Basically, RightNow is charting the new, young, uncertain waters of running a so-called hosted software business, where it serves up applications from a web site, rather than as a traditional software installation on a company’s facilities. That leads to shifting pricing models that in turn can lead to unpredictable results, as happened back in April.
Verbeck says that on the plus side, the company has a good footing in automating customer service functions, which is a big chunk of the market for customer relationship management [CRM] software, with big, big customers such as Cisco Systems (CSCO) and Nokia (NOK).
However, RightNow faces a number of worrisome transitions, he writes. The move to a subscription-based pricing practice for selling its software could provide shortfalls in future revenue. “Significant uncertainty remains,” he writes. “Historically, the quarter over quarter change in recurring revenue has been fairly volatile, likely influenced in part by the license offering.” It’s also producing mounting operating losses for the company [RightNow will probably lose money in the next five quarters, according to Verbeck’s research].
The departure of the company’s chief of sales is another de-stabilizing transition. Moreover, RightNow’s product breadth is thin, claims Verbeck, as it tries to expand beyond just customer service to other parts of CRM.
Verbeck says it’s difficult to find comparable valuations by which to assign the right price target, given all the company's challenges, and given the fact that some younger competitors have more rapidly expanding operating margins and a diverse mix of tax operating-loss carry forwards. His method to value RightNow is to forecast five years worth of 20% earnings growth at a 20% operating profit margin, assign a 24x multiple to that, and discount it back by a weighted average cost of capital of 11.3%, for a target of $18 per share.
RNOW 1-yr. chart: