NICE Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 12 speakers on the call.

Operator

Welcome to the NICE Conference Call discussing Third Quarter 2023 Results, and thank you all for holding. All participants are at present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded, November 16, 2023. I would now like to turn this call over to Marty Cohen, Vice President, Investor Relations at NICE.

Operator

Please go ahead.

Speaker 1

Thank you, operator. With me on the call today are Barak Elam, Chief Executive Officer and Beth Gaspich, Chief Financial Officer. Before we start, I would like to point out that some of these statements made on this call will constitute forward looking statements. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be advised that the company's actual results Could differ materially from these forward looking statements.

Speaker 1

Additional information regarding the factors that could cause actual results What performance of the company to differ materially is contained in the section entitled Risk Factors in Item 3 The company's 2022 Annual Report on Form 20F has filed with the Securities and Exchange Commission on March 30, 2023. During today's call, we will present a more detailed discussion of Q3 2023 results and the company's guidance for the full year of 2023. You can find our press release as well as a PDF of our financial results on NICE's Investor Relations website. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this Call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles As reflected, meaning accounting for share based compensation, amortization of acquired intangibles, acquisition related expenses, Amortization of discount on debt, loss from extinguishment of debt, the tax effect of the non GAAP adjustments.

Speaker 1

The differences between the non GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. Information and some of our comments

Speaker 2

Thank you, Marty, and welcome, everyone. We are pleased to report another strong quarter exceeding The high end of our guidance range on both total revenue and earnings per share for the Q3 of 2023. Record total revenue of $601,000,000 was driven by another outstanding performance In cloud revenue, which grew 22 percent to $403,000,000 Along with the great top line performance, we continue to further distance ourselves from the competition with our unrivaled profitability. Our operating income grew 15% to $184,000,000 and operating margin Grew 119 basis points to a record 30.6%. Earnings per share Came in at $2.27 representing 18% growth.

Speaker 2

Moreover, cash flow from operations Another unparalleled competitive advantage grew 28% to $121,000,000 in the 3rd quarter. NICE continues to set the gold standard for the CX market. We always have and we will always will. Our cloud revenue growth continues to significantly outperform the rest of the industry And on a much higher cloud revenue base. Our outperformance is attributed to 2 main factors.

Speaker 2

First, we continue to consistently beat our competitors, especially at the high end of the market And in effect, widening our market share lead. Our comment of the high end of the market is demonstrated By the 35% last 12 months growth of CXone Enterprise ARR that we define as customers Billing over $1,000,000 annually. 2nd, we executed on our strategy and expanded CXone Into a comprehensive digital engagement and CXAI platform, AI is now a meaningful growth engine by itself With a significant incremental TAM, this powerful growth engine is substantiated by the fact that in Q3, AI was included in 80% of our new enterprise CX deals and was the fuel that drove those deals. Additionally, year to date our CXone AI bookings increased 163% And digital engagement bookings grew 78% compared to the same period last year. The CX market is experiencing a shift in the demand dynamics that is tailwind for NICE.

Speaker 2

This favorable shift is unleashing a positive ripple effect. It starts With heightened demand for CXAI, this in turn is driving an accelerated demand for platformization Because for AI to be effective in the complex world of CX, there is a resolute prerequisite to converge all CX assets Into a single platform. This mandates faster decision making for cloud adoption and migration In a market that is still only 20% penetrated in the cloud, the shift in demand dynamics Plays exactly into our competitive strength and differentiation. Digital engagement and CXAI The fastest growing segments of our pipeline, increasing sevenfold year over year and representing a significant part of our new business pipeline. The quintessential CX for enterprises Is to shift as many customer service interactions as possible to be consumer led and agentless.

Speaker 2

However, most past automation efforts failed and the hurdles to fully automate customer service still remains today. AI now brings a fresh enabling technology rejuvenating these efforts. But for EAI to be successful, it needs to be CX specific, 100% accurate, Fully personalized, non generic and fully aligned with the brand's goals. Above all, It is imperative to deliver a non fragmented end to end customer journey that is seamless, not back breaking. Taking the generic AI path with either standard gen AI or siloed point solutions simply doesn't work.

Speaker 2

This rude awakening is creating a surge of customers turning into NICE to be their CXAI vendor of choice. Moreover, CXai represent a significant incremental revenue and TAM opportunity As pricing is evolving from exclusively seat based and expanding to also include the exponentially growing volume of interactions. In fact, we are already monetizing on it in the many deals we signed in Q3. In a 7 digit ACV deal with 1 of the largest cruise ship operators, digital engagement in CXAI doubled the size of the deal. AI was the main determining factor for our win over multiple competitors that could only deliver slideware.

Speaker 2

In another 7 digit ACV deal, this one with a large BPO, AI increased the deal by 6x. This company, like many other BPOs, is expanding its AI capabilities to transform their business models by using more automation. The incumbent cloud provider which we replaced could not deliver through CXAI capabilities. We signed a 7 digit ACV deal with a major European broadband provider and this deal was 1 100 percent AI. This customer turned to NICE in our AI portfolio to help them deliver better AI driven proactive service for a growing customer base.

Speaker 2

We signed a 7 digit ACV deal with a large energy distributor Where digital and AI nearly doubled the size of the deal. As part of its overall strategy to incorporate AI for effective self-service, We placed 3 legacy point solutions vendors and converged everything on to CXone. The bedrock of CXai is underpinned by the breadth and quality of its Underlying CX assets, including data, knowledge and interactions, but its power comes from their convergence. While AI and cloud are the most visible growth drivers in the CX market, platformization is an extremely powerful Under current of growth, it enables the convergence of all CX assets and facilitates the transition From a multi vendor, multi point solution environment to one that is consolidating onto a single platform. This revolutionary phase of platformization is clearly being driven by CXone with its unique convergence power.

Speaker 2

We are seeing a tremendous increase in the number of vendors we are displacing in each new customer win. In Q3, we saw a staggering 48% year over year increase in new customer portfolio deals. We signed a 7 digit ACV deal with 1 of the largest healthcare providers in the UK, Replacing legacy on premise providers and converging older CX operations onto CXone platform. Other similar platform consolidation deals included a 7 digit deal with a large state government We will replace a legacy vendor and a hosted cloud solution. A major international hotel chain in Asia Replaced multiple legacy and cloud incumbents due to the lack of complete portfolio and a large U.

Speaker 2

S. Home and security company We will converge 9 different siloed solutions on to CXone. The core catalyst fueling demand in the CX market is and will continue to be cloudification. On premise hosted and immature cloud solutions are an affliction emanating throughout the enterprise, Hindering speed of innovation, ability to elevate AI and the capacity to reduce of cost of ownership. We are only now reaching the enterprise adoption cycle of cloud in the CX market.

Speaker 2

With extremely high barrier of entry, only a few players will emerge. We are the clear leader With CXone having the largest customer base by far and serving the most complex enterprises at scale, After a decade of massive investment to build and differentiate CXone, we are the preeminent CX Cloud vendor. Q3 was reached with deals driven by the need of customers to clarify. A few examples include A 7 digit ACV deal with a very large East Coast Medical Center, where we replaced a legacy vendor And won against other cloud vendors to bring this institution on to a unified platform. There was a 7 digit deal with a large healthcare platform company in which we won against 2 cloud competitors And replaced the incumbent cloud provider because the DIY cloud infrastructure was too complex, Forcing the customer to build most of it themselves.

Speaker 2

We are winning across the board, Fluently riding a tidal wave of strong demand for AI, Platformization and Cloud. At the same time, We own the winning playbook on profitability with industry best cloud architecture that delivers on outstanding and Spending cloud gross margin leading to our best in class industry operating margin. Our top notch profitability, cash flow and rock solid balance sheet provide us substantial financial flexibility. This is clearly demonstrated by this year's accelerated buyback program, the announcement of a new and even larger Share repurchase plan and our expected 2024 closure of the Livebox acquisition, which we announced a few weeks ago. LiveVox is the market leader in CX proactive outreach.

Speaker 2

LiveVox Provide us with a strategic complementary offering that will further extend CXone's market leadership. The combination of CXone with contact engine, which we acquired 2 years ago and the upcoming addition of LiveVox creates a conversational AI powerhouse for both inbound and outbound CX. Additionally, the LiveRocks premier and loyal customer base provides us significant opportunities to upsell and cross sell CXone into that base. We're also selling LiveBooks into a large existing CXone customer base. Moreover, we Expect a very synergetic financial outcome that will be accretive to operating income, operating margin and free cash flow in 2024.

Speaker 2

In summary, we're extremely excited about the opportunities in our market As we have dug our heels deep in innovation, go to market and execution to lead the way now and beyond. As market dynamics are rapidly evolving, pricing models changing and organizations accelerating their modernization efforts, We are well prepared with the market's best CXone platform CXone, the leading CXAI offering and the most established cloud infrastructure Moreover, we have an unbeatable dedicated senior leadership team with decades of industry experience. Before I hand it over to Beth, the NICE team takes great comfort In your continued outpouring of support and well wishes since the eruption of the horrific events that took place in Israel. And for this, we thank you. 850 of our 8,000 NISRs are based in Israel And I couldn't be more proud of the full commitment and ongoing engagement to our customers, roadmap and business.

Speaker 2

On a personal note, my heart goes out to the 239 hostages, Including infants and elderly being held over 41 days in captivity, And I have only one message, bring them home now. I will now turn the call over to Beth.

