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RightNow Technologies, Inc. (NASDAQ:RNOW)

Q4 2009 Earnings Call

February 3, 2010 4:30 pm ET

Executives

Stacie Bosinoff – Investor Relations

Greg Gianforte - Chief Executive Officer

Jeff Davison - Chief Financial Officer

Analysts

Tom Ernst – Deutsche

Brendan Barnicle - Pacific Crest Securities

Patrick Walravens - JMP Securities

Laura Lederman - William Blair

Analyst for Thomas Roderick - Thomas Weisel Partners

Analyst for David Hilal - FBR Capital Markets

Sasa Zorovic - Janney Montgomery

Nathan Schneiderman – Roth Capital

Michael Huang - Thinkequity Llc

Analyst for Steve Ashley - Robert W. Baird

Keith Weiss - Morgan Stanley

Eric Lemus – Raymond James

Analyst for Mark Murphy – Piper Jaffray

Analyst for Derek Wood – Wedbush Securities

Analyst for Ross MacMillan - Jefferies & Co

Operator

Welcome to today’s RightNow Technology’s fourth quarter 2009 financial results conference call. (Operator Instructions) At this time I would like to turn the call over to Ms. Stacie Bosinoff.

Stacie Bosinoff

Good afternoon everyone and thank you for joining us on RightNow’s fourth quarter and year-end 2009 conference call. Joining me on the call today is CEO and Founder, Greg Gianforte, and Chief Financial Officer, Jeff Davison. Before turning the call over to the company, I will read our Safe Harbor statements.

During the course of this call, we may make projections or forward-looking statements regarding future conditions or events which may drive our future business, current and new products and services and their performance, the size and strength of our markets, our future financial performance and outlook for the company. These forward-looking statements may include, but are not limited to, statements about revenue growth and profitability, our future strategic plans and perceived growth opportunities, perceived opportunities related to the social platform, market acceptance of our products and other statements relating to our operating results. These forward-looking statements speak only as of today and are based upon the information currently available to us. This information will likely change over time.

By discussing our current perception of our market and the future performance of the company and our products with you today, we are not undertaking an obligation to provide updates in the future. We caution you that such statements are just projections and actual events and results may differ materially from what we discuss today. Please refer to the documents that file with the SEC, specifically our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

As a reminder, we are providing a supplemental data sheet, as well as an updated investor presentation on the Investor Relations section of our website, that contains historical information for easy reference. During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliation of GAAP which can be found in our company’s earnings release, which is posted on the Investor Relations portion of our website.

With that, I will turn the call over to Greg.

Greg Gianforte

Thanks Stacie. Welcome everyone. I will recap the quarter and then talk about our achievements this past year and how we have positioned RightNow for continued growth in 2010.

In short, it was another record quarter for RightNow. I am very pleased with the consistent performance we delivered in 2009 and in Q4 both revenue and EPS were above our guidance. Revenue was $41.6 million and non-GAAP EPS was $0.10. We had eight deals over $1 million and added great customers across the whole CX solution for web, contact center and social.

The launch of RightNow’s CX at our Users Conference in October has been a tremendous success. CX grew out of a few simple things. One, our focus. Our product focus has always been driven by the customers. Two, we are uncompromising about our customer satisfaction. Three, we are experts in customer experience. Every employee at RightNow is fully vested in the success of CX and our customers. We take great pride in helping them deliver exceptional customer experiences.

New and expanded business came from customers like Alltel, [Belvacom], EHarmony, Jacuzzi brands, Life Nation, 3M, Napster, Rakutan, Survey Monkey, Social Security Administration and Virgin Atlantic Airways.

One of the trends in the quarter was an increase in deals where we were replacing home-grown systems. As more CIOs are recognizing the benefits of spending their dollars on proven solutions where they can easily measure the ROI instead of throwing more dollars at legacy systems. We are also seeing continued strong win rates against Salesforce.com including a number of replacements this past quarter.

We had 704 million interactions in the fourth quarter and approximately 2.5 billion for the year which was a 19% increase over last year. This number of interactions has more than doubled over the past three years, a testament to the increasing role we play in helping our customers address the customer experience across all interaction channels. This metric is increasing for a number of reasons. Partly because we have expanded our customer base while adding new customers and also because we are leading the industry in solving the challenge of handling more customer touches while keeping costs down.

Overall we had a great quarter and a great year. Our sales teams executed well across all geographies and with the launch of CX we are very excited about 2010. I will say we believe CX is a real game changed for right now. This platform ties together the three primary customer experiences that really matter; Web, social and contact center. These experiences all support the customer lifecycle from need to buy to support to buy more which we believe helps our customers not only reduce costs but also increase revenue. We listened to our customers and focused development on delivering a platform that provides a seamless customer experience across all channels while offering features and enhancements that drive better performance out of each of the individual channels.

