Rightnow Technologies Inc. Q1 2008 Earnings Call Transcript

May.16.08 | About: RightNow Technologies, (RNOW)

Rightnow Technologies Inc. (NASDAQ:RNOW)

Q1 2008 Earnings Call

April 30, 2008 4:30 pm ET

Executives

Staci Bosinoff - IR

Greg Gianforte - President and CEO

Jeff Davison - CFO

Susan Carstensen - COO

Analysts

Alan Cooke - Merrill Lynch

Nathan Schneiderman - Roth Capital Partners

Sasa Zorovic - Goldman Sachs

Brendan Barnicle - Pacific Crest Securities

John Yeung - Citigroup

Brandon Chin - Piper Jaffray

Atul Bagga - ThinkPanmure

Raghavan Sarathy - Ferris Baker Watts

Greg McDowell - JMP Securities

Brendan Barnicle - Pacific Crest Securities

Derrick Wood - Pacific Crest Securities

Operator

Good afternoon my name is Gwen and I will be your conference coordinator. Today's call is being recorded. At this time I would like to welcome everyone to the RightNow Technologies, Incorporated, First Quarter 2008 Earnings Results Conference Call. All lines have been placed on mute. After the speakers' remarks there will be a question-and-answer period. I would now like to turn the call over to Staci Bosinoff. Please go ahead.

Staci Bosinoff

Good afternoon, everyone, and thank you for joining us on RightNow's first quarter 2008 conference call. Joining me on the call today is founder and CEO, Greg Gianforte, Chief Financial Officer, Jeff Davison; and Chief Operating Officer, Susan Carstensen. Before turning the call over to the company I will read our Safe Harbor statement.

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 the 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, 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're 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 we 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're 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.

With that, I'll turn the call over to Greg.

Greg Gianforte

Thanks Stacy. Good afternoon, everyone, and thank you for joining us. I am pleased to report that we carried our momentum from last year into the first quarter of 2008 with both revenue and EPS ahead of guidance.

Revenue in the quarter was $32.9 million, recurring revenue was $24.4 million, and non-GAAP EPS was a loss of $0.06. As Jeff will discuss later, we're raising our full-year guidance to reflect our success in this first quarter.

The success and our confidence in the full-year outlook is driven by a number of factors. Today our pipeline is robust. Our visibility in recurring revenue is strong. We're making great progress towards returning to profitability later this year. Our balance sheet continues to strengthen from positive cash generation, and we couldn't be more pleased with the quality of customers that we're adding to do business with, like Applied Biosystems, Concur, Corel, Guthy Renker, Nike China, Plantronics, Scholastic, Reader's Digest and Vodafone.

I'll touch briefly on our success drivers before I turn the call over to Jeff for more details on the financials. For starters, RightNow 8 enables us to take advantage of market opportunities with both our installed base and new customers. Clearly, our Land and Expand strategy is working and continues to drive success for us.

Our initial wins with large global customers are translating into bigger expansion deals. Most important, customers like our Land and Expand strategy, because it allows them to; one, experience the benefits of our solutions quickly; two, minimize upfront costs and risk; and, three, see real ROI before making larger follow-on commitments.

Many of our greatest successes with RightNow 8 have been with our largest customers, who start with an initial departmental deployment using just one of our products. Then, as we prove our value, they expand their use of RightNow. As you have heard me say in the past, we earn the right to go back and sell them more.

For example, Cabela's, one of the world's largest retailers of hunting, fishing and outdoor gear, continues to expand its use of RightNow solutions and is now providing customers with multichannel online service capabilities that include chat, Web self-service and e-mail management. Offering a number of communication channels for customers, including chat, has increased Cabela's agent productivity. By giving their agents the ability to chat with customers during their online shopping experience, Cabela's has also reduced the number of abandoned shopping carts.

In addition, our Land and Expand approach drives shorter sales cycles, more repeat business and higher visibility through recurring revenue growth. I want to make one more point about Land and Expand that provides tangible proof that this is the right approach.

Two years ago, an average RightNow customer spent four times their initial purchase price within the following three years. Today, an average customer spends six times their initial purchase price over the same three-year period. Keep in mind that our ASP has increased in the last three years, enhancing this metric even further. This increased spend per customer is a result of our broadening solution suite and our focus on global enterprise customers.

Underlying all of the success is RightNow 8, the solution for delivering great customer experiences. Customers and prospects consistently tell us that RightNow 8 offers great flexibility, broad multichannel support and performance that meets and often beats that of legacy on-premise applications. We now have approximately 50% of our customers upgraded to RightNow 8, and with the recent February release we added two new powerful capabilities that help our clients improve customer experience even more.

Contextual work spaces, one of the new features in the February version, dynamically tailors its agent screen to the specific customer inquiry; for example, initiation of a new account or handling a return. This result's in higher agent efficiency, reduced training and higher client satisfaction.