Speaker 3

Thank you, Barak. Q3 was characteristic of our repeated success and consistent execution at NICE, Growing our cloud revenue, profitability and cash generation at industry leading growth rates. Our Q3 revenue and EPS both exceeded the high end of our guidance range. Total revenue for the Q3 was a record $601,000,000 up 8% year over year, driven by the strength of our cloud business, which now represents a record 67% of our total revenue compared to 60% last year. Cloud revenue increased 22% year over year to a record of $403,000,000 in the 3rd quarter As we continue to see increasing adoption of our CXone platform by large enterprises, driven by strong demand From our digital and AI solutions, we continue to consistently add over 200 new logos each quarter, Demonstrating the large opportunity that remains in displacing legacy on premise incumbents as well as the preference of customers to adopt NICE's market leading platform, CXone.

Speaker 3

We further demonstrated the strength of our business With cloud revenue accelerating sequentially in each of the first three quarters of this year, Services revenue, which represented 27% of total revenue, was $160,000,000 A decrease of 3% year over year, in line with our expectations product revenue, which represented 6% of total revenue in the quarter compared to 11% of total revenue last year decreased to $38,000,000 Our recurring revenue further increased to a record 87% of total revenue in the 3rd quarter compared to 82% last year and is nearly $2,000,000,000 over the trailing 12 months. Recurring revenue is comprised primarily of a combination of cloud and maintenance revenue. From a geographic breakdown, primarily from the success of CXone sales in the region. The EMEA region, which represented 10% of our total revenue, decreased slightly year over year. The downturn in EMEA was primarily due to our strategic shift to a recurring cloud model in contrast more non recurring premise based product revenue in the prior year.

Speaker 3

The APAC region, which represented 6% of total revenue, Increased 10% year over year. The foreign exchange headwinds in APAC and tailwinds in the EMEA region offset each other such That the net currency exchange impact on total revenue was negligible. With respect to our business units, Customer engagement revenues, which represented 83% of our total revenue in Q3, were 498,000,000 dollars, a 10% increase. CXone, the most complete customer experience cloud platform, is the Primary growth driver in customer engagement led by our CXAI, where we booked a record number of Enlighten deals in Q3. Revenues from Financial Crime and Compliance, which represented 17% of our total revenue in Q3 And totaled $103,000,000 delivered as expected and was flat year over year.

Speaker 3

Like customer engagement, we are executing on our strategy to clarify the segment of the market, both to the high end and mid tier financial institutions Through adoption of our cloud platforms, X Sight and Xcede. In Q3, the cloud revenue growth year over year was offset by a decrease in product and services. We expect to see this cloud growth materialize in the revenue stream in future periods and for the segment to return to growth as the cloud revenue becomes more meaningful. Similar to our top line, we delivered yet another quarter of strong profitability. At NICE, we have always maintained a balanced approach to driving top line growth, while delivering increasing profitability.

Speaker 3

In parallel to reporting 22% growth in our cloud revenue this quarter, we continued to invest in the future growth of our cloud business Through the introduction of our local sovereign cloud CXone offerings, while increasing our cloud margin, demonstrating the positive leverage We have in our operating model. Over the next few years, we expect our cloud gross margin to expand to at least 75% As adoption of CXone by Enterprises increases and we cross sell our higher margin applications, which In Q3, operating income increased 15% year over year to 100 and $84,000,000 and our industry leading operating margin increased 190 basis points to a record 30.6% compared to 28.7% last year. This expansion demonstrates our keen ability and focus on continuing to expand our operating profit margin toward our mid term financial target of 35% over the next few years. EBITDA increased by 16% year over year to an all time high of $203,000,000 in the quarter. Our EBITDA margin in Q3 increased to a record 33.7%, increasing 210 basis points compared to last year.

Speaker 3

Earnings per share for the 3rd quarter totaled a record 2 point 18% increase compared to Q3 last year. Our financial and other income was $8,000,000 resulting primarily from interest income earned from our healthy cash and investment portfolio, offset by some foreign exchange headwinds On the revaluation of our British pound and euro receivables, cash flow from operations in Q3 increased 28% year over year to $121,000,000 as a result of our strong billings and collections. Over the past 4 quarters, we have generated more than $550,000,000 in cash flow from operations. The strength of our cash flow provides us with significant flexibility and capital allocation priorities of M and A and share buyback. Accordingly, this year we accelerated our buyback program and in the past 3 quarters alone we deployed $220,000,000 nearly double the amount utilized for share repurchases for the same period last year.