Our commitment to our customers’ success can be seen in our recently unveiled Centers of Excellence which bring together experts from RightNow’s product management, development, support, professional services and sales teams to define best practices, provide deep product expertise and drive additional solution innovation. The five centers of excellence cover all major building blocks of our CX solution and are one more example of how we are helping our clients drive real business results.

One of the things I am most proud of is while we were pushing the envelope on the product side we also delivered strong performance on the financial side growing our top line and marching towards our operating margin target. We had two primary objectives in 2009. One, to take care of our customers. Two, to grow profitability. Our success against these objectives was the primary reason we grew recurring revenue 22% in the fourth quarter and 13% for the year and includes our operating margin over 1,000 basis points over last year.

One priority for me over this last year has been spending time on the road with customers and partners. In 2009 I visited over 150 individual customers around the globe. Those visits not only gave us perspective on what drove our strong performance in 2009 but also highlights the key trends that we believe will drive our success in 2010 and beyond.

At a high level our results for 2010 will be a function of our continuing momentum with large consumer organizations and helping our clients improve their customer experiences across web, social and contact center.

I would like to spend a couple of minutes just talking about the three specific trends that I think will be important in 2010. First, our focus on the customer experience and RightNow’s CX is quickly moving higher in the executive suite in large organizations. I have mentioned that before that I am meeting with more C-level people than ever before. This trend continues and we believe this shift in attendance has to do with the increasing importance of the customer experience.

We are the experts and our customers are asking us to help them develop their CX strategies. The challenges they want to solve is integrating all three experiences; the web, contact center and social into one actionable knowledge base and they want direction from us. They know what their ultimate goal is but they want us to help them reach that goal.

Our recipe for success starts with our eight steps approach to great customer experience and the expertise we have built around this. Recognizing this strategic advantage we have established a comprehensive set of best practices. Our customers work with hands on experts who are tasked with using our best practices to walk clients through the eight step approach, benchmark their efforts and show them how to best utilize the CX platform for an integrated customer experience.

Let me give you an example of one fortune 50 B2B2C company who decided to implement an integrated customer experience initiative that started with a directive from the CIO and the CMO. In addition, the Chief Security Officer was also heavily involved as our team worked directly with him to clear their security requirements. This was a customer we had three C-level execs each owning a specific business process mandate shaping the direction of the project. We ended up growing our relationship with a multi-solution commitment in Q4 that included our agent desktop, knowledge base, web self service, enterprise feedback management and marketing. With serving their customer’s needs top of mind at the executive level we were able to work together to integrate a customer experience strategy unique to their consumers.

A second trend I picked up from my customer visits is the increased importance of the social experience. You will recall when we launched our social solution we talked about our experience in this market over the past four years and why we believe it is important to move from partnering in this space to a fully integrated social capability in RightNow’s CX. This focus on social has really intensified in recent months. Most of the customers I have met wanted to talk about how to leverage social networking in a consumer business.

Their reasons for this focus are obvious. Facebook gets over 5 billion minutes of use a day. There are 3 million Tweets every day. 100 million videos on YouTube viewed and 85% of social media users believe a company should go beyond just having a presence online and actually interacting with the customers. The number of sites with user generated content is growing every day. Organizations need to listen to and participate in conversations in the cloud and facilitate communities for their customers.

We believe integrating the social channel with our CX platform has proven to be the right move and we have had tremendous response from our customers. In Q4 we saw initial adoption in social that exceeded our expectations. One of these new social customers was Photo Box, Europe’s number one online photo site. They were an existing user of many of our solutions and when we showed them our new social experience it didn’t take long for them to see the benefits. They have a lot of traffic through Facebook and Twitter they want to manage better. They also want to use the platform to answer support issues, up sell and cross sell through their communities and drive product innovation.

In addition, Photo Box has many white label customers throughout EMEA and with our social solution they will be able to integrate these communities using the same platform. This was a competitive win with our key differentiators being the integration with the whole CX platform and a more complete social solution.

One other notable social expansion in the quarter was with My Space. You may remember in Q3 we formed a relationship with My Space for web sales service and agent desktop and in that account we replaced Salesforce.com. In the fourth quarter they expanded their solution to include social. Integrating the social experience is a key element in the overall customer experience and our customers are recognizing this as well.