The second new feature, topic monitoring, helps clients easily glean customer sentiment from free-form text. Previously, free-form text from customers, although where most of valuable information is contained, was often difficult to analyze and often lost. Topic monitoring now allows our clients to easily understand and classify customer survey feedback and then take action.

We continue to get significant industry press and analyst recognition including, for example, our fifth consecutive CRM Magazine Service Leader Award. Even more rewarding is that our customer iRobot received a Service Elite award, yet another RightNow customer being recognized for superior customer experience.

Let me just give you some of the details. iRobot launched a new contact center within eight weeks with self-service, voice response, enterprise feedback management. Their self-service rate improved to 97%, which means only 3% of the customer interactions required an agent contact. They experienced a 30% reduction in call volume and reduced abandonment rates by 18%. Using our marketing solution, they more than doubled their marketing contacts, which helped them increase year-over-year sales by 33%.

iRobot did something else very innovative with our solution that highlights the value of a multichannel approach to service delivery. Now, if you send an e-mail to iRobot and then decide to call their contact center, our voice system asks you if you are calling about your most recent e-mail. If you say yes, your call is then routed to the agent who responds to the e-mail, thus reducing frustration for the customer and improving agent efficiency.

As you know, my primary focus since January has been to spend more time with our customers. Already this year I've had more than 90 meetings worldwide. What I see in my travels is that the customer experience is receiving attention from the highest levels within consumer-focused organizations. Customer experience initiatives have C-level sponsorship. These executives are looking for help, and our messages are resonating with them and our solutions match their needs.

For example, at one multinational telecommunications company, I met with the senior vice president responsible for all of their call centers worldwide. He told me that RightNow's 8-step approach to delivering exceptional customer experience maps directly to his 2008 goals. During a visit with executives in another global enterprise, we learned that totally one-third of their employees are devoted to customer service. RightNow is helping them improve the productivity of these employees, which has a huge impact on their bottom line.

I've also been encouraged by the momentum I see building in the field. We have a great team, and we're all encouraged by the market opportunity and the doors that RightNow 8 has opened for us, which is reflected in our Q1 results, where we had strong performance across all the regions worldwide.

Also important, especially in this uncertain economy, is our ability to prove value, which is critical at a time when organizations need to justify each and every expenditure. Having said that, so far we're not seeing a trend towards customers delaying buying decisions.

To give you a bit more color on the quarter, let me share a few examples. We signed one deal this quarter with a top-tier Internet marketplace company. We started with a series of highly successful pilots across Europe and this quarter signed an order for global deployment for over $1 million.

Another new customer, Guthy Renker, one of the world's largest direct response TV companies and well-known brands like Proactiv and more than $1.5 billion in annual sales. There, we're integrating RightNow with solutions from our partner, Sterling Commerce, for a complete end-to-end order management and customer service system.

Customers like Guthy Renker are not unusual. We're seeing more and more enterprise class customers looking for ways to elevate their customer service without all the extra spending they had once had to do. Our solution scale, and as customers' needs grow, so does our opportunity.

To support our growth, we have expanded our delivery capabilities. Last quarter we talked about how we increased our spending in professional services, partly to expand our system integration partnerships.

I'm pleased to report that we formalized our relationship with Tata Consultancy Services. Tata, with more than 100,000 IT consultants in 47 countries, and the company has selected RightNow as one of the leading products for its SaaS customer service and support center of excellence. This alliance with Tata demonstrates the recognized value that our products provide to customers and the growing recognition among systems integrators that on-demand solutions are enterprise ready.

In summary, we have a tremendous market opportunity due to a number of factors. Global enterprises are increasingly recognizing the importance of delivering a great customer experience while reducing operating costs, our core value proposition. These large organizations are also moving away from legacy on-premise, single-channel solutions, especially in the contact center. RightNow 8's ease of use, functionality, scalability and multilingual capabilities matches the needs of these enterprises and our core strategy of Land and Expand is working, and RightNow 8 enables us to take advantage of many expansion opportunities.

With that, I'll turn the call over to Jeff.

Jeff Davison

Thanks Greg. Revenue in the first quarter was $32.9 million, ahead of guidance. Recurring revenue for the quarter was $24.4 million compared to $23.5 million last quarter and $19.2 million last year, a 4% sequential and 27% year-over-year increase.

Professional service revenue was $8.3 million for the quarter. Perpetual revenue continues to decline as expected and was $144,000 compared to $564,000 last quarter and $594,000 in the first quarter of 2007. The mix of revenue across geographies for the quarter was 67% Americas, 25% EMEA and 8% Asia-Pac.

Turning to ASP's, for Q1 the first-year average contract value was $90,000, which is up from $84,000 last quarter and $62,000 in the same quarter last year, a 45% increase. It's important to correlate our increasing ASPs with our increasing penetration into enterprise markets. We had four deals over $1 million and added 64 new customers this quarter. Approximately 52% of our business was with organizations with over $1 billion in revenue in the public sector.

Strong verticals during the quarter included high-tech, retail CPG, telecommunications, entertainment media and public sector. We had 463 million interactions this quarter compared to 352 million a year ago, indicating the increasing importance of our solutions to our enterprise customers. As we add new enterprise customers, our opportunity for expansion significantly increases.

On expenses, note that my comments are before stock-based compensation. Gross margin was 63% compared to 65% in Q4. This reflects an increase in the mix of professional services in Q1. We delivered a 15% professional services gross margin, which is a significant improvement over Q4, driven by higher utilization.

Total operating expenses were $23.8 million this quarter, up about 2% from Q4, and represented 72% of revenue. This represents our fifth consecutive quarter of operating margin improvement. Headcount at the end of the quarter was 718, up 5% from 686 at the end of the year.

Next, on the balance sheet and cash flow statement. We ended the quarter with total cash and investments of approximately $100 million. I've received some questions, so I wanted to take this opportunity to note that we have approximately $18 million in auction rate securities. We believe our cash and short-term investments provide more than enough liquidity for the company, and we have no short-term need to liquidate these investments, nor do we have plans to liquidate them at less than par value.

Also, remember, in the last three years we have generated more than $60 million in cash from operations. We will continue to assess the carrying value of the auction rate securities each quarter. As of March 31st, we've reclassified the investments as long-term investments and have recorded a market adjustment of $415,000, which is recognized in the equity section of the balance sheet, since it is not considered permanent.

Cash from operations was $3.7 million for the quarter. This was within range of our expectations, considering that we had very strong cash collections at the end of Q4. We are reiterating our guidance of $25 million to $30 million for cash from operations for the year. DSO's were 70 for the quarter compared to 65 days in Q4 and 70 days in Q3.

Now turning to guidance, we're updating our guidance for 2008 to reflect our strong Q1 performance. For the full year, we expect revenue in the range of $136 million to $141 million with recurring revenue growth of approximately 25% and professional services growth of approximately 20%.

We are raising our expected range for full-year non-GAAP EPS to be a loss in the range of $0.05 to $0.12 and GAAP EPS to be a loss of $0.25 to $0.32. For the second quarter we expect revenue in the range of $34 million to $35 million. We expect non-GAAP EPS to be a loss in the range of $0.05 to $0.07 and GAAP EPS to be a loss of $0.10 to $0.12. We continue to reiterate our goal of returning to non-GAAP profitability in the second half of this year.

There are few additional notes I'd like to make. First, we expect stock-based compensation to be approximately $1.8 million for Q2 and $6.5 million for the full year. Second, on interest income, taking into account current rates on investments, we are now forecasting approximately $2.3 million for the rest of the year. Third, due to state taxes and foreign withholdings, we expect tax expense to be approximately $500,000 expense for the full year.

And finally, for the full year, we're forecasting a basic share count of 34 million shares. For the quarter, we're forecasting 33.8 million shares. Now, the difference between our basic share count used in unprofitable periods and diluted share count, used in profitable periods, is approximately one million shares.

In closing, we had a strong first quarter, which gives us a good start to the year. We are executing on our Land and Expand strategy, as evidenced by the 45% increase in ASP over last year, and we're pleased with the caliber of companies we continue to do business with. The business model provides us visibility into 90% of next quarter's revenue and over 60% into the next year. Our improvement in EPS demonstrates we're executing to our plan to return to non-GAAP profitability in the second half of this year.

With that, I'd like to turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll go first to Tom Roderick with Thomas Weisel Partners.

Unidentified Analyst

Hey guys this is actually (inaudible) as on for Tom Roderick. I had a question on deferred revenue. I'm noticing that you guys had a 4% sequential increase in recurring revenue and an increase in ASP as well, yet I'm noticing that deferred revenue is down on a quarter-to-quarter basis. Is this a function of cash collection, or is there something else going on here? If you could help me better understand that, I'd be appreciative.

Jeff Davison

The deferred revenue, you are looking at the change from Q4 to Q1. That's the decline you are seeing. That's really a factor of Q4 sales versus Q1 sales. So obviously Q4 is the stronger quarter. Q1 is seasonably not as strong, so what pulls out of deferred revenue, with lower sales, we're not putting as much back in.

Unidentified Analyst

Okay. I guess on [forecast].

Jeff Davison

But they are still, if you compare over prior year, it's significantly higher. And then I'd look at the growth of the business just in recurring revenue of 27%.

Unidentified Analyst

I guess from a confusion stems from is that you added 64 new customers, and your ASP is increasing as well. It seems like, versus Q4, your business would actually be up on a quarter-to-quarter basis. That's where I'm confused here.

Jeff Davison

Well, that's where you'd look at the recurring revenue again over the prior year, being 27% greater than Q1 of last year. The other thing to keep in mind on deferred revenue, if you're not recalling just the change from last year, all of the business that's booked doesn't go into deferred revenue now. So all of the off-balance sheet stuff, all of the monthly pay, is not recorded in deferred revenue.

Unidentified Analyst

Okay, and so another quick question here on headcount, I guess you showed a nice increase here on a quarter-to-quarter basis. Can you tell me where you are adding folks here in the organization, following about two quarters of decline in headcount?