Speaker 3

Earlier today, we announced an even larger new share repurchase program in the amount of $300,000,000 This new program demonstrates our continued confidence in the growth of our business and our solid financial profile. It also reflects our ongoing commitment to return capital to our shareholders as disciplined capital allocation is fundamental to our overall strategy. We expect to fully execute this program by the end of 2024. Total cash and investments at the end of September totaled $1,652,000,000 Our debt, Net of a hedge instrument was $544,000,000 resulting in net cash and investments exceeding 1 strength of our cloud business and the attractiveness of our digital and AI offerings our commitment to profitable growth Bolstered by our expanding market leadership and best in class financial profile enables us to deliver on our growth expectations. Now for our total revenue and EPS guidance for the full year 2023.

Speaker 3

For the full year 20 which represents an increase of 9% at the midpoint. Full year 2023 non GAAP Fully diluted earnings per share is expected to be in a range of $8.58 to 8 point $0.78 which represents an increase of 14% at the midpoint. Finally, I would like to address Some preliminary expectations beyond 2023. We are expecting our full year 2024 cloud revenue To grow by at least an industry leading 18% year over year. This is excluding any revenue contribution from Livox, which is expected to close sometime in the first half of twenty twenty four.

Speaker 3

Livox should contribute approximately 140 $2,000,000 on a full year basis after assuming some revenue redundancies in the initial year of transaction transition. On the bottom line, LiveVox is expected to be extremely synergetic, and together with the organic profit expansion of NICE, we expect 2024 EBITDA to be close to $900,000,000 and to exceed the $1,000,000,000 mark in 2025. I will now turn the call over to the operator for questions. Operator?

Operator

Thank you. Thank you. Our first question comes from Samad Samana from Jefferies. Please proceed.

Speaker 4

Hi, good morning. First, I just wanted to say, Barak, I just want to extend my support and best wishes for you and the entire NICE family And all of your colleagues impacted by the tragedy in Israel. So maybe transitioning to the business in the quarter, it's good to see the results. I was wondering if maybe you could help us understand, you highlighted several large deals that AI is driving And the impact to ACV in the dollars booked, can you maybe just help us understand within the AI portfolio, the handful of products you highlighted Earlier this year at InterXion, maybe which of those products are driving the biggest ACV growth or the biggest commitment? And how much of like that book dollars, like how quickly are those customers actually turning on the AI features?

Speaker 2

Thanks, Samad, and thanks for the question and the earlier remarks. Absolutely. So first, I'll say, one thing I highlighted before is that we see a shift in demand dynamics, kind of this ripple effect. So A lot of our conversation today with customers start with the end state in mind. They want to move to an AI driven CX environment.

Speaker 2

They understand that taking the simple route of just deploying a simple Gen AR that didn't work for them. Then they understand that they need to put all the CX assets These are the things that are driving AI and then we drive a much faster decision on the cloudification effort, Specifically on the AI products or solution that we see that are moving extremely fast, obviously in the co pilot, When we think about AI in the contact center, it's I would give it like two names. There is the concept of augmented intelligence And artificial intelligence, the contact center or the customer service space is still very labor intensive And the ability to first bring AI to augment in a co pilot mode the agent is the first priority of customer and then Starting to find different tasks and use cases and fully automate them with what we call autopilot. So the 2 leading products that we see being prioritized by customers is the Enlighten CoPilot And Enlighten Autopilot and the combination of the 2. In terms of just to complete that, I'm sorry, in terms of contribution, We provided some initial percentages.

Speaker 2

It's starting to be a very, very significant part We'll take a very significant part of our pipeline moving forward. We see the closing rates of AI faster than other parts of our business Because of the priority of customers, hence the optimism moving forward.

Speaker 4

Great. And then maybe Beth, a follow-up question for you. Just as I think about some of the growth rates that you're seeing in AI driven Bookings and what you've seen in terms of the cloud business this year and then just kind of reconciling that with your the initial kind of at least 18 And outlook for 2024, can you help us maybe think about in that 18% how are you thinking about growth The number of agents versus AI dollars, just maybe help us understand better what's being assumed Today in that 18% number.

Speaker 3

Sure. Thank you for the question, Samad. We shared that our expectation next year in terms of our initial outlook for cloud growth is at Leased 18% and we believe we have the opportunity to further accelerate that as we're looking towards 2025, and that confidence is coming both from the large enterprise wins we've already announced during this Of this year, combined with all of the AI and digital bookings that we've seen and we should highlight that Those AI and digital capabilities are really unlocking a new incremental revenue stream that's captured in that growth opportunity for us. So we have factored in the expectation of the digital and AI both that we've seen in our results to date, As well as the strength of the pipeline we have looking into next year. Of course, with the expectation of our Forecast in the cloud, we continue to have a pricing model that is a blend of both agents.

Speaker 3

But as I highlighted, it's unlocking The potential now and we're seeing more and more of that in digital and AI.

Speaker 4

Great. Thanks again for taking my questions.

Speaker 1

Thank you.

