| RIGHTNOW TECHNOLOGIES INC Item 1A Risk Factors Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below, in addition to the other cautionary statements and risks described elsewhere and the other information contained in this Report and in our other filings with the SEC, including our reports on Forms 10-Q and 8-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on RightNow, our business, financial condition and results of operations could be seriously harmed |
| In that event, the market price for our common stock could decline and you may lose all or part of your investment |
| We may not be able to sustain or increase our profitability in the future |
| Prior to 2004, we incurred significant operating losses of approximately dlra4dtta1 million in 2003, dlra2dtta7 million in 2002 and dlra15dtta3 million in 2001 |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra33 million |
| We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses as we expand our operations and, as a result, we will need to generate significant revenue to maintain profitability |
| Even if we continue to achieve profitability, we may not be able to increase profitability on a quarterly or annual basis in the future, which may cause the price of our stock to decline |
| Our quarterly results of operations may fluctuate in the future |
| Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control |
| If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially |
| Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section: · our ability to retain and increase sales to existing clients, attract new clients and satisfy our clients’ requirements; · changes in the volume and mix of term and perpetual licenses sold in a particular quarter, because perpetual license revenue is recorded into revenue upon delivery whereas term licenses are recorded into revenue ratably over the period of license; · our policy of expensing sales commissions at the time of invoice, while the majority of our revenue is recognized ratably over future periods; · changes in the mix of revenue between professional services and software, hosting and support, because the gross margin on professional services is typically lower than the gross margin on software, hosting and support; · changes in the mix of voice self service applications sold and/or usage volume, because the gross margin on voice self service applications is typically lower than the gross margin on our sales, marketing and service applications; 12 ______________________________________________________________________ · the timing and success of new product introductions or upgrades by us or our competitors; · changes in our pricing policies or those of our competitors; · the amount and timing of expenditures related to expanding our operations; · changes in the payment terms for our products and services, including changes in the mix of payment options chosen by our customers; · the purchasing and budgeting cycles of our clients; and · general economic, industry and market conditions |
| Because the sales cycle for the evaluation and implementation of our solutions typically ranges from 60 to 180 days, we may also experience a delay between increasing operating expenses and the generation of corresponding revenue, if any |
| Moreover, because the majority of our clients purchase term licenses, and we recognize revenue from these licenses over the term of the agreement, downturns or upturns in sales may not be immediately reflected in our operating results |
| Most of our expenses, such as salaries and third-party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels |
| As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter |
| Due to the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance |
| If our efforts to enhance existing solutions, introduce new solutions or expand the applications for our products and solutions to broader CRM markets do not succeed, our ability to grow our business will be adversely affected |
| Approximately 90prca of our revenue is derived from RightNow Service, a suite of solutions used to optimize customer service operations |
| If we are unable to successfully develop and sell new and enhanced versions of RightNow Service, or introduce new products and solutions for the customer service market, our financial performance will suffer |
| Although to date the majority of business has been focused on providing solutions for customer service operations, we recently introduced RightNow CRM 7dtta5 and voice-enabled CRM applications to expand our solution offerings |
| Our efforts to expand beyond the customer service market may not be successful because certain of our competitors have far greater experience and brand recognition in the broader segments of the CRM market |
| In addition, our efforts to expand our on-demand software solutions beyond the customer service market may divert management resources from our existing operations and require us to commit significant financial resources to a market where we are unproven, which may harm our business, financial condition and results of operations |
| We face intense competition, and our failure to compete successfully could make it difficult for us to add and retain clients and could reduce or impede the growth of our business |
| The market for customer relationship management solutions is highly competitive and fragmented, and is subject to rapidly changing technology, shifting client requirements, frequent introductions of new products and services, and increased marketing activities of other industry participants |
| Competition has intensified with our most recent product releases |
| Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance |
| If we are unable to compete effectively, it will be difficult for us to add and retain clients, and our business, financial condition and results of operations will be seriously harmed |
| 13 ______________________________________________________________________ We face competition from: · companies currently providing customer service solutions, some of whom offer hosted services, including BMC Software Corporation, Inc, eGain Communications Corporation, FrontRange Solutions, Inc, IBM Corporation, Kana Software, Inc, Microsoft Corporation, Netsuite, Oracle Corporation/Siebel Systems, SAP AG, salesforce |
