RightNow Proves 'Software as a Service' Isn't Perfect

Generally speaking, software as a service (SaaS) is a great business model for tech companies and their customers. But a flood of press coverage has suggested that SaaS specialists are immune to an economic slowdown or recession.

Once again, I want to go on the record stating that this just isn't true. The latest example: RightNow (RNOW), a leading SaaS provider, has delivered a disappointing financial forecast. Here's a quick look at the situation at RightNow, and some big-picture thoughts on SaaS.

You're probably familiar with SalesForce.com. But RightNow is a key SaaS provider that should also remain on your radar, as SaaS and managed services continue to attract investor interest.

RightNow specializes in on-demand CRM software. The company signed up more than 250 new customers in 2007. Many of them are household names, including Activision and Epson America.

Sounds great — until you consider RightNow isn't meeting Wall Street's financial expectations. After the US financial markets closed on January 30, RightNow disclosed that its Q4 2007 loss was larger than analysts expected, and the company also predicted 2008 losses will exceed Wall Street's original projections. Shares in the company fell nearly 9 percent on the news.

RightNow has been working to change its business model from one-time licenses to recurring licenses. In other words, the company wants to enjoy a true SaaS/managed services revenue model. But so far, that shift hasn't occurred as quickly as Wall Street would like.

Still, the glass appears half full (not half empty) for RightNow. Sales will likely grow 25 percent to $135 million or $140 million in 2008, the company predicts. Wall Street wants higher growth rates, but plenty of tech providers would welcome RightNow's growth challenges.

For investors, pumping money into SaaS companies remains a prime opportunity -- but not a perfect opportunity. Just because a company offers software as a service, that doesn't guarantee success.

Keep a close eye on SaaS providers as they try to transition from an "application" mindset to a "platform" mindset. Their goal is to get partners to write additional applications for their platforms. For example, NetSuite is promoting a "micro vertical" strategy that allows partners to write targeted accounting applications for super-niche markets.

You should also keep a particularly close eye on the open source market, where SugarCRM is charting a long-range course to an IPO. Yes, SugarCRM can be installed on traditional customer servers. But the software is increasingly deployed in hosted data centers, that customers pay a monthly fee to access.

The bottom line: There are plenty of SaaS companies for you to potentially invest in. And the SaaS market remains hot. But don't think of SaaS (or any technology, for that matter) as a cure-all to an economic slowdown.

Disclosure: None

Comments

[borisb]

Right Now Technology might be a laggard. Perhaps the bigger players CRM-N-SAP have the generic software nailed and the specialist like Dealer Track-trak are dominating specialized niches.

[calvino]

CRM and N are trading at multiples that invite, beg, and compel every code writer to participate in the opportunity. Unless you think pepole like Bill Gates and Larry Ellison have lost their need for money, expect the crm startups to have to compete not only with each other, but with the heavies. Most are secretly counting on a huge buyout premium, however with softie haveing spent down it's entire cash hoard on a completely insane offer for a shrinking market company, there is a lot less money for takeover premiums. My best advice is to go back in time and get in the softie line for insane take out premiums. Maybe the insanely high barriers to entry will prevent further competition. Light Java code is a very rare and capital intensive skill, so there is no way I could go to India or Eastern Europe and start one of these companies for 5 million.

[PennyHerscher]

The key issue here is the RNOW was not truly a SaaS vendor. They had an on-demand delivery model but their revenue model was perpetual - like an enterprise software vendor. Now as they transition to be a true SaaS vendor they will reap the benefits of the visibilty and immunity to downturns. But they will not be completely immune until their revenue is 100% subscription, or ratable, like Salesforce - or FirstRain.

pennyherscher.blogspot...

[TomGreenberg]

For a saas company to miss expectations is one thing and implying that the model is in trouble is another. First RightNow is only one company in the CRM SaaS space and there are others such as Salesforce.com, Netsuite, Salesboom.com, etc.

Second, these vendors are in a growth mode and are spending huge amounts of money on sales and marketing to gain market share from the big vendors such as Oracle and SAP.

Third, the SaaS model is pay-as-you-go, therefore it takes 2-3 years for customers to pay off but then it is pure gravy.

[Demian]

From a Wall Street perspective, it's awfully early in the game to make sweeping assessments of the SaaS business model. It's much easier to look forward and make predictions based on fundamentals.

But what do we base our predicitons on? I, for one, would look very closely at comps on unit economics like COGS and Revenue per user as key indicators of future value.