Operator

Our next Question comes from Tyler Radke from Citi. Please proceed.

Speaker 5

Hey, good morning. Thanks for taking the question. So The cloud revenue, certainly nice to see the sequential acceleration this quarter. I'm curious the issues that you called out Last quarter in terms of some of the weaker consumption that you saw in the SMB, did that play out as you expected or was that Better than you feared and then how are you thinking about specifically that cohort ramping up into Q4 Given the holiday seasonality and any further guidelines we should be thinking about in terms of Q4 cloud revenue growth? Thank you.

Speaker 3

Thank you for the question, Tyler. We highlighted that last quarter and it's been a tighter economic cycle So we have seen that on the SMB side of our business, there has been slower and less Usage than what we have seen in years past, but we do know we've gone through similar cycles like this In the past and this type of tightening around usage is temporary. We see signs of that and See that as the overall environment, economic environment is opening up, that that is going to be an impact that is now

Speaker 5

And any Cloud revenue growth for Q4?

Speaker 3

Yes. With respect To our cloud revenue, we have shared in the past the expectation of a range for the year and we do expect to land within our guidance At approximately around the 22% growth in cloud revenue for the full year. And as we've seen both in the current quarter and really throughout this year, that 22% is considerably higher than any of our peer group. And of course, it's on a much higher cloud revenue base, which is more than $1,600,000,000 in recurring revenue in the cloud.

Speaker 5

Great. And a question follow-up for Barak. Just on the LiveVox deal, great To see the goals around that being accretive, I guess just given all the organic momentum that you're seeing on The generative AI side with Enlighten And getting that asset folded into the NICE And I guess why does it make sense to do this acquisition now given the opportunity that you're seeing on the core business? Thank you.

Speaker 2

Tyler, thank you for the question. You're breaking up a bit, but I think I got most of the question. In essence, you're asking on the strategic rationale of the acquisition. I hope I got it right. So absolutely happy to share.

Speaker 2

I think Live Oak It's a great addition to the NICE portfolio. Most of our business is in the inbound Business of customer care or customer service, we do have an outbound business, but no doubt it is a specialized offering by itself And we started a journey several years back to make sure that we have not just a good Offering in the outbound, but something that is revolutionary and bring conversational capabilities also to that area of the outbound. So we started With some organic development, acquired contact engine that brings really a completely new way to think about proactive outreach. And then we were looking in the last, if you'd like, few months or almost a year, we are debating between, If you would like less than handful of good assets and someone that have a superior technology and a customer base in that area And by no doubt, the leading vendor is LiveVox. So that's the rationale.

Speaker 2

Yes, we see of course our core strategy is to expand into digital engagement and AI, but at the core of our business, This is a great opportunity to make sure that we cover all of our bases and we have really not just a complete, but a complete and leading offering For every type of customer. Last but not least, I will say that as the markets of the large enterprises It's now shifting to the cloud. These outbound capabilities are more relevant in their complexity It is a very, very complicated type of domain expertise in outbound. This is very typical for the Large enterprises, hence we thought putting those assets together makes sense and of course financially It looked very, very attractive. So both from a strategic fit as well as financially and the price itself looks Attractive and hence we decided to go for

Speaker 5

it. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Siti Panigari from Mizuho. Please proceed.

Speaker 6

Hey, it's actually Dan on for Citi. Thanks for taking my question. I guess it's good to hear about the strong AI bookings trends in 7 Figure AI deals. I was just wondering, could we get a sense of some of the early customer feedback you're getting on your new AI capabilities? And then maybe what's the uptake you're seeing for these features between new customers and existing customers?

Speaker 2

That's a great question. Thanks for that. So first of all, the feedback is phenomenal. I'm personally engaged with many of those customers I can tell you it gets visibility and open doors at the most senior level of large enterprises. And most of the deals that we talked about are with brand new customers.

Speaker 2

We talked about the fact that this quarter 80% of our new customers Our new customer deals were sold both driven by AI, but also sold with AI solutions. And the deployment that we started already for past deals is just going in absolutely great way. And it allows us, by the way, to start Enjoying for more and higher consumption from these customers that started sometime relatively small And the consumption is going and the volume of interaction is going exponentially growing. But as you said it yourself, we have thousands of existing CXone customers that I have already all the assets in place and turning AI for them is actually a very, very fast act and we have a dedicated Sales team that is tasked with doing exactly that and cross selling into the base. Our most Crowded marketing events, webinars and any other lead generation event is with respect to And a lot of that is indeed with our customer base because they are already very familiar with CXone and they see it as an easy Add on to their existing environment.

Speaker 7

Okay. Thank you.

Operator

Our next question comes from Meta Marshall from Morgan Stanley. Please proceed.