| com, inc, and SSA Global; · CRM systems that are developed and maintained internally by businesses; · CRM products or services that are developed, or bundled with other products or services, and installed on a client’s premises by software vendors; · outsourced contact center providers who bundle solutions and agent labor in their service offerings; · new companies entering the CRM software market, the on-demand applications market and the on-demand CRM market, or expanding from any one of these markets to the others; and · voice system integrators and voice-enabled IVR technology providers, such as Edify, Unveil Technologies, Apptera, Voxify, TuVox, Microsoft, IBM, and Intervoice |
| Many of our current and potential competitors have longer operating histories and larger presence in the general CRM market, greater name recognition, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have |
| As a result, such competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or client requirements or devote greater resources to the promotion and sale of their products and services than we can |
| To the extent our competitors have an existing relationship with a potential client, that client may be unwilling to switch vendors due to the time and financial commitments already made with our competitors |
| In addition, many of our current and potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential clients, alliance partners or other third parties, or may combine and consolidate to become more formidable competitors with better resources |
| For example, in January 2006, Oracle Corporation completed its acquisition of Siebel Systems, Inc |
| We also expect that new competitors, such as enterprise software vendors and online service providers that have traditionally focused on enterprise resource planning or back office applications, will continue to enter the on-demand CRM market with competing products as the on-demand CRM market develops and matures |
| It is possible that these new competitors could rapidly acquire significant market share |
| The market for our on-demand application services is at an early stage of development, and if it does not develop or develops more slowly than we expect, our business will be harmed |
| The market for on-demand application services is at an early stage of development, and it is uncertain whether these application services will achieve and sustain high levels of demand and market acceptance |
| Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand application services in general and for on-demand customer relationship management applications in particular |
| Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand application services |
| While we have supported and continue to support traditional on-site deployment of our software applications, widespread market acceptance of our on-demand software solutions is critical to the success of our business |
| Other factors that may affect the market acceptance of our solutions include: · on-demand security capabilities and reliability; 14 ______________________________________________________________________ · concerns with entrusting a third party to store and manage critical customer data; · our ability to meet the needs of broader segments of the CRM market or other on-demand markets; · the level of customization we offer; · our ability to continue to achieve and maintain high levels of client satisfaction; · concerns with purchasing critical CRM solutions from a company with a history of operating losses that only recently turned profitable; and · the price, performance and availability of competing products and services |
| If businesses do not perceive the benefits of on-demand solutions in general, or our on-demand solutions in particular, then the market for these solutions may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations |
| Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our client base and achieve broader market acceptance of our solutions |
| Increasing our client base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our sales and marketing operations |
| We plan to continue to expand our direct sales force and engage additional third-party channel partners, both domestically and internationally |
| This expansion will require us to invest significant financial and other resources |
| Our business will be seriously harmed if our efforts do not generate a corresponding significant increase in revenue |
| We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if we are unable to retain our existing direct sales personnel |
| We also may not achieve anticipated revenue growth from our third-party channel partners if we are unable to attract and retain additional motivated channel partners, if any existing or future channel partners fail to successfully market, resell, implement or support our solutions for their customers, or if they represent multiple providers and devote greater resources to market, resell, implement and support competing products and services |
| The majority of our solutions are sold pursuant to term license agreements, and if our existing clients elect not to renew their licenses or to renew their licenses on terms less favorable to us, our business, financial condition and results of operations will be adversely affected |
| The majority of our solutions are sold pursuant to term license agreements that are subject to renewal every two years or less and our clients have no obligation to renew their licenses |
| Because our clients may elect not to renew, we may not be able to consistently and accurately predict future renewal rates |
| Our clients’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our solutions, their ability to continue their operations or invest in customer service, or the availability and pricing of competing products |
| If large numbers of existing clients do not renew their licenses, or renew their licenses on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new licenses generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected |
| 15 ______________________________________________________________________ We have experienced rapid growth in recent periods |
| If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges |
| We have substantially expanded our overall business, headcount and operations in recent periods |
| We have increased our total number of full-time employees to 530 at December 31, 2005 from 403 at December 31, 2004 |