The third theme from my customer meetings was the importance of our new government cloud. We launched our government cloud offering last year and we have had a strong response from the federal sector. 90% of our government customers are already live in the cloud or are in the process of migrating to the cloud. The reality is Salesforce.com, Oracle On Demand CRM and the cornucopia of other cloud based offerings don’t even meet the moderate security levels for federal agency applications let alone the higher security levels required by the Department of Defense that we are deploying solutions under today.

Cloud offering differentiates us from our competitors and puts us a league of our own. For example, the United States Army Human Resources Command last quarter committed to our government cloud offering. This command manages all personnel activity for the U.S. Army, enlisted, officers, Reserves, National Guard and certain Joint Forces. They selected our CX platform for the entire command beating out Oracle and other legacy CRM custom developed, on-premise solutions.

We have had great success in the public sector but having our government cloud significantly benefits the government accounts that already use RightNow and allows us to move forward with other areas that require this specialized secure capability. Our government initiatives align well also with President Obama’s new Open government directive which requires compliance for all federal agencies for increased transparency, participation and collaboration. Because of our track record of success serving federal government customers we are well positioned to be a strategic partner as cabinet level agencies strive to meet this new directive.

In fact, within one week the Department of Defense publicly declared their compliance with the Open Government directive because of their existing use of RightNow on the website Defense.gov.

As we move further into 2010 we will continue to innovate around the customer. We plan to grow and expand our CX suite every quarter with new capabilities. Our roadmap includes additional social capabilities, new mobile functionality, knowledge based enhancements, new development tools and additional contact center functionality. We are also rolling out a new, easier way to buy CX that we believe will further differentiate RightNow. We will meet our customer’s needs in shorter sales cycles. We are addressing these needs in a dynamic new way that we believe will deepen the partnership between RightNow and our customers.

In short, every software vendor faces the same hurdles when it comes to closing business. We have identified those hurdles and removed them from the buying process. We will be providing more details about this later this quarter.

We are also deploying new client success managers around the globe to ensure that our customers are getting the most from their RightNow engagements. These CSMs will be solely focused on making sure our customers are getting the best from us and helping them march along the eight steps to great customer experiences. I am very excited about what we have in store for this year. As I said earlier, our 2009 objectives were; One, take care of customers and two, grow profitability.

In 2010 our company-wide objectives are to one, rid the world of bad experiences. Two, accelerate growth and expand operating margins. We are looking forward to continuing our momentum, growing our great products for our customers and delivering against our financial objectives.

Before I turn it over to Jeff I want to let you know we will be having our quarterly product release webcast later this month. We will also be inviting you to a marketing event we will be hosting in San Francisco on March 4th. Details on both of these events will follow later but if you are not on our contact list be sure to contact Todd or Stacie at the Blue Shirt Group.

With that I will turn it over to Jeff.

Jeff Davison

Thanks Greg. As Greg mentioned we had another great quarter. Revenue in the fourth quarter was $41.6 million above our guidance. Looking at the breakdown of revenue, recurring revenue was $32.2 million, an increase of 8% from $29.8 million last quarter and a 22% increase over $26.5 million in the fourth quarter last year.

Professional service revenue was $9.4 million for the quarter, an increase of approximately $400,000 from the previous quarter. Bookings for the quarter were $55.5 million in total contract value. As I have mentioned on previous calls bookings will fluctuate quarter to quarter depending on several factors including sales in the period and the makeup of renewals, contract length and the timing of renewals.

That being said we are very pleased with our performance this quarter and this year as we delivered record bookings in the past three quarters. Exiting the year we grew total gross deferred revenue which includes the portion not recorded on the balance sheet to $180 million from $151 million a year ago. The current portion of the gross deferred revenue is approximately $121 million which is expected to be recognized into revenue in the next 12 months. The mix of revenue across geographies for the quarter was 71% Americas, 19% EMEA and 10% Asia Pac.

Turning to ASPs, the average first year contract value was approximately $95,000 for the quarter and approximately $102,000 for the year. We had eight deals over one million, nine new deals between $100,000 and $1 million and 435 deals less than $100,000. The average contract term increased to 25 months compared to 20 months in Q3. For the full year our average contract length was 23 months.

We signed 51 new customers this quarter. Our solutions enabled 704 million customer interactions this quarter compared to 620 million last quarter and 583 million a year ago. In 2009 total interactions were 2.5 billion compared to 2.1 billion in 2008. Strong verticals in the quarter included telecommunications, high tech, retail CPG, public sector and entertainment media.