Speaker 8

Great. Thanks. Helpful information upfront just on kind of the early Community being more augmented agents and then kind of, but they're also being an AI piece as well. Just wondering how you guys look at the opportunity between augmented and true kind of virtual agents just as you guys go forward? And then just maybe as a second question, given you guys believe that Livebox could be accretive within the 1st year, just Where are areas where you see kind of those greatest synergies coming from?

Speaker 8

Thanks.

Speaker 2

Sure. So I'll start with the first question. I've been in the industry for now 25 years, the industry of the CX market And I've seen our markets way before the AI days trying to drive automation because at the end of the day, It is a very labor intensive market. 90 some percent of the cost is still with label, with agents and There is obviously a desire to go for automation, but the historical path most vendors and companies took about automation, it's Either or. It's either that you have something with an agent that is fully manual, done by the agent with some technology or Fully automated task and the approach we have been taking with AI and that's the reason that we have launched CoPilot and Auto together, the Enlighten Co Pilot and Autopilot is the ability to move in this continuum And deliver a continuing experience for customers.

Speaker 2

And that makes sense and that makes automation much more viable. So this is the wider concept that I talked about 1st, not first, but to start with an augmented intelligence to the agent, make them much more powerful And but at the same time, take those parts and the interactions that can be fully automated, move them to full automation, but also the ability to toggle between them. We've all been probably as consumers through the experience that you start with an agent or you start with a bot And as soon as there is a certain ambiguity about the intent, you are stuck at that point and your experience is deteriorating. The ability With CXone that is a unified platform that have all the convergence assets and provide AI for both agents and Full automation, that would allow you to break this 20 some years of failures in automation and bring it to life. So that's with respect to that.

Speaker 2

Your question about LiveVox, I'll hand it over to Beth.

Speaker 3

Yes. With respect to the impact, we expect So LiveVox to have a considerable amount of synergies and be highly synergetic to really drive an accretive nature to both our profitability and And we have that confidence as there's quite a few overlaps as you think about another public company as it pertains to G and A related costs and of course we still operate in the same space as well. So we also have synergies when it comes to go to market and the product as well. If you look back on our track Record of making acquisitions over the past several years, you can see we really have a great track record and a strong muscle in Showing the and delivering on the ability to drive healthy synergies into our operating model and that's what we expect with LiveVox as well.

Speaker 8

Great. Thank you.

Operator

Our next question comes from Pat Walravens From JMP Securities, please proceed.

Speaker 5

Great. Thank you. And Barak, we're praying for you, your families and especially for the safe return of the hostages.

Speaker 2

If you look at At

Speaker 5

the Gartner Magic Quadrant, you and Genesis are the 2 clear leaders in the space. Can you walk us through what the competitive dynamics So like with them, when do you usually win and when do you usually not win? How does it work?

Speaker 2

So thank you, Pat. So there is the competitive landscape is more Just us on Genesis, but needless to say, Genesis is one of our competitors. We believe we are winning. We have a superior winning rate over Genesis. In many cases, Genesis and others are the incumbents And because of their financial considerations trying to hold on to their customer base and maintenance base, That's number 1.

Speaker 2

And second, I think giving once again the financial considerations like a very high debt And the way that the company is being held in terms of ownership, I think they are very short term oriented In terms of their investment and the long term viability of the company for customers, so I think that gives us a superiority. Our investments Typically, in expanding into digital engagement and AI, it's something that we haven't seen there. And it gives us these days a significant advantage. And when it comes to just simple price war, We will do what it takes to win the customer, but we win not just on price, we win on the value proposition And customer understanding that NICE is here for the long run. We don't have an exit plan.

Speaker 2

We don't need to transact the company. We don't try Five times a year go around and sell the company like others do. So our management attention is 100%, 7 days a week, 24 hours a day, just focusing on our customers and our business.

Speaker 9

Thank you.

Operator

Our next question comes from Michael Funk From Bank of America, please proceed.

Speaker 10

Hi, good morning. Thank you for the questions. One for Beth to begin. Beth, I think In response to an earlier question about prior comments about weaker SMB consumption, I think you said that you felt the tightening is temporary and I believe I heard you say that you're Expecting some positive shift or seeing some positive shift entering next year. So Hopefully, you could clarify a bit on that comment.

Speaker 10

Then I have one follow-up, if I could.

Speaker 3

Yes. Thank you for the question, Michael. And your comment was correct. I did say that during the course of this And the tighter economy, we have seen some less usage on the CX side of the house and the SMB installed base. And that next year with the economy looking brighter, we are seeing signs as well that we will expect To see more of that consumption going back to what we have seen as historical norms, of course, we expect to see that Further happening throughout the course of next year.