| To achieve our business objectives, we will need to continue to expand our business at a rapid pace |
| This expansion has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, financial and other resources |
| We anticipate that this expansion will require substantial management effort and significant additional investment in our infrastructure |
| If we are unable to successfully manage our growth, our business, financial condition and results of operations will be adversely affected |
| Part of the challenge that we expect to face in the course of our expansion is to maintain the high level of customer service to which our clients have become accustomed |
| To date, we have focused on providing personalized account management and customer service on a frequent basis to ensure our clients are effectively leveraging the capabilities of our solution |
| We believe that much of our success to date has been the result of high client satisfaction, attributable in part to this focus on client service |
| To the extent our client base grows, we will need to expand our account management, client service and other personnel, and third party channel partners, in order to enable us to continue to maintain high levels of client service and satisfaction |
| If we are not able to continue to provide high levels of client service, our reputation, as well as our business, financial condition and results of operations, could be harmed |
| If there are interruptions or delays in our hosting services through third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions could become impaired, which could harm our relationships with clients and subject us to liability |
| As of December 31, 2005, approximately 87prca of our clients were using our hosting services for deployment of our software applications |
| We provide our hosting services for our non-voice applications through computer hardware that we own and that is currently located in third-party web hosting co-location facilities maintained and operated in California and New Jersey |
| We provide hosting services for our voice applications through a third-party hosting facility based in Georgia, using hardware owned and operated by the third party |
| We do not maintain long-term supply contracts with any of our hosting providers, and providers do not guarantee that our clients’ access to hosted solutions will be uninterrupted, error-free or secure |
| Our operations depend on our providers’ ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events |
| Our back-up computer hardware and systems located in our Montana headquarters (non-voice) and in New York (voice) have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring simultaneously at all hosting facilities |
| In the event that our hosting facility arrangements were terminated, or there was a lapse of service or accidental or willful damage to such facilities, we could experience lengthy interruptions in our hosting service as well as delays and/or additional expense in arranging new facilities and services |
| In addition, the failure by our third-party hosting facilities to meet our capacity requirements could result in interruptions in our service or impede our ability to scale our operations |
| Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our clients’ service to their customers |
| Any interruptions or delays in our hosting services, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with clients and our reputation |
| This in turn could reduce our revenue, subject us to liability, cause us to issue credits or pay penalties or cause clients to fail to renew their licenses, any of which could 16 ______________________________________________________________________ adversely affect our business, financial condition and results of operations |
| In the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur |
| If the security of our clients’ confidential information contained in our systems or stored by use of our software is breached or otherwise subjected to unauthorized access, our hosting service or our software may be perceived as not being secure and clients may curtail or stop using our hosting service and our solutions |
| Our hosting systems and our software store and transmit proprietary information and critical data belonging to our clients and their customers |
| Any accidental or willful security breaches or other unauthorized access could expose us to a risk of information loss, litigation and other possible liabilities |
| If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our clients’ data, our relationships with clients and our reputation will be damaged, our business may suffer and we could incur significant liability |
| Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we and our third-party hosting co-location facilities may be unable to anticipate these techniques or to implement adequate preventative measures |
| We have significant international sales and are subject to risks associated with operating in international markets |
| International sales comprised 26prca, 27prca, and 24prca of our revenue for the years ended December 31, 2005, 2004, and 2003, respectively |
| We intend to continue to pursue and expand our international business activities |
| Adverse political and economic conditions could make it difficult for us to increase our international sales or to operate abroad |
| International operations are subject to many inherent risks, including: · political, social and economic instability, including conflicts in the Middle East and elsewhere abroad, terrorist attacks and security concerns in general; · adverse changes in tariffs and other protectionist laws and business practices that favor local competitors; · fluctuations in currency exchange rates; · longer collection periods and difficulties in collecting receivables from foreign entities; · exposure to different legal standards and burdens of complying with a variety of foreign laws, including employment, tax, privacy and data protection laws and regulations; · reduced protection for our intellectual property in some countries; · expenses associated with localizing products for foreign countries, including translation into foreign languages; and · import and export license requirements and restrictions of the United States and each other country in which we operate |