On expenses note that my comments are before stock based compensation. Gross margin was 70% compared to 71% in Q3. We delivered a 28% professional services gross margin, slightly down from 31% last quarter as we expected. Total operating expenses were $25.7 million this quarter, an increase of about 8% from Q3 and represented 62% of revenue compared to 61% of revenue last quarter. The increase in expenses includes approximately $1 million of expense related to HiveLive as we expected.

We were very pleased to report an operating profit of $3.4 million or 8% of revenue. On the bottom line we reported a GAAP profit of $2.6 million or $0.08 per share. Excluding stock based compensation and a non-recurring litigation settlement our non-GAAP net income was $3.3 million or $0.10 per share.

Weighted average diluted shares at the end of the quarter were 33 million. Headcount at the end of the quarter was 797, up from 792 at the end of Q3 and up 8% from the end of 2008.

Next on the balance sheet and cash flow statement. Cash generated from operations was $4.2 million for the quarter and total cash from operations for the year was $16.1 million compared to $14.7 million last year. Capital expenditures for the quarter were $2.3 million and $6.2 million for the year. DSOs were 72 days for the quarter compared to 69 days in Q3. As we have discussed previously the majority of our business has shifted towards quarterly or annual payments which has resulted in the increased in our deferred revenue and does not appear on the balance sheet. We ended the quarter with total cash and investments of approximately $97 million.

Now turning to guidance. For the first quarter of 2010 we expect revenue to be in a range of approximately $42-42.5 million comprised of an increased in recurring revenue from Q4 and slightly lower professional services revenue. We expect non-GAAP EPS to be in a range of $0.06 to $0.08 and GAAP earnings per share to be in a range of $0.00 to $0.02. For the year we expect revenue in the range of $175 million to $180 million with recurring revenue growth of approximately 20%. We expect non-GAAP operating income which excludes stock based compensation to be in the range of $15-18 million and GAAP operating income in the range of $6.5-9.5 million.

This guidance reflects an operating margin of 9-10% for the full year. We expect interest income for the full year to be approximately $1 million. For tax expense we expect the full year 2010 effective tax rate to increase from the previous guidance of 20% to be in a range of 38-40% or $2.8-4.3 million. This increase is due to the favorable results in Q4 and our expected earnings in 2010. To be clear, this increase in tax rate will not impact our cash tax expenses.

One additional note on the taxes, as you are aware we have a full valuation allowance on our deferred tax assets. As we continue to improve our profitability we believe that we may need to reduce or remove the allowance in 2010. This will result in a benefit to net income and earnings per share. I have not forecasted the impact of this potential benefit in the guidance provided today.

We expect non-GAAP earnings per share for the year in a range of $0.39 to $0.45 and GAAP earnings per share in a range of $0.14 to $0.20 for the year. We expect stock based compensation to be approximately $2 million for Q1 and $8.5 million for the full year with similar quarterly trends as 2009. We expect capital expenditures to be approximately $10 million for the year. We are forecasting 33.8 million fully diluted shares outstanding for the first quarter and 34 million fully diluted shares for the full year.

With that I will turn the call over for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Tom Ernst – Deutsche.

Tom Ernst – Deutsche

A pretty outrageous goal to rid the world of bad experiences. You might have to replace most of the other software companies out there to do that I think.

Greg Gianforte

With a goal like that we know we will be gainfully employed for a long time.

Tom Ernst – Deutsche

Big question first. You have had a very nice acceleration now for a couple of quarters in your revenue run rate but the rest of the metrics look good but aren’t nearing the same acceleration in terms of customer count and your change in current deferred and that sort of thing. How do you view that all in balance as you look forward? You raised the outlook as well so you are feeling better about the environment. Are we seeing just kind of some lumpy short-term performance and that is the big jump in the near-term performance but then more broadly in pipeline you see a build? What is happening?

Greg Gianforte

I think you hit it right. We had seen an acceleration in growth. You look at 22% growth in Q4 in recurring revenue over a year ago and a forecast this year of 20% growth in recurring revenue. The fundamentals in the business are very, very strong. I think there is more revenue going into the deferred number that is not on the balance sheet. Maybe I will point to Jeff and ask him to address kind of the right way to look at that whole deferred area to understand the momentum that is really building in the business.

Jeff Davison

You mentioned a net deferred and we pointed to that in previous years. Really the number to focus on is that gross deferred number that I gave you which is that $180 million. When you compare it to a year ago it was $151 million. So that is 20% increase in that gross deferred. It is not all showing up on the balance sheet due to this trend of signing more contracts with annual payment.

So in the past you recall we have talked about 25% of the business being recorded off-balance sheet or nothing recorded on the balance sheet. That has grown to 45% or more of our business so I just want to be clear you are looking at the gross deferred number we are talking about and not focusing on the balance sheet or the net deferred?