Speaker 10

Great. And then just on AI, a lot of discussion Over time about how AI potentially shifts more of the TAM spending away from human agents and more towards Solutions that companies like NICE provides. Do you have any earlier kind of one off data Points or examples and how on deals that you've signed with AI, how those may be shifted from say 90% of spend On humans versus 10 for technology, where that's come out on the back end of these deals?

Speaker 2

Yes, thanks for that. So,

Speaker 3

first of

Speaker 2

all, there is general just to clear out something quite general, we don't see right now, Whether it's good or bad, we don't see a reduction in number of agent industry right now. Not to speak about the fact that With 20% penetration of cloud, even if there will be some reduction in number of agents, we still have a very, very long way to go In winning market share on the agents. What we see is that a lot of companies are dealing it's almost like avoiding adding more labor Because the number of interactions, digital or not, are increasing exponentially and becoming more complicated And that's where they're trying to deploy AI in order to avoid the Internet the additional labor cost. And it's also the reason why they take the journey usually of either starting or doing together both co pilot and autopilot In our understanding that there will always be a need to a certain extent of a human agent. Generally, I think that The opportunity that we have in AI is significantly higher in the very long run than the one that we have on Supporting agents for 25 or more years, we've been as a company focusing 99% of our effort just on The time where the actual consumers speak with an agent or interact with an agent, today more and more of our business go beyond that, Which is a TAM expansion for us and we find ourselves taking over legacy vendor that used to be Dealing with Gen 1 automation, so all of those together are actually giving us great Confidence in our vision, in our future and the ability to fight for much and what fight and win for a much bigger TAM.

Speaker 10

Great. Thank you for that. I hope you and your employees are all well.

Speaker 2

Appreciate that. Thank you.

Operator

Our next question comes from Kim Fish from Piper Sandler. Please proceed.

Speaker 7

Hey guys, this is Quintin on for Jim Fish. Thanks for taking our questions. Beth, maybe first for you. You talked Couple of times already about some lower usage and the macro pressures impacting the SMB side this year. But maybe as we look across the entire cloud base, Can you talk about how net retention has trended in this quarter?

Speaker 7

And then it sounds like you're kind of embedding some return or kind of a bounce As we look to 2024 retention rates, are we thinking about that correctly?

Speaker 3

Thank you for the question. And With respect to our expectations and let me address the net retention, we saw a quite healthy net retention during the quarter. And as we look further into next year, we don't expect to see an overnight change or Shipped from that usage, but we are seeing healthy signs there and we expect that to continue to evolve and return to more normals as we get further away from the tighter economy that we've been in during the course of this year.

Speaker 7

Makes sense. And then, Barak, maybe for you. Obviously, the government sector has always been slow to adopt new technology, especially on the cloud You guys announced a fairly large win with the state government this quarter. Are you seeing AI and digital opportunities creating that inflection where now they Feel comfortable to move to the cloud and how do you balance kind of you guys have the Fed ramp, others don't. So what do you see that opportunity in kind of land grabbing federal as we look at 2024?

Speaker 7

Thank you.

Speaker 2

Yes, it's actually quite an interesting question that you've asked and I had We had all of us had the same perception about government. And when we say government, everything from the federal government, state, municipalities, State and local, if you would like, and federal. And we had the exact same experience and perception with those are very slow to adopt. Going back to COVID, I think COVID changed, I'm not I don't know if it's for the Forever, but at least for the foreseeable future, change 2 very significant things with respect to technology adoption By state and local, a, the early days of COVID shows government agencies that they can actually move fast. If we remember the early days of COVID and all of a sudden we got from different states, they adopted new communication channels, they adopted the variety of Technologies in a very fast way.

Speaker 2

That approach in nature really changed the behavior and we see that continuing Well into 2023 and also in the dialogue into 2024, which is very positive. The second thing that we like Any wave of recession or budget constraint in the, SLED markets and of course we are enjoying that as well. Operator?

Operator

Our next question comes from Tim Horan from Oppenheimer and Company. Please proceed.

Speaker 9

Thanks guys. More of a qualitative question, but can you talk about how much your AI product has improved over the last year? I mean, The Chat GPT is only about a year old at this point, the breakthrough. Are you using that? Has that massively improved the product?

Speaker 9

And Are you using reinforced learning where the product will be a lot better a year from now? And just any comments and how does it compare right now

Speaker 2

That's a great question, Tim. I've been in the tech sector for more than 25 years, And I've seen a variety of cycles of technology, significant technology all the way from proprietary hardware, software, Internet, mobile, cloud and these days AI. And those aware of this technology are And enabling technology that create a compound effect of innovation. But I think that we can all agree that's what we are seeing with AI in terms of this Rate of compound effect, if you are not staying up to date for a week, all of a sudden it seems like a year passed by. And we see that with AI.