| We believe that international sales will continue to represent a significant portion of our revenue for the foreseeable future, and that continued growth will require further expansion of our international operations |
| A substantial percentage of our international sales are denominated in the local currency |
| As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets |
| We typically do not engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations |
| Any of these factors may adversely 17 ______________________________________________________________________ affect our future international sales and, consequently, affect our business, financial condition and results of operations |
| If we fail to respond effectively to rapidly changing technology and evolving industry standards, particularly in the on-demand CRM industry, our solutions may become less competitive or obsolete |
| The CRM industry is characterized by rapid technological advances, changes in client requirements, frequent new product and service introductions and enhancements, changes in protocols and evolving industry standards |
| Our hosted business model and the on-demand CRM market are relatively new and may evolve even more rapidly than the rest of the CRM market |
| Competing products and services based on new technologies or new industry standards may perform better or cost less than our solutions and could render our solutions less competitive or obsolete |
| In addition, because our solutions are designed to operate on a variety of network hardware and software platforms using a standard Internet web browser, we will need to continuously modify and enhance our solutions to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies and to integrate with our clients’ systems as they change and evolve |
| Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses |
| If we are unable to successfully develop and market new and enhanced solutions that respond in a timely manner to changing technology and evolving industry standards, and if we are unable to satisfy the diverse and evolving technology needs of our clients, our business, financial condition and results of operations will suffer |
| Our failure to attract and retain qualified or key personnel may prevent us from effectively developing, marketing, selling, integrating and supporting our products |
| Our success and future growth depends to a significant degree upon the skills, experience, performance and continued service of our senior management, engineering, sales, marketing, service, support and other key personnel |
| Specifically, we believe that our future success is highly dependent on Greg Gianforte, our founder, Chairman and Chief Executive Officer |
| In addition, we do not have employment agreements with any of our senior management or key personnel that require them to remain our employees and, therefore, they could terminate their employment with us at any time without penalty |
| Gianforte or any of our other key personnel, our business will be severely disrupted and we may be unable to operate effectively |
| We do not maintain “key person” life insurance policies on any of our key employees except Mr |
| This life insurance policy would not be sufficient to compensate us for the loss of his services |
| Our future success also depends in large part upon our ability to attract, train, integrate, motivate and retain highly skilled employees, particularly sales, marketing and professional services personnel, software engineers, product trainers, and senior personnel |
| Competition for these personnel is intense, especially for engineers with high levels of expertise in designing and developing software and for senior sales executives |
| If our solutions fail to perform properly or if they contain technical defects, our reputation will be harmed, our market share would decline and we could be subject to product liability claims |
| Our software products may contain undetected errors or defects that may result in product failures, slow response times, or otherwise cause our products to fail to perform in accordance with client expectations |
| Because our clients use our products for important aspects of their business, any errors or defects in, or other performance problems with, our products could hurt our reputation and may damage our clients’ businesses |
| If that occurs, we could lose future sales, or our existing clients could elect to not renew or to delay or withhold payment to us, which could result in an increase in our provision for doubtful accounts and an increase in collection cycles for accounts receivable |
| Clients also may make warranty claims against us, which could result in the expense and risk of litigation |
| Product performance problems 18 ______________________________________________________________________ could result in loss of market share, failure to achieve market acceptance and the diversion of development resources |
| If one or more of our products fails to perform or contains a technical defect, a client may assert a claim against us for substantial damages, whether or not we are responsible for the product failure or defect |
| Product liability claims could require us to spend significant time and money in litigation or to pay significant settlements or damages |
| Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may not be sufficient to cover liabilities resulting from such product liability claims |
| Also, our insurer may disclaim coverage |
| Our liability insurance also may not continue to be available to us on reasonable terms, in sufficient amounts, or at all |
| Any product liability claims successfully brought against us would cause our business to suffer |
| If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights |
| Our success depends to a significant degree upon the protection of our software and other proprietary technology rights |
| We rely on trade secret, copyright and trademark laws, patents and confidentiality agreements with employees and third parties, all of which offer only limited protection |
| The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions |
| We may not be able to obtain any further patents or trademarks, and our pending applications may not result in the issuance of patents or trademarks |