Jeff Davison

I'll direct that question to Susan Carstensen, who has joined us on the call.

Susan Carstensen

Well, we added net of about 30 people in Q1, and it was predominantly in professional services area and in engineering.

Unidentified Analyst

Okay, thank you very much, I will jump back in the queue.

Operator

We'll go next to Jeff Huston with William Blair. We expect Mr. Huston has disconnected, we'll go next to Alan Cooke with Merrill Lynch.

Alan Cooke - Merrill Lynch

Okay, thank you very much. Can you talk to us about the uptake of RightNow 8, and how many customers have upgraded to it?

Greg Gianforte

Sure. We had set a goal a year ago of having 50% of our clients live on RightNow 8 within a year of release. We are at that point now. 50% our clients are on RightNow 8. So we have been very pleased with the uptake. As I mentioned in my comments, as really RightNow 8 is opening up these new doors for us.

Alan Cooke - Merrill Lynch

Okay, so that's an increase from the 40% that you had at the end of Q4. Where do you expect to be by the end of the year?

Greg Gianforte

We had looked back and how quickly new versions has gotten adopted by our client base, and 50% within one year was an aggressive goal for us, but we thought it was really essential to get customers on this new version. Momentum is built, at this point, we have not set an explicit goal for year end. We really set the goal around the first year, because we know the remainder will come in due time here.

Alan Cooke - Merrill Lynch

Okay and in terms of your services revenues, it was a pretty significant uptick. What's behind that, and can we expect that sort of run rate going forward?

Jeff Davison

I'm sorry? Would you repeat that question?

Alan Cooke - Merrill Lynch

With respect to your professional services revenue, you came in a little over $8 million, which was a pretty significant uptick from previous quarters. What was behind that? Can we expect that sort of run rate going forward?

Jeff Davison

Sure, good question. The uptick really is related to the capacity we talked about in Q4. Q4, recall, we had a high cost to sales. We were investing in additional headcount and third-party capacity. That capacity we saw utilization out of this quarter, which drove higher revenue. We're going to continue to increase capacity in the next quarter. You'll see a little more uptick in it, but it should level out. Really, the long-term goal is for professional services not to really exceed 25% of total revenue.

Alan Cooke - Merrill Lynch

Okay, great. Thank you very much.

Operator

We will go next to Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman - Roth Capital Partners

Hi, thanks very much. Greg, I have a couple of questions for you. You said that you did not see any lengthening of sales cycles, but I wanted to ask a follow-up there. Was that true across geographies? Also, if you could, though ASP's were up, did you see increases in ASP's across geographies as well, or did you see any contraction in North America, Europe or APAC?

Greg Gianforte

Okay, I guess the question behind the question here is, [what you're seeing] about the macroeconomic environment? I was in Europe this past quarter. I was in Asia twice, and all over North America, these 90 visits I did were across all geographies. I did not see any slowing in spending or reduce in average prices. I think that you have to keep in mind that we do have a very modular approach. This Land and Expand is very important, because we prove ROI step. We're coming into Q2, as I mentioned in my prepared comments, with a very robust pipeline.

So I don't have data specifically on ASPs by region. That's not something we typically release. I don't have that at my fingertips here. But we have not seen the slowing. And not to say we are immune, because there's certainly a lot of doom and gloom about the economy. I think we're somewhat favored by the fact that we do have tangible ROI, and in slower times companies spend to keep their customers, and that's at the heart of our value proposition.

Not to say we're completely immune, but we have not seen in our business at this point.

Nathan Schneiderman - Roth Capital Partners

Okay and Jeff, last quarter you gave us the number of deals over $100,000 and the number of deals over $25,000. You suggested that might be a good new metric going forward. I was wondering if you could give us those numbers in the year ago?

Jeff Davison

Last quarter, when I provided that, what I was really trying to do was provide a little more color so that you could understand the mix of business and the companies that we're doing business with. We did four deals over $1 million this quarter. Last quarter, it was five. The other numbers aren't right here at my fingertips, but I think what I would look at is, just look at that ASP increase. It was 82 last quarter, it's 90 this quarter.

Nathan Schneiderman - Roth Capital Partners

Okay, all right. Next question I have for you, Greg the hope has been that RightNow 8, given that it's much more performance, would get you into larger opportunities in the case management area. I was wondering if you could give us any data on that. How many deals do you feel you are in this quarter that would have been, let's say, too large an engagement for you to previously compete in?

Greg Gianforte

I am thinking about that, where the breakthrough is, I think, and I explained this in last quarter's call as well, I would say about half of the clients in North America that I've met with are in the midst of what we're calling some form of call center transformation, where we have a beachhead in the account. We have landed with e-service, but they're getting their call center solution, whether it's Siebel or Clarify or Vantiv, is getting very long in the tooth, and they need to look at doing a replacement.