Speaker 2

The beauty going back to our business is that since we've started our journey Much before, we started it several years back, but practically we started it much before 2 years back because the most important Part, and the most important thing in order to have AI working well is the data, a variety of assets including data. It's data, it's knowledge, it's media, it's interactions and the derivative information from all of those assets. NICE It has a unique, unbeatable position where we have years of these data In the tens and hundreds of billions of interactions and knowledge assets and other things. So the answer the short answer is yes. We are seeing a tremendous improvement in both the accuracy, relevancy And on top of that, of course, we have more and more out of the box models, which dramatically shorten And simplify the deployment for customers.

Speaker 2

We have today more than 1,000 enlightened models For every possible or most possible CX scenario and that's what we do for a living. So we are becoming a StxAI powerhouse, both in terms of the assets and the technology. Of course, We in order to focus on our core competency, where relevant and when relevant, We leverage some generic technologies like Gen AI and others in order to focus our efforts on the things that are uniquely for us And that are needed in order to take it and make it a viable option for the CX market.

Speaker 9

Very helpful. So is it fair to say 6 months, a year from now the product will be dramatically better and do you think you're pretty far ahead of your competitors?

Speaker 2

Absolutely. First of all, I'm 100 percent sure it will be even better every quarter. I myself spend A lot of time these days, with my passion to technology and I like to see it working both in customer environment And in our labs, if you would like, and I see the cycles of improvement on a weekly basis. And in terms of us vis a vis the competition, I think we are years ahead of our competitors, both the ones that have I'll be more sizable, but also the issue of the point solution. It goes back to my point about it's not enough just to have the technology, It's important to have the platform and our years of investments building CXone as a platform that can contain and manage and converge All the assets together, this is what makes AI for us working.

Speaker 2

This convergence power of CXone is second to none.

Speaker 1

Thank you.

Operator

Our next question comes from Arjun Bahathia from William Blair. Please proceed.

Speaker 11

Yes, thank you. It's actually Rachel on for Arjun. I'll echo everybody else's best wishes to you guys. I wanted to ask, it seems like it's still pretty early days for migrating existing customers to the cloud. Could you talk a little about the opportunity for AI to Drive increased conversions or PC, any other potential catalysts to accelerate the pace of migrations?

Speaker 2

Yes. Thank you for the question, Rachel. So we said it numerous times in the past and actually you can see it in our Financials is that we've built already a $1,600,000,000 DC, dollars 1,600,000,000 give or take $1,000,000,000 revenue of cloud without tapping much into the legacy customer base of ours and predominantly taking over A market where we did not have any presence in and this is the ACD market and this is where the market is still only 20% penetrated. AI provides, 1st of all, it's a growth engine by itself, but I believe, as I mentioned before, it Can be a catalyst for those decisions and we see it in the both pipeline as well as the discussions we have with customers Because of the triple effect that I talked about before, let's start with they want the AI. In order to have AI, understand that they need to converge all assets into 1 platform.

Speaker 2

And for that, of course, the prerequisite is to be in the cloud with a true Native cloud solution that is scalable to their environment. So that narrative is true both for Competitive customers that we don't have presence, so we replaced the incumbents. Someone asked before about certain competition. We replaced a lot of those vendors this quarter, including the one that was mentioned before, but it's also true for us starting to tap And accelerate the conversion of the existing customer base the on prem customer base of NICE.

Speaker 11

Great. Thank you.

Operator

This concludes our question and answer session. I would like to turn the floor back over to Barak Ilham for closing comments.

Speaker 2

Thank you very much everyone for joining us. We appreciate your

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Key Takeaways

  • Nice delivered record Q3 results with total revenue of $601 m (up 8% YoY), cloud revenue of $403 m (up 22%), operating margin of 30.6% (up 119 bps), EPS of $2.27 (up 18%) and cash flow from operations of $121 m (up 28%).
  • Cloud now makes up 67% of total revenue, with CXone Enterprise ARR (>$1 m customers) growing 35% LTM, and digital engagement and AI bookings up 78% and 163% YTD respectively, as AI was included in 80% of new enterprise CX deals.
  • Nice’s strategy of platformization and convergence of CX data, knowledge and interactions has driven a seven-fold increase in digital and AI pipeline and a 48% YoY rise in new customer portfolio deals replacing multiple legacy vendors.
  • The company announced a new $300 m share repurchase program following accelerated buybacks of $220 m YTD, and expects to close the LiveVox acquisition in H1 2024 to gain outbound CXAI capabilities that will be accretive to operating income, margins and free cash flow.
  • For full-year 2023 NICE reaffirms guidance of 9% revenue growth and $8.58–8.78 EPS, and projects 2024 cloud revenue growth of at least 18% (excluding LiveVox), with EBITDA near $900 m and exceeding $1 bn in 2025.
A.I. generated. May contain errors.
Earnings Conference Call
NICE Q3 2023
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