| Any of our issued patents may not be broad enough to protect our proprietary rights or could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents |
| Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in other countries are uncertain and may afford little or no effective protection of our proprietary technology |
| Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology |
| Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible |
| Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others |
| Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business |
| Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property |
| Our product development efforts may be constrained by the intellectual property of others, and we may become subject to claims of intellectual property infringement, which could be costly and time-consuming |
| The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights |
| As we seek to extend our CRM product and service offerings, we may be constrained by the intellectual property rights of others |
| We have in the past been named as a defendant in a lawsuit alleging intellectual property infringement, and we may again in the future have to defend against intellectual property lawsuits |
| We may not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent uncertainties in litigation |
| Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing agreements |
| If any of our products violate third-party proprietary rights, we may be required to re-engineer our products or seek to obtain licenses from third parties, which may not be available on reasonable terms or at all |
| Because our license agreements typically require us to indemnify our clients from any claim or finding of intellectual property infringement, any such litigation or successful infringement claims could 19 ______________________________________________________________________ adversely affect our business, financial condition and results of operations |
| Any efforts to re-engineer our products, obtain licenses from third parties on favorable terms or license a substitute technology may not be successful and, in any case, may substantially increase our costs and harm our business, financial condition and results of operations |
| Further, our software products contain open source software components that are licensed to us under various public domain licenses |
| While we believe we have complied with our obligations under the various applicable licenses for open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown |
| Use of open source standards also may make us more vulnerable to competition because the public availability of open source software could make it easier for new market entrants and existing competitors to introduce similar competing products quickly and cheaply |
| Future acquisitions could disrupt our business and harm our financial condition and results of operations |
| In order to expand our addressable market, we may decide to acquire additional businesses, products and technologies |
| In May 2005, we acquired the intellectual property and other assets of Convergent Voice, Inc, our first acquisition since becoming a public company |
| Acquisitions could require significant capital infusions and could involve many risks, including, but not limited to, the following: · an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges; · we may encounter difficulties in assimilating and integrating the business, technologies, products, personnel or operations of companies that we acquire, particularly if key personnel of the acquired company decide not to work for us; · our existing and potential clients and the customers of the acquired company may delay purchases due to uncertainty related to an acquisition; · an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; · the acquired businesses, products or technologies may not generate sufficient revenue to offset acquisition costs; · we may have to issue equity securities to complete an acquisition, which would dilute our stockholders and could adversely affect the market price of our common stock; and · acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience |
| We cannot assure you that we will be able to identify or consummate any future acquisitions on favorable terms, or at all |
| If we do pursue any future acquisitions, it is possible that we may not realize the anticipated benefits from the acquisitions or that the financial markets or investors will negatively view the acquisitions |
| Even if we successfully complete an acquisition, it could adversely affect our business, financial condition and results of operations |
| 20 ______________________________________________________________________ Changes in the accounting treatment of stock options will adversely affect our results of operations |
| The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards Nodtta 123R, Share-Based Payment (“SFAS 123R”) |
| SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments issued, and is effective for annual periods beginning after June 15, 2005 |
| SFAS 123R replaces SFAS Nodtta 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion Nodtta 25, Accounting for Stock Issued to Employees (“APB 25”) |
| SFAS 123R requires us to value our employee stock option grants, transactions under our Employee Stock Purchase Plan, and other possible equity-based transactions, pursuant to a fair value formula, and then amortize that value against our reported earnings over the vesting period in effect for those transactions |
| We currently account for stock-based awards to employees in accordance with APB 25, and have adopted the disclosure-only alternative of SFAS 123 |
| This change in accounting treatment, beginning January 1, 2006, will materially and adversely affect our reported results of operations as the stock-based compensation expense will be charged directly against our reported earnings |
| We do not expect this accounting change to materially affect our liquidity because equity-based compensation is a non-cash expense |
| Volatility in the price of our common stock may adversely affect our ability to predict the fair value of our stock awards and the resulting stock-based compensation expense |
| The fair value of stock awards under SFAS 123R is estimated using several factors, including the underlying price of the stock option, which is not known until the date of grant, and Company assumptions of expected stock price volatility, the expected term of the award, and other factors |