With our 7.5 product, we could tick most of the boxes, but not all of the boxes. With RightNow 8, we're in a position in the vast majority of cases to tick all the boxes. That's the door, in part that RightNow 8 has opened for us. So the good news is a lot of accounts are at a point where they are looking at doing a call center transformation, and with RightNow 8, we're in the position to capitalize on it. So that would be my feedback to that question.

Operator

We'll go next to Jeff Houston with William Blair.

Laura Lederman - William Blair

Hi, it's Laura Lederman. Sorry about that earlier; we get disconnected. Can you talk a little bit about changes in the competitive environment, anything that you have seen for your number of different products, whether it's in the e-service or the call center?

Also, any weakness at all, even in markets like financial services, where obviously the economy is harder hit in the states? Sorry to keep harping on the economy, but it is the number one question we're all getting from investors.

Greg Gianforte

It's on all of our minds, Laura. So, let me talk about competition, and then I'll talk about financial services. The competitive landscape, I would just say the buckets are the same. I think the positions have gotten a little more pronounced. If I had to bucket the competitive landscape, you have, number one, the whole SaaS space. And clearly, us and Salesforce.com are the dominant providers there.

I think, as we become more dominant in our respective places in either sales automation or service automation, we tend to cross paths a little more. But generally, somebody is in the wrong place. That's not who we see as a strategic competitor, really, with our focus on consumer-focused, larger organizations and other firms' focus on just different markets. So that's bucket number one. Nothing has really changed there, except we see each other a little more. Usually somebody is in the wrong place.

In the e-service space, I would say our competitive win rate continues to tick up. Data from this last quarter, our competitive win rate was greater than 90% against the little niche e-service providers. The just can't invest enough on the engineering side. They continue to sell on-premise solutions which are too expensive and too complicated, and we continue to do replacements there. So that's like game over.

And then, the third category, which is really kind of interesting, given SAP's announcement here just in the last day or so. They are cutting their engineering spend. They can't get a SaaS product out the door. We have said for some time that it's going to be very hard for these legacy enterprise software vendors to get into this space. I think SAP's announcement yesterday just emphasizes that.

And Oracle has been remarkably silent. And, both of these firms are really the incumbent in the enterprise call center. Those are the people who we are really strategically competing with. As I said, SAP has thrown in the towel and Oracle has stopped talking about it. So, that bodes well for us.

And then, on your second question, e-services has always not been a large market for us. In Q1 it was 6% of our total business. We continue to do business there, but we just don't have the much exposure.

Laura Lederman - William Blair

Just add one quick question and then I'll pass it on. One is, international obviously is growing nicely. Is that mainly Europe? In other words, can you give me a feel for how that business looks, if you look by geography? Also, do you expect it to go to 40% by the next year or so? Or just give us a sense of how you see that expanding as a percentage of the total over time?

Susan Carstensen

The bulk of the international sales would be based out of our EMEA office, and there we have got a strategy focused on the key verticals, really, across Europe. So they are seeing success and we're seeing success there in the telco space, travel and leisure, retail, the primary ones, plus some public sector. Then, in terms of growth projections, it is about 30% certainly see it growing to 40% over time.

Operator

We'll go next to Sasa Zorovic with Goldman Sachs.

Sasa Zorovic - Goldman Sachs

So, let's stick with this international, I guess, as a topic. I guess, if we're looking at this right, it seems that Europe, if you're looking at quarter-over-quarter, year-over-year, Europe grew very strongly. Asia stayed somewhat flat, and actually the Americas decreased about 4%. Is that right?

Susan Carstensen

On a percentage or total dollars?

Sasa Zorovic - Goldman Sachs

Total dollars.

Susan Carstensen

Let me look. We had talked last year, we saw a terrific performance in 2006 when we went through kind of our transition in EMEA, Asia-Pac did a nice job, and where we had the most significant transition was in North America. You should see the impact of really the recovery and the strong momentum we're seeing in North America and the revenue, in the quarters going forward, except a little bit of a lagging indicator.

Sasa Zorovic - Goldman Sachs

So in a sense though, even though I guess in the last year, first quarter in the perpetual revenue, we had just about $600,000 there, that's really kind of what accounts for this discrepancy then, if you look at that 4% decline on a year-over-year basis; right?

Susan Carstensen

Oh, yes. The perpetual dropped to almost nothing this quarter.

Sasa Zorovic - Goldman Sachs

Okay. Then, let me ask about sort of the average deal length that was, I guess, one of the issues during the last year. I was wondering, I guess, where that stands at this point?

Jeff Davison

Sure, the average deal length last two quarters of last year hovered at around 20 months. We're still seeing about that term; no real change there.

Operator

We'll go next to Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thank you very much. Greg, you've had a lot of questions about the economy. I was wondering, we've certainly seen better visibility in the model, given the on-demand nature of the model. Are you seeing enough data points as you look at your business and others' to feel like this on-demand model is going to be more defensive through a tougher economy? Certainly, we're seeing better results.

Greg Gianforte

Well, I think the thing that we've said for some time we think the on-demand model is the future of the software industry. I think one of the things that works to the disadvantage of the traditional model is there's large upfront capital expenditures, and it takes a long time to get value out of the solutions. Both of those factors tend to have corporations thinking twice before they pull the trigger.

When they compare that with an on-demand offering that goes in quickly and delivers value quickly, it's easier to make a business case. So, I think that works in our favor. We think the writing is on the wall. This is SaaS delivery its the future of the software industry. A slowdown in the economy is going to pinch large capital expenditures more than it will sort of real-time investments and operations that deliver real-time results.

Brendan Barnicle - Pacific Crest Securities

Great, thanks, and I just had a couple of numbers questions. Jeff, as we think about the gross margins on the services business, which improved nicely, should we stay at that rate as we are modeling out for the remainder of the year, or do you see any additional leverage there?

Jeff Davison

The margin, so the increased of 15% was great this quarter. I think, next quarter, it's probably going to be pretty similar and towards the second half of the year it should climb back up more to the 18% to 20%, where it's been before.

Brendan Barnicle - Pacific Crest Securities

Great and similarly, as we think about at the back half of the year for decreases in your expenses you had indicated that with the hiring we were going to see more sort front-end loaded expenses in the first half of the year. Where are the biggest sources of leverage as we look at the model for the back half of the year on the operating expenses?

Jeff Davison

Well, if you recall, we mentioned we were going to hire increased heads 10% to 15% in the year, and we said it would be front-end loaded. So we've got 30 people onboard. We're probably a third of the way there on the hiring. Again, that was in the services, heavier in the sales and then across the board. So those headcounts, it will come in next quarter similar to this quarter, and then I think it will come off a little bit towards the end of the year.

Operator

We'll go next to Brent Thill with Citi.

John Yeung - Citigroup

Hi, this is actually [John Yeung] for Brent Thill. I had a question on the cash flow from operations. I understand the drop, given the big collection in the last quarter. How do you expect that to bounce back as we go through the rest of the year? Is that going to come back quickly and linearly?

Jeff Davison

Okay good question. I guess the way I would look at the cash flow is, couple points. Obviously, we plan to sign more business this year. We are growing; right? Going to generate 20% more revenue growth; that's our guidance. With the growth in EPS, obviously we're generating more operating income. Those two things combined, along with the fact, if you look at, last year we generated $21 million in cash from operations on $112 million of revenue. If you just took that run rate or that factor and compared it to our guidance, our guidance for 2008 is right in line with that performance. So it's growth of the business, is what we expect to happen there.

John Yeung - Citigroup

For Q2, the EPS guidance is roughly flat. But obviously, revenues are still going up a little bit. Is there anything that we should take away from that? Are you just being conservative are there any additional expenses?

Jeff Davison

No, I think, we were pretty favorable to guidance for Q1, and like we had talked about additional spending in professional services, and I mentioned this a few minutes earlier. We're going to spend again to that level in pro services in Q2. That's why you're going to see pretty similar results in Q2 to Q1. But then again, going into the second half of the year, that will change and we're planning to be non-GAAP profitable in the second half of this year.

John Yeung - Citigroup

Then, lastly, the pro services, obviously you had some upside even compared to your guidance, and you have increased the headcount there. But at the same time, you've kept the full-year guidance for growth the same. So does that mean that it has kind of leveled off fairly quickly? Or, is there not a good reason for that? Thank you.

Jeff Davison

Well, the full-year guidance, we left the percentage the same. We increased the revenue guidance $1 million. I guess, from a percentage perspective, yes. I expected the uptick to be Q4 to Q1, and then a little more Q1 to Q2. But, it should remain pretty even, then, the rest of the year. I think that the area where you're seeing the uptick is going from periods where our capacity wasn't up to speed yet, so they were still in training, and that was generating lower margins. So now that it's kicking in, it jumped the revenue, and that will flatten out.

Operator

We'll go next to [Brandon Chin] with Piper Jaffray.

Brandon Chin - Piper Jaffray

Hi thanks for taking my call. Greg, can you talk about what product are customers taking out initially; and also, what additional products they will take on after that?

Greg Gianforte

Sure. Yes, typically, we're landing with e-service, either with self-service, chat, or e-mail management. The reason for that is that this electronic channel, still for many clients, is a greenfield where they have not invested there or they have some kind of home-grown thing the Webmaster has thrown together. That decision doesn't require the customer to have to think about replacing the existing CRM system.

So they tended to be greenfield. We can deploy them quickly. There's very, very strong ROI. Typically, we can eliminate 20% to 50% of their e-mails in a couple of weeks. So we're landing, typically, with e-service, or our new enterprise feedback management systems. Many clients concerned about customer experience are initiating voice-of-customer projects. So that's the second category that we tend to land with. It could be any one of those four products.

And then, the most logical follow-on, expand, is this call center transformation I talked about. Although we have an eight-step methodology or roadmap that we share with clients, and there are projects in each one of those eight steps, clients react very, very well to that because it's very modular, there's ROI at every step. That's part of the reason why we've seen the increase in lifetime value from individual customers, because we have this roadmap, it makes sense to clients, they start, we give them good ROI, and then we built on it.

Brandon Chin - Piper Jaffray

Okay thanks.

Operator

Well, go next to Atul Bagga with ThinkPanmure.

Atul Bagga - ThinkPanmure

Thank you guys, thanks for taking my call. Actually, you just answered my question, but just to follow up on that. So, when the customers are moving on to RightNow 8 platform, are you guys seeing any additional opportunities for sale of other products or modules?

Greg Gianforte

Yes, and that's really the beauty it. That might start with a typical scenario as they might start with Web self-service. We give them good ROI. They then say, well I want more interactive capability on the Web, and we're seeing a trend towards live chat for some of the clients; that's the second module. They then say, we'll achieve this, this stone tablet and chisel I have in the call center, it's time to go. We sell them case management, which is now the agent desktop in the call center. They might want to integrate multiple channels, we might add some of our voice capabilities.

They then may want to take the demographic data they're collecting about their customers and leverage that for upsell/cross-sell. Our campaign management capabilities come in at that point. Each one of these steps is a discrete product in our product offering. Each one is modular; it can be implemented separately. Each one has a stand-alone ROI associated with it so the customer doesn't do anything that just doesn't make straightforward, common businesses sense to them.

Atul Bagga - ThinkPanmure

Got you. Have you guys done any -- can you share some numbers when a customer migrates from 7, 7.5 to 8 platform? Typically what's the revenue opportunity for you guys? Is it 1 to 1.2? Is it more than that?

Greg Gianforte

This is more anecdotal, but hopefully I'll address your question. A typical call center transformation where we're doing the agent desktop and this is just very general. The size of that deal is at least twice as large as an e-service deal. And, if with 7.5, clients concluded that they liked us for e-service, but couldn't use us as their agent desktop in the call center, then that second follow-on deal is not accessible to us. With RightNow 8, they are accessible to us. And that particular follow-on transaction, which I think obviously is our largest single opportunity, is about twice the size of an average e-service deal, if that gives you some context.

Operator

We'll go next to Raghavan Sarathy with Ferris, Baker, Watts.

Raghavan Sarathy - Ferris Baker Watts

This is going back to the professional services. Jeff, did you say that you expect professional services to grow 20% year-over-year?

Jeff Davison

Yes, that was our guidance, 20% growth.

Raghavan Sarathy - Ferris Baker Watts

So, that would imply that we are looking at roughly $7.3 million in quarterly professional services revenue for the next three quarters. So that contradicts the utilization you're expecting?

Jeff Davison

I guess one of the things I hadn't mentioned in the Q1, and we talked of this in Q4, we built up a backlog of pro services in Q4 projects, and we are flushing, we're not flushing, but we're getting through those, Q1 and Q2 of this year. I guess that's where I was indicating earlier that you're not going to see continued uptick on the number.

Raghavan Sarathy - Ferris Baker Watts

Even you assume flat, you are $2 million short, lets say $8 million, so $2 million short for the full year.

Jeff Davison

You know, I guess maybe that number should be 30%, then.

Raghavan Sarathy - Ferris Baker Watts

So basically, you are still expecting flat to slightly up on professional services? That's a reasonable assumption?

Jeff Davison

Yes, for the rest of the year, it's going to be flat to slightly up.

Raghavan Sarathy - Ferris Baker Watts

And then on the recurring revenue, so I'm nitpicking here, if I recall correctly, you mentioned that you were looking about $1 million sequential increase in recurring revenue for the first quarter. It was slightly below that. Did the revenue get pushed out, or can you give us some indication on why this is a little bit short?

Jeff Davison

Sure. We did guide to $1 million to increase from Q4 to Q1, and we came in around $900,000. The recurring revenue on a quarterly basis like that is really is going to be impacted by how the new business is signed in the quarter, if it comes in earlier or late. And, the increase also can be impacted by the previous quarter, when it came in. So it's mostly due to the timing of when those deals are signed.

Raghavan Sarathy - Ferris Baker Watts

In terms of the deferred revenue, I'm looking at the net deferred current, the dollar increase sequential. It seems like the lowest in the last four quarters. But on the flip side, if when I look at the net deferred non-current sequential increase, again in dollars, it seems like the strongest. And I know you answered that there wasn't any change in the term length contract. What drove this sort of the trend here?

Jeff Davison

So the change in the net deferred was just 2% over Q4, about 36% over Q1 of last year, the net deferred. The impact on the current is obviously the deals we booked that are 12 months out. If the term length extends, which has stayed around 20 months, you'd see the longer term portion increase more as long as we're collecting that up front. But it didn't change, and so the long-term is really just impacted by what's flowing out of there.

Operator

And we'll go next to Greg McDowell with JMP Securities.

