RightNow Technologies: Whether To Buy Right Now

| About: RightNow Technologies, (RNOW)

RightNow's software-as-a-service (SaaS) offerings focus on lowering customer service and support costs. The stock provides a compelling investment opportunity as it combines accelerated revenue growth with a recurring/predictable financial model and peer-discounted valuation that should enable it to outperform the broader market long term.

Key Points

  • Large addressable market in need of modernization. RightNow is well established as a leader in providing SaaS offerings to enterprise customer service and support organizations. I believe RightNow is addressing a multi-billion dollar market that requires significant modernization in the face of both rapidly evolving customer communications channels and rapidly shifting IT spending preferences.
  • Strong acceleration to organic growth. Intense macroeconomic pressures dampened RightNow’s retention and growth and resulted in a year-over-year growth rate low of 3% in 2Q09. Subsequently, the company’s re-acceleration has been impressive with year-over-year growth rising steadily to reach a near-term high of 26% in 2Q11.
  • Highly visible, recurring revenue model. As a SaaS business, the volatility of quarterly licensing revenues of legacy software providers has been replaced by a highly predictable revenue and earnings model. This has in the past, and should in the future, result in a premium valuation in comparison to many other growth-oriented companies who lack such visibility.
  • Scaling profitability and strong cash reserves could support new buybacks. RightNow’s balance sheet is strong, with nearly $256 million in estimated cash reserves post a late 2010 $175 million convertible offering. Having turned meaningfully pro forma earnings positive over the past two years (with an outlook to scale profitability steadily going forward) and with selectivity in acquisitions, management might decide to opportunistically buy back stock beyond the $29 million purchased over the past three years.
  • Attractive valuation. RightNow is trading at less than 5x 2Q11 run-rate revenues (net of cash holdings), in line with its SaaS peer average. With solid scale, a rapid organic growth rate, and reporting consistent record earnings (of $0.57 pro forma for the trailing-twelve month period), moderate multiple expansion appears to be warranted in the near term from current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.