I am just going to add to that, there you have 20% growth over last year. You have Q4 results 22% growth over last year and our guidance for next year is 20% growth in recurring revenue.

Operator

The next question comes from the line of Brendan Barnicle - Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

I was wondering if you could comment a little on gross margins. Saw a little change there. Can you give us any additional guidance on what you are expecting on the gross margin?

Jeff Davison

There was a slight change on gross margin in Q4 that is primarily driven by the slightly lower professional services margin which I was expecting. So all year we ran around 30% or slightly above. In Q4 we did some hiring and I was expecting it to come down, actually expected it a little lower than where it was. I expected it around 26% and we came in at 28%. Going forward I am expecting professional services to be in the lower to mid 20’s as we are doing some hiring and we are giving raises at the beginning of the year so we will see some expenses come up and there will be a little bit of a margin hit on the PS but as we grow the recurring revenue line you are going to continue to see gross margins around 70-71% moving towards our target model.

Brendan Barnicle - Pacific Crest Securities

Anything on the product side in terms of gross margin? Any change there?

Jeff Davison

There hasn’t been anything significantly happening there. No.

Operator

The next question comes from the line of Patrick Walravens - JMP Securities.

Patrick Walravens - JMP Securities

Can you talk a little bit about the change in the competitive dynamics with Salesforce? It sounds like maybe there was a change there.

Greg Gianforte

I wouldn’t say there has been any change between this quarter and last quarter. You will probably remember I went pretty aggressively after them last quarter in large part not because we had seen a difference in the market, our win rate continued to be very, very strong there. But last quarter we did see quite a bit of mistruths and misinformation being promoted and I felt I needed to address it head on. So that is kind of no real change. I will say that we have seen less of the hype this last quarter but if they come out with Version 2.0 of Hype as a service I will let you know as well.

Patrick Walravens - JMP Securities

How about against Oracle?

Greg Gianforte

We continue to see good win rates. Honestly I have been surprised at how quiet they have been. There has really been no product announcements in this area. We haven’t really been seeing them in an as many competitive deals. I did mention one in the call today that was a competitive win, that Army deal. We do regularly beat them. It is not hard because their offering is still exclusively the on-premise offering which costs a lot more and takes a lot longer to install.

Patrick Walravens - JMP Securities

On the CapEx, $10 million in 2010 versus $6 million in 2009. I am just wondering what is that getting spent on?

Jeff Davison

That is a good question on the CapEx. We have been running around $6 million. I would say that last year we probably lagged a bit so I think part of it is catching up there which includes investment in our data centers to support our growth. You read the articles, we are planning headcount growth this year so it is infrastructure to support the headcount. As you know we have eliminated the on-premise version of our software so we are completely in the SAS model now which calls for different accounting rules with a broader capitalization period and as such I expect to be capitalizing software a few million in 2010.

Operator

The next question comes from the line of Laura Lederman - William Blair.

Laura Lederman - William Blair

Can you talk about the ASP in social and what you are seeing so far? I realize it is early days. Also who are seeing there competitively? A total separate question of given the growth in the off-balance sheet deferred it looks like it was a good quarter. I just want to get a sense of how much the quarter drained the pipeline at all or if it is at the same place it was at the beginning of last quarter?

Greg Gianforte

I will take the first half and give the second half to Jeff. On ASP for social, last quarter as I said we exceeded our expectations in terms of new customer signs. In terms of competitive space, honestly it is mostly green field. We did do a number of lithium replacements last quarter. The reason for that was really focused on the integration with the rest of the CX platform that social really can’t be a separate silo. It needs to be integrated with the work flow and the contact center for service level agreement compliance and all of the workflow stuff we have been doing for 13 years.

On ASPs, the average social deal last quarter was between $50,000 to $100,000 although I will say one of our eight deals over $1 million was a social deal. So this is a critical business need. It is primarily a green field, new opportunity. Ever consumer business is going to have to deal with it and there is a willingness to pay to solve this problem. So we were pretty encouraged by that.

Jeff Davison

I think the last part of your question was on growth of the pipeline. Heading into 2010 we are pleased looking at the pipeline for Q1. It has got the consistent makeup of what we have seen in the past which is a good mix of large deals and many other sizes with new and existing customers. I think there is some exciting business in there so we are looking forward to 2010.

Operator

The next question comes from the line of Analyst for Thomas Roderick - Thomas Weisel Partners.

Analyst for Thomas Roderick - Thomas Weisel Partners

If we use the data you provided around deferred revenue it looks like we are getting absolute bookings number of about $180 million which looks like about 10% year-over-year growth. Is that the right way to think about the overall growth in the business this year or should we more look at the recurring revenue growth at 20% exiting Q4?