| These factors can cause significant variations in the estimated fair value of the awards, and therefore cause significant fluctuations in our operating results |
| For example, the estimated fair value of stock options granted in our third quarter ended September 30, 2005 was dlra6dtta93 per share |
| However, due to an increase in the underlying price of our common stock, the estimated fair value of a like award granted in our fourth quarter ended December 31, 2005 would have increased 67prca to dlra11dtta57 per share |
| Volatility in the market value of our stock could cause us to incur significantly higher or lower stock-based compensation expense in future periods |
| The trading price of our common stock depends in part on our ability to accurately forecast our results, and if we were to miss our forecasts, we may lose credibility with investors and research analysts, which in turn could cause the price of our common stock to decline |
| The required adoption of SFAS 123R makes stock options a less attractive form of employee compensation, and our use of alternative forms of employee compensation in response to SFAS 123R could adversely affect our ability to attract and retain personnel |
| We have historically used stock options as a key component of our employee compensation because, we believe it aligns employees’ interests with our stockholders’ interest, encourages employee retention, and provides a competitive component of our overall compensation program |
| Due to the required adoption of SFAS 123R, and the recording of stock option expense on our operating statements, we may determine that it is in our best interest to reduce the number or size of our stock-based awards, or change the type of awards granted |
| We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs |
| We may require additional capital to respond to business challenges, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure, fund expansion, respond to competitive pressures and acquire complementary businesses, products and technologies |
| Absent sufficient cash flow from operations, we may need to engage in equity or debt financings to secure 21 ______________________________________________________________________ additional funds to meet our operating and capital needs |
| In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons |
| We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding |
| If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock |
| Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, to pay dividends and to pursue business opportunities, including potential acquisitions |
| In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our interest or principal payments |
| Risks Related to Our Industry The success of our products and our hosted business depends on the continued growth and acceptance of the Internet as a business and communications tool, and the related expansion of the Internet infrastructure |
| The future success of our products and our hosted business depends upon the continued and widespread adoption of the Internet as a primary medium for commerce, communication and business applications |
| Our business growth would be impeded if the performance or perception of the Internet, or companies providing hosted solutions, was harmed by security problems such as “viruses,” “worms” and other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet activity, increased costs, decreased accessibility and quality of service, or increased government regulation and taxation of Internet activity |
| Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy, the solicitation, collection, processing or use of personal or consumer information, the use of the Internet as a commercial medium and the use of e-mail for marketing or other consumer communications |
| In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or for sending commercial e-mail |
| These laws or charges could limit the growth of Internet-related commerce or communications generally, result in a decline in the use of the Internet and the viability of Internet- based services such as ours and reduce the demand for our products, particularly our RightNow Marketing solution |
| The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times |
| If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected |
| Privacy concerns and laws or other domestic or foreign regulations may adversely affect our business or reduce sales of our solutions |
| Businesses using our solutions collect personal information regarding their customers when those customers contact them with customer service inquiries |
| A valuable component of our solutions is their ability to allow our clients to use and analyze their customers’ information to increase sales, marketing and up-sell or cross-sell opportunities |
| Federal, state and foreign government bodies and agencies, however, have adopted and are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers |
| The costs of compliance with, and other 22 ______________________________________________________________________ burdens imposed by, such laws and regulations that are applicable to the businesses of our clients may limit the use and adoption of this component of our solutions and reduce overall demand for our solutions |
| Furthermore, even where a client desires to make full use of these features in our solutions, privacy concerns may cause our clients’ customers to resist providing the personal data necessary to allow our clients to use our solutions most effectively |
| Even the perception of privacy concerns, whether or not valid, may inhibit market acceptance of our products |
| The European Union has also adopted a directive that requires member states to impose restrictions on the collection and use of personal data that are far more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States |
| All of these domestic and international legislative and regulatory initiatives may adversely affect our clients’ ability to collect and/or use demographic and personal information from their customers, which could reduce demand for our solutions |
| In addition to government activity, privacy advocacy groups and the technology and direct marketing industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us |