Greg McDowell - JMP Securities

Hi, guys this is Greg McDowell for Pat Walravens. Greg, since you've been out in the field so much visiting customers with your account managers, can you just talk a little bit about how happy you are with the structure of the sales force in terms of industry focus or geographical focus, and maybe a bit on how the comp plan structure is gelling so far in 2008? Thanks

Greg Gianforte

Sure. So, first I'll just kind of on a personal note, I loving being out in the field. It has really been enjoyable to work with clients. So, you have the bunch of questions there. I'd say, I'm really encouraged by the breadth of performance we've seen across our sales force here in Q1. That is a dramatic improvement for us. That leads to a much happier field organization that's going to be able to perform at a higher level. I think that we have different strategies in the region based on the geography of the region and the strength of markets in those regions. I'm pleased with where we are.

The whole GM structure, the design of that, was to push responsibility and decision-making to the local regions so they can run their business. I'm not in the regions to help them redesign how they go to market. It's really to help them carry the torch at higher levels in the organizations and for me to collect feedback and to motivate the staff. It's a combination of things. So that's some color on it. It's a specific part of your question because there are a lot of elements there I didn't address. Just let me know; I can go back to it.

Greg McDowell - JMP Securities

That's great, thanks very much.

Operator

And we will go next to Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks guys, I just had a follow-up, as I was looking out at next year's tax rate, trying to think about when your NOLs might run out, when you expect that you might start being a fuller, more normalized taxpayer.

Jeff Davison

Sure thanks Greg. So this year, $500,000. We're not really a tax rate calculation. The NOLs, I think you'd probably figure those will run out mid-2010, so we'd still be running kind of off of what we are this year, and move towards a rate calculation in '09.

Brendan Barnicle - Pacific Crest Securities

So through all of '09, would you still have this kind of tax situation like you've had this year, where it's the special situation and related to foreign entities or something?

Jeff Davison

Yes, it's going to be pretty similar.

Brendan Barnicle - Pacific Crest Securities

Then just on CapEx, do you think it stays about the same level as it had through Q1, or do you expect that to fluctuate much?

Jeff Davison

CapEx is pretty much in line with what we had planned, and it's going to be pretty level with Q1. I think, we said $7 million to $8 million with our guidance at the beginning of the year.

Brendan Barnicle - Pacific Crest Securities

Great thanks.

Operator

We'll go next to Derrick Wood, Pacific Crest Securities.

Derrick Wood - Pacific Crest Securities

Hi, thanks. I was hoping to get a little bit more color as to how this investment in professional services and what seems to be a little bit more engagement with the SIG entity community, how this is going to help you position with new deals going forward and how it can run this for you. Is this part of the strategy, to get to the end goal, which is this new Land and Expand, and do this call center transformation type of implementation?

Susan Carstensen

Yes. Derrick, it's very much part of the strategy. The SI's play a significant role in a lot of these call center transformation initiatives. A lot of them literally have practices around it that they are building. So we went out to a number of them, engaged with them, figured out the right kind of fit with us and our go-to-market strategy. TCS was a perfect example. So what they started with was by -- we've essentially been training some of their folks, getting them up to speed on our products and solutions from an implementation perspective as well as engaging with the business model side of it and the business planning and how we fit into their call center, centers of excellence from a go-to-market perspective. But it's very deliberate. We want to expand both our delivery capabilities broader. We don't need to do the services work for every deployment, as well as utilize their reach into these global enterprise customers.

Derrick Wood - Pacific Crest Securities

When would you expect that relationship to start generating meaningful business flow for you?

Susan Carstensen

We started engaging on the consulting side with them last quarter. We signed the formal agreement this quarter. I would say an impact on revenue later this year.

Derrick Wood - Pacific Crest Securities

I'm just curious about the time line from land to expand and, really, from moving from an e-service sale to a call center sale. It seems like it's fairly early, but is that something that takes three years, or could you see expanding into the call center from an initial conversation happening in a year time frame?

Susan Carstensen

We have seen it all over the map. We had a terrific example with an electronics company in Europe last year where we started with the pilot in the first quarter. By the end of the year, very significant call center expansion opportunity. It's also happened as short as a month. We've done 20K pilot that turns into a $1 million-plus deal. So the better we are at focusing our efforts on customers that we can really effectively broadly serve, the quicker we shorten that time.

Derrick Wood - Pacific Crest Securities

Okay thanks.

Operator

That concludes our question-and-answer session. I'd like to turn things back to our speakers for any closing remarks.

Jeff Davison

Okay, this is Jeff. I just had a couple points I was going to clarify. Raj had a question that I guess he kind of caught me on. I should have updated the percentage of the professional services. I had in the script it was 20%. I should have updated that to 30% growth, since we did have that strong performance in Q1. So a little clarification on there.

Greg Gianforte

Okay, Jeff this is Greg, just to close out, we had a great start to the year, really solid execution. Land and Expand is working for us, and RightNow 8 is opening up new doors and we very much look forward to returning to non-GAAP profitability by the end of the year. Thank you for joining us.

Operator

Thank you, everyone. That does conclude today's conference. You may now disconnect.

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