Jeff Davison

I would look at the recurring revenue growth. If you want to look at 2009 the recurring revenue growth for the full year is like 13%. When you back out foreign exchange it is over 15%. When we look forward to 2010 we look at the more recent quarters from 2009 which are going to be 20% and that is how we are looking forward and that is behind the guidance we have given you on our recurring revenue growth. You are right on your math on the bookings though.

Analyst for Thomas Roderick - Thomas Weisel Partners

On professional services revenue it looks like with all these large deals you would expect to see pro serve up year-over-year but it has been essentially flat. Is this because of the increased involvement you are seeing from your SI partners? Can you talk about the importance of those partnerships as you go forward?

Greg Gianforte

We have an expanding partner strategy but I would say we are doing an awful lot of work in the solution to make it more and more configurable so obviously our goal is not to drive up the PS. We are seeing more involvement from partners but I would say there was a fair amount of services involved in getting people onto the current platform. That is primarily behind us. We think a longer term target for PS is probably lower than where we currently are.

Operator

The next question comes from the line of Analyst for David Hilal - FBR Capital Markets.

Analyst for David Hilal - FBR Capital Markets

Just a question in regards to your renewal conversations and could you talk about renewal rates and when you have those conversations what has changed in Q4 compared to the earlier part of the year? Do you find that customers are now expanding deployments, adding features and adding seats?

Greg Gianforte

Thanks for asking the question. Honestly we have not seen any real change in Q4 from prior periods last year. If you think about, we added 51 new customers last quarter but we also reported over 500 transactions. It is pretty easy to see if you just to the straight numbers 450 transactions were with existing customers and 50 were with new customers. We still have substantial opportunity in our installed base and that shows up as seat expansions, new regions, adding social, adding contact center seats. It is all of that together.

Operator

The next question comes from the line of Sasa Zorovic - Janney Montgomery.

Sasa Zorovic - Janney Montgomery

My first question would be regarding, I didn’t hear you specifically mention it but I just want to clarify that you are sticking with that long-term two years out guidance last June about getting to 20% operating margins run rate two years from now?

Jeff Davison

Yes. Our target operating margin is 18-22% and we are targeting the exit of 2011 to reach that. The way I look at it and how we get there is it is fairly linear. However, our plan to get there is increasing revenue, increasing expenses and we typically see expenses take the biggest increase in Q1 of every year so the operating margin will tend to take a dip there and then climb back up through the year. But that is no change to that when we hit that operating target.

Sasa Zorovic - Janney Montgomery

You used to provide a metric of percentage of sales that was with customers with over $1 billion in revenue or the government. Where does that stand at this point?

Greg Gianforte

That is in our investor deck that we posted on the website today. Jeff…

Jeff Davison

Less than $1 billion is 38%. So that is 62%.

Operator

The next question comes from the line of Nathan Schneiderman – Roth Capital.

Nathan Schneiderman – Roth Capital

Going back to the gross current deferred, I heard the figure of $121 million for the gross current deferred revenue but I didn’t year the year-ago period.

Jeff Davison

I didn’t give you the year-ago period.

Nathan Schneiderman – Roth Capital

Is that something you have?

Jeff Davison

It is if you want to go to the next part of your question and I will come back and give it to you.

Nathan Schneiderman – Roth Capital

Also on these gross deferred metrics I was hoping you could give us the Q3 numbers for the total as well as the current.

Jeff Davison

I am sorry could you repeat that?

Nathan Schneiderman – Roth Capital

You gave us $180 million of which $121 million is current. What was that in Q3?

Jeff Davison

Okay. In Q3 the current was $116 million and Q4 a year ago it was $102 million.

Nathan Schneiderman – Roth Capital

Also the total gross deferred last quarter versus the $180 million this quarter.

Jeff Davison

166.

Nathan Schneiderman – Roth Capital

I was hoping you could share with us the number of social wins you had during Q4 and how many social deal cycles would you say are ongoing right now?

Greg Gianforte

We did 15 deals in Q4 in social but understand that was from a standing start at the beginning of the quarter. No pipeline whatsoever. Typical sales cycles for us are 3-6 months so we were pretty encouraged by that result. We believe that there is application of social across our entire installed base plus with prospects and I am not going to go more specifically than that into the pipeline on a go forward basis.

Nathan Schneiderman – Roth Capital

You ended headcount at 797. Where would you expect that number to be a year from now approximately?