| If the gathering of profiling information were to be curtailed in this manner, customer service CRM solutions would be less effective, which would reduce demand for our solutions and harm our business |
| Non-solicitation concerns, laws or regulations may adversely affect our clients’ ability to perform outbound marketing and other e-mail communications, which could reduce sales of our solutions |
| In January 2004, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, became effective |
| The CAN-SPAM Act regulates the transmission and content of commercial e-mails and, among other things, obligates the sender of such e-mails to provide recipients with the ability to opt-out of receiving future e-mails from the sender, and establishes penalties for the transmission of e-mail messages which are intended to deceive the recipient as to source or content |
| Many state legislatures also have adopted laws that impact the delivery of commercial e-mail, and laws that regulate commercial e-mail practices have been enacted in many of the international jurisdictions in which we do business, including Europe, Australia, and Canada |
| In addition, Internet service providers and licensors of software products have introduced a variety of systems and products to filter out certain types of commercial e-mail, without any common protocol to determine whether the recipient desired to receive the e-mail being blocked |
| As a result, it is difficult for us to determine in advance whether or not e-mails generated by our clients using our solutions will be permitted by spam filters to reach the intended recipients |
| Our RightNow Marketing solution specifically serves the market for mass distribution marketing and other e-mail communications |
| The increasing regulation of e-mail delivery, both domestically and internationally, and the spam filtering practices of Internet service providers and e-mail users generally, will place significant additional burdens on our clients who have outbound communication programs, and may cause those clients to substantially change their outbound communications programs or abandon them altogether |
| These factors may lead to a reduction in sales of our RightNow Marketing solution, may make it necessary to redesign our RightNow Marketing solution to make it easier for our clients to conform to the requirements of such laws and standards, which would increase our expenses, or may make it necessary for us to redefine the market for and use of our RightNow Marketing solution, which could reduce our revenue |
| 23 ______________________________________________________________________ General economic conditions could adversely affect our clients’ ability or willingness to purchase our products, which could materially and adversely affect our results of operations |
| Our clients consist of large and small companies in nearly all industry sectors and geographies |
| Potential new clients or existing clients could defer purchases of our products because of unfavorable macroeconomic conditions, such as rising interest rates, fluctuations in currency exchange rates, industry or national economic downturns, industry purchasing patterns, and other factors |
| Our ability to grow revenues may be adversely affected by unfavorable economic conditions |
| Risks Related to Ownership of Our Common Stock The significant control over stockholder voting matters and our office leases that may be exercised by our founder and Chief Executive Officer will limit your ability to influence corporate actions and may require us to find alternative office space to lease or buy in the future |
| At December 31, 2005, Greg Gianforte, our founder and Chief Executive Officer, and his spouse, Susan Gianforte, together beneficially owned approximately 36prca of our currently outstanding common stock and, together with our other officers and directors, beneficially owned approximately 52prca of our currently outstanding common stock |
| In addition, none of the shares of common stock held by Mr |
| Gianforte and Mrs |
| Gianforte are subject to vesting restrictions |
| Gianforte, acting alone or together with some of our other officers and directors, will be able to control all matters requiring stockholder approval, including the election of directors, management changes and approval of significant corporate transactions |
| This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of RightNow, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of RightNow and might reduce the market price of our common stock |
| Gianforte beneficially owns, directly or indirectly, a 50prca membership interest in Genesis Partners, LLC, our landlord from whom we lease our principal offices in Bozeman, Montana |
| Consequently, Mr |
| Gianforte has significant control over any decisions by Genesis Partners regarding renewal, modification or termination of our Bozeman, Montana leases |
| In the event that our current leases with Genesis Partners were terminated or otherwise could not be renewed, or came up for renewal on commercially unreasonable terms, we would be required to find alternative office space to lease or buy |
| Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock |
| Provisions of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable and may limit the market price of our common stock |
| These provisions include the following: · establishing a classified board in which only a portion of the total board members will be elected at each annual meeting; · authorizing the board to issue preferred stock; · providing the board with sole authority to set the number of authorized directors and to fill vacancies on the board; · limiting the persons who may call special meetings of stockholders; · prohibiting certain transactions under certain circumstances with interested stockholders; · requiring supermajority approval to amend certain provisions of the certificate of incorporation; and 24 ______________________________________________________________________ · prohibiting stockholder action by written consent |
| It is possible that the provisions contained in our certificate of incorporation and bylaws, the existence of super voting rights held by insiders and the ability of our board of directors to issue preferred stock without stockholder action may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock |