Earnings Report: Is RightNow Fully Valued for Now?

| About: RightNow Technologies, (RNOW)

RightNow Technologies Inc. (NASDAQ:RNOW) reported earnings from continuing operations (excluding one times, but including stock-based compensation) of 4 cents per share for the second quarter of 2011, exceeding the Zacks Consensus Estimate of a loss per share of 1 cent. The results benefited from the shift in revenue mix toward higher margin yielding recurring revenue.

The company has consistently exceeded expectations. On average, RightNow has beaten the Zacks Consensus Estimate by 259.64% in the last four quarters.

Second Quarter Earnings Flashback

RightNow generated total revenue of $54.8 million, up 26% from the year-earlier quarter.

In terms of revenue mix, recurring revenue, a key measure of growth, was $45.4 million, up 31% from the year-earlier quarter. Revenues from Professional Services were $9.4 million, up 8% from the year-earlier quarter.

Management stated that there was a shift in revenue mix toward recurring revenue. The software portion of the current backlog at the end of the quarter was $152 million, which is 43% greater than the year-earlier quarter. The company also has a strong pipeline.

Total gross margin was 72%, up 200 basis points from the year-earlier quarter, driven by recurring revenues, partially offset by a decrease in margins from Professional Services.

Operating margins improved to 11% from 9% in the year-earlier quarter. Including one-time items, EPS was 1 cent compared with 4 cents in the year-earlier quarter.

Agreements of Analysts

Fiscal earnings estimates have remained static for RightNow in the past seven days. Of the 11 analysts covering the stock in the last 30 days, six analysts went in for an upward revision of estimates for fiscal 2011, while two analysts revised their estimates downward for the same period.

Magnitude of Estimate Revisions

Since the earnings release, the Zacks Consensus Estimate for 2011 was stable at 7 cents per share. For 2011, the estimates range from 2 cents to 10 cents.

RightNow expects a net income (excluding stock-based compensation expense and non-recurring expenses) per share of 15 cents for the forthcoming quarter and 58 cents for fiscal 2011.

Our Take

We believe that demand for the company’s products remains strong despite the discontinuation of the perpetual model. RightNow is set to capitalize on the growth of the market for its CX solutions, an on-demand (cloud-based) suite of software and services.

The company will continue to benefit from the shift in revenue mix toward higher margin yielding recurring revenue. Furthermore, the rise in backlog, increased contact center replacement and strong pipeline will lead to impressive revenues for the coming quarter.

RightNow’s recent acquisition of Q-go.com B.V. will help the company expand its client base.

However, we believe that the company operates in a highly competitive environment and the positives are included in the stock price.

We would like to be on the sidelines as of now and maintain a Neutral recommendation. In the short term, we have a Zacks #3 Rank that translates into a Hold rating, indicating that the stock is expected to perform in line with the overall U.S. equity market.

About Earnings Estimate Scorecard: Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements.

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