Jeff Davison

We already have news out there that we were planning to hire 100 heads this year. We will be around there. We adjust our hiring as the year goes but that is kind of our initial plan of where we expect to be for the year.

Operator

The next question comes from the line of Michael Huang - Thinkequity Llc.

Michael Huang - Thinkequity Llc

With respect to term length I think that kicked up a little bit in Q4. I just want to clarify is that a function of agent desktop deals or is that something else and how would you expect that to trend through 2010?

Greg Gianforte

Term length is a number that is weighted based on deals. The large deals will influence that. If you look at the eight large deals I would say a good majority of those were 2 and 3 year deals which tend to drive that up. What it is though is we are doing contact center deals and so companies don’t want to enter into a contact center one year license for their solutions. They are looking at this as a longer term solution. So that is why I think that picks up. I see it leveling probably somewhere between 2-3 years.

Michael Huang - Thinkequity Llc

In terms of the 90% migration to the government cloud you mentioned does that impact bookings or annual contract value at all or is this more of an impact on future customer acquisition in the public sector?

Greg Gianforte

On that particular point that 90% I was referring to are existing RightNow customers that may have had some older versions of RightNow capability in on-premise deployments. 90% of them now are either live on our government cloud offering or in the process to move there. The advantages to us and the increased revenue opportunity comes from having them on a later version so they can take advantage of all the CX enhancements we have made over the last five years. If they are on an earlier version we can’t even license stuff to them because it is not even available for on-premise deployment anymore. It is really the opportunity associated with selling them enhanced capabilities once they move into the cloud. Plus they have all the benefit of lower operating costs, higher reliability, all the intrinsic benefits of SAS delivered in that highly secure environment for Department of Defense and the civilian agencies.

Michael Huang - Thinkequity Llc

The 10% that are remaining are those smaller organizations or is there a reason why those haven’t been started yet?

Greg Gianforte

Only that we haven’t gotten a commitment from them yet. I would fully expect that the vast majority of the remaining ones will move into our government cloud.

Operator

The next question comes from the line of Analyst for Steve Ashley - Robert W. Baird.

Analyst for Steve Ashley - Robert W. Baird

I am hoping you can provide a little color on how performance was in various geographies and did you see any improvement in Europe in the quarter?

Greg Gianforte

We had pretty consistent performance across regions. There were no, I wouldn’t say overall we had a record bookings quarter so we were pleased with all the regions. There wasn’t a standout. There wasn’t somebody who was way above anybody else. There were no laggers. It was just good, solid performance across all the regions.

Analyst for Steve Ashley - Robert W. Baird

In terms of the public business or the government business how did the performance in the quarter compare to the performance in Q3?

Greg Gianforte

Q3 is always higher because it is the end of the fiscal year. We had a reasonable quarter in Q4.

Operator

The next question comes from the line of Keith Weiss - Morgan Stanley.

Keith Weiss - Morgan Stanley

I wanted to drill down into the guidance a little bit particularly the commentary around the 20% recurring revenue growth in calendar year 2010. If I am looking at this right if you just take the current run rate on recurring revenues and project that into the first half of 2010 given the easier comps you are going to be growing something above that 20% growth rate. Are you implying a decline in growth rate through the back half of 2010 or is this just either one-time items in 4Q or some other impacts that I am not taking into account in the equation?

Jeff Davison

That is a good question. No we are not forecasting a slow down and pick up or pick up and slow down. What you are seeing is going from Q4 to Q1 not as much of an increase because there are some one-time items in Q4 so each quarter revenue is impacted by business that is close in the quarter and what it consists of and when it closes. So if it closes earlier in the quarter we get more out of it in quarter versus if it closes on the last day which then there is no revenue in the quarter. That is what you are seeing impact the math you are doing there from Q4.

Operator

The next question comes from the line of Eric Lemus – Raymond James.

Eric Lemus – Raymond James

I just have a quick question on your cash right now. As far as an M&A perspective are you going to be using your cash actively for M&A or does the HiveLive acquisition keep you busy for awhile?

Greg Gianforte

I would say we continue to look at things that are consistent with our whole CX strategy and we are pretty picky. So there is no specific plans we are announcing today but we continue to look at things.

Operator

The next question comes from the line of Analyst for Mark Murphy – Piper Jaffray.

Analyst for Mark Murphy – Piper Jaffray

I kind of hopped on a little bit late here but I just wanted to hear a little bit about HiveLive and the performance in the quarter and how that did according to your expectations?

