meaningful in comparable year-over-year is a measure of our new recurring business. The recurring revenue plus the change in net deferred revenue is a proxy for the new recurring business we are signing and billing.
“While the short-term income statement impact is somewhat painful for all of us, these changes are unquestionably the right thing to do for the business and for our shareholders – and now is the right time to do it. We are increasing the visibility and predictability of our business, increasing the lifetime value of the customer relationship, all while expecting to grow recurring revenue by 40 per cent and cash from operations by 30 per cent.”
CEO Greg Gianforte also struck an upbeat note, arguing that the transition was necessary. “The next stage for us in terms of our vision is, how do we take this business from $100 million to $1 billion in revenue,” he said. “We’ve got to have the right people in place. It is critical for us that we pushed decision-making out away from headquarters into the field close to where the customers are. In particular that meant putting a General Manager in Europe to run Europe, to move our very successful public sector business, to put a person on the ground in Washington, DC. I personally think that has been an issue that we needed to address to continue to grow that business. So, I think we have a much stronger team today than we did six months ago. And honestly, I hope to have a much stronger team six months from now.”
“There’s been quite a few rumours, an amazing amount of speculation about our comp plan. And as we said in the last call last fall, the comp plan we rolled out earlier this month pays our reps the same or more under the new comp plan than the old comp plan. There was some speculation that we were going to cut payouts by 75 per cent to our reps this year and if we had done that, we wouldn’t have any reps working for us anymore. I mean it’s such a ludicrous idea. So, the focus in terms of the new plan is really on recurring revenue in cash. And what we've done is, we've aligned the incentives and earning potential of the reps exactly in line with the overall corporate objectives. And this is part of the conflict we have seen in the past with our focus on bookings and not having it show up in the financial results of the business. The underlying fundamentals are very strong and now we have gotten them aligned up and down the line.”
But the company clearly has its work cut out to restore confidence among some elements of the financial analyst community. “Significant uncertainty remains,” said Cantor Fitzgerald analyst Mark Verbeck, adding that RightNow would probably lose money in the next five quarters. “Historically, the quarter-over-quarter change in recurring revenue has been fairly volatile, likely influenced in part by the licence offering.”
For now, the company needs to keep on chalking up customer wins and demonstrating that its emphasis on “customer experience” is working while making the painful strategic shift that will clearly go on hurting for some time. As Gianforte said: “The transition that we outlined earlier in the year is proceeding well, although it is taking longer than expected.”