Greg Gianforte

In my mind we had a fabulous quarter related to social. I said in the prepared remarks we exceeded our expectations. The thing that was most impressive to me was that the 15 names we added in Q4 were top drawer names. OPhoto in Europe, number one digital photography site. My Space, I don’t have permission to release the other names on this call but they were all top drawer consumer brands without exception. That bodes well given we started at a standing start at the beginning of September. One of those deals we closed in Q4 came over as part of the pipeline with HiveLive. The remainder were done from a standing start post-acquisition.

Analyst for Mark Murphy – Piper Jaffray

Was there any FX benefit or adverse FX effect on the deferred revenue line in the quarter?

Jeff Davison

From the quarter perspective sequentially nothing big on the deferred revenue, no. The big comparison is when you look to last year.

Analyst for Mark Murphy – Piper Jaffray

What was that on a year-over-year basis?

Jeff Davison

It is about $4 million I think.

Operator

The next question comes from the line of Analyst for Derek Wood – Wedbush Securities.

Analyst for Derek Wood – Wedbush Securities

Going to the government vertical for a moment can you give the percentage of total revenue that comes from the government vertical? And can you speak a little to the pipeline? You talked about the existing customer base but what about the prospective customers?

Greg Gianforte

I am just looking at Michael here. That is posted on the website as part of our investor deck, the trailing 12 months revenue on our public sector. We will get that number for you in a second. 13% on a trailing 12 month basis. We are continuing to see new opportunities in these agencies. I mentioned this Open Government directive which was published in December 2009 from OMB under the Administration. If you Google “Open Government Directive” it is a very short document. It is only a couple of pages but it is a mandate put out by the Obama Administration that all Federal agencies must comply with and in fact they have some deliverables as quickly as 60 days. They are coming due here during Q1.

We think because of our current solution set the mandate and our existing relationships with every executive cabinet level agency we are in a very unique position to help these agencies satisfy those requirements. I mentioned even the Defense.gov they put out a press release if you search Open Government Initiative and Defense.gov you will probably find the press release from the Defense Department announcing their compliance with the Open Government directive. They did that within one week of the directive being published by the white house. So we think that is a good opportunity for us.

Analyst for Derek Wood – Wedbush Securities

Can you talk a bit about the sales structure? Are you making any changes to the regions, comp plans and what are your hiring plans in sales?

Greg Gianforte

We just had our kick off in January. We are off and running. A lot of enthusiasm there. I would say the biggest change that was made in the field organization was the introduction of the client success managers. These are the individuals we spoke about that will be assigned to each customer and working with them to get maximum benefit. What that does is it really significantly increases our selling capacity because it frees up the account executives from dealing with some of that work that will now be passed to the client success manager. So that increases capacity. No fundamental changes to comp plans or anything like that. It is really business as usual.

Analyst for Derek Wood – Wedbush Securities

Do you have a cash tax rate that you are projecting for 2010?

Jeff Davison

Not a specific cash tax rate I am providing other than we don’t expect to be paying any taxes in 2010. We have NOLs and those should hold us through 2010.So while we have got that you do have the bigger tax expense that I provided in the guidance. That is not the same for the cash so I do want to make that very clear.

Operator

The next question comes from the line of Analyst for Ross MacMillan - Jefferies & Co

Analyst for Ross MacMillan - Jefferies & Co

I have a quick one on the deals over $1 million. I was wondering if you could give some color as to how many of them came with existing customers versus new customers? And if you could also talk to the geographic split of those deals.

Greg Gianforte

What I would say about the large deals is it is pretty consistent with what we have seen the last three quarters. It is a really nice mix, expansion business across our installed customer base. There are a couple that are either in pilot conversion or the first real expansion from their small implementation which is great. From a geographic perspective off the top of my head I know at least one of those was from outside of the U.S. and I believe there was a government deal in there as well. Actually two of them were outside the U.S. We have one in Asia, one in EMEA and nice broad spectrum. It is really encouraging. It is great that it shows the expansion strategy works.

Analyst for Ross MacMillan - Jefferies & Co

The additional hiring you are planning to do in 2010 I was wondering if you could give some color as to which lines of the business you are looking at growing? Is it on the sales side or R&D, etc.?

Greg Gianforte

The investment in additional headcount is really across the business. I would say the concentration is in R&D and these client success managers in the field organization but it is across the board.

Operator

At this time we have no further questions in the question queue. I would like to turn the call back over to the moderators for any additional or closing remarks.

Greg Gianforte

Again, thank you for joining us today. I would remind you about the product webcast coming up and the event on March 4th but we were really thrilled to see the turn in the year that we did in 2009. We look forward to an exciting 2010.

Operator

This does conclude today’s conference. Thank you for your participation.

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Source: RightNow Technologies, Inc. Q4 2009 Earnings Call Transcript

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