NICE Ltd. (NASDAQ:NICE) Q2 2023 Earnings Call Transcript

NICE Ltd. (NASDAQ:NICE) Q2 2023 Earnings Call Transcript August 17, 2023

NICE Ltd. beats earnings expectations. Reported EPS is $2.13, expectations were $2.06.

Operator: Welcome to the NICE Conference Call discussing Second Quarter 2023 Results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded August 17, 2023. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.

Marty Cohen : Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer; and Beth Gaspich, Chief Financial Officer. Before we start, I’d like to point out that some of the 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 the company’s actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in Item 3 of the company’s 2022 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 30, 2023.

During today’s call, we will present a more detailed discussion of second quarter 2023 results and the company’s guidance for the third quarter and full year 2023. You can find our press release as well as PDFs 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 mainly in accounting for share-based compensation, amortization of acquired intangible assets, acquisition-related expenses, amortization of discount on debt and loss from extinguishment of debt and the tax effect of the non-GAAP adjustments.

The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today’s press release. The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties and assumptions. I’ll now turn the call over to Barak.

Barak Eilam : Thank you, Marty, and welcome, everyone. Our momentum continued into Q2 as evidenced by another strong quarter, highlighted by another double-digit growth across all key financial metrics. Total revenue increased 10% to $581 million driven by continued strong growth in the cloud, which grew 23% year-over-year outpacing the rest of the industry and at a much larger scale. In addition, our industry-leading superior profitability was once again reinforced in Q2, and it has become an unlimiting financial competitive advantage. Cloud gross margin continued to increase to 70.3%. Operating income increased 10% to $170 million, and our operating margin grew to 29.2%, up 20 basis points year-over-year. EPS came in at $2.13, representing an increase of 15%.

Those strong results demonstrate the rapid progress we are making as we expand our total addressable market and leadership from core customer service to the broader CX category. This broader expansion encompasses digital engagement and conversational AI, where we are rapidly capturing market share. NICE is strategically positioned for complete coverage of all customer service interaction, digital and voice, agent-assisted and consumer-led. Furthermore, our state-of-the-art platform CXone combined with our clear leadership in all segments of the market, particularly large enterprises, allows us to greatly expand our TAM and market share while driving industry-best profitable growth. Let me start by describing how digital engagement drove the success of our business in Q2.

We delivered a 70% increase in new digital bookings with much of the deals coming from large enterprises, and the share of new digital bookings doubled year-over-year. Many of those deals were displacements of legacy point solution vendors that are failing to deliver on the holistic digital approach required by large enterprises. In addition, we are winning many of these deals due to the native cloud architecture of CXone, the only platform in the market that seamlessly integrates digital and voice CX solutions. In Q2, we signed an 8-digit deal with one of the largest entertainment companies in the world. Not only did this large enterprise want to consolidate on to a cloud platform with a single vendor, but they also wanted to partner with a vendor that can take them into the future digitally as they are expanding their self-service and IVA capabilities on CXone, replacing legacy digital point solution providers.

We signed a 7-digit deal with one of the largest hotel chains in the world, replacing the incumbent Gen 1 digital solution. With CXone’s AI-driven knowledge management capabilities, this company can now provide more advanced digital self-service for its customers. We signed a 7-digit deal with a large global payment processor as they’re consolidating on our CXone digital platform to future proof their digital needs. The emergence of AI coupled with gen AI is the most significant TAM expansion opportunity for NICE in all of our markets and in the CX space, in particular. The investments we made in building Enlighten over the last few years has embedded AI foundation of CXone with hundreds of CX-specific models is now emerging as a concrete material differentiation and revenue growth opportunity.

And this is underscored by a record quarter of Enlighten bookings. Moreover, all of our $1 million plus ACV deals in the quarter included AI. We signed a 7-digit AI deal with a major communications company, which is looking to expand its capabilities around proactive conversational AI, and our advanced innovation was the only one that provides smart self-service. We signed a 7-digit deal with a large energy company, replacing the incumbency provider who could not meet their requirements as they are aiming to fully transform to AI-powered self-service. This customer is looking to greatly expand its digital interactions volume through trusted conversational AI and selected CXone for its AI precision and scalability. A very large consumer electronics company signed a 7-digit AI deal as they want to consolidate their self-service experience for sales and service, replacing their legacy bots with CXone AI.

Enlighten AI in just all voice and digital interactions continuously identifies opportunities for automation and then fully executes interaction flows to self-service. We had many other large enterprise Enlighten deals, including one of the largest banks in the world and a Fortune 500 fintech company. From these deals and the ongoing momentum we are seeing with AI, we expect to generate significant future revenue resulting from the consumption-based pricing model of AI, which is tightly linked to the fast-growing volume of self-service interactions. Customer demand for Enlighten has been strong ever since we began delivering to the market. During our extremely successful Interactions customer conference back in June, we announced 3 new groundbreaking solutions leveraging the powerful combination of Enlighten and generative AI: Enlighten Copilot, turbocharging customer service employees; Enlighten Autopilot, the next-generation conversational AI; and Enlighten Actions, a whole new paradigm to manage CX.

Subsequently, the Enlighten pipeline has rapidly accelerated. In fact, Enlighten bookings in Q2 were greater than the previous 5 quarters combined. We continue to win the clarification cycle in our markets across all segments and geographies, especially at the higher end of the market. Our high win rate is also leading to our unmatched profitable growth. The investments that we have made in building CXone as a native cloud platform with a suite of more than 45 applications have resulted in record adoption of incremental applications by our customers, leading to continuous growth in the average revenue per user throughout our entire customer base. Furthermore, the architecture of CXone with limitless scalability continues to fuel the expansion of our gross margin with every new deal.

In Q2, we continue to win market share with large portfolio deals, reflecting the leading architecture, completeness and innovative end-to-end approach, including purpose-built analytics and AI of CXone. We signed an 8-digit deal with one of the largest car manufacturers in the world, replacing 2 large legacy incumbent on-premise vendors both with cloud solutions that could not provide a complete suite and seamless integration experience of CXone. We signed a 7-digit deal with a very large cruise ship operator, replacing the incumbent on-premise provider. We won the deal for our fully integrated suite of applications on a single cloud platform covering both digital and voice which is seamless and unified user experience. We signed a 7-digit deal with a very large retailer, which is a new Fortune 100 customer for NICE that has standardized on CXone.

We replaced the incumbent on-premise provider. And following a competitive process, NICE was selected due to the clear leadership of CXone and our ability to serve on current and future transformational needs of this customer. Other large cloud deals in the quarter included 8-digit deals with 2 major U.S. banks and a 7-digit deal with the West Coast State government. The momentum that we are seeing at the high end of the market combined with the adoption of our fast-growing portfolio by our very large customer base will continue to fuel our profitability going forward. In summary, the CX cloudification cycle is rapidly expanding into the large enterprise market with AI approaching faster than many probably had expected. These dynamics are clearly favorable for NICE as we’ve been smartly investing over the past 6 years, winning the market and strategically preparing for this moment.

In addition, we have an industry-best capital structure that allows us to further expand our market leadership at this crucial pivot in the CX market. Moreover, our extremely profitable position allows us to continue to invest and innovate at a breakneck speed while delivering strong top and bottom line results. I’ll now turn over the call to Beth.

Beth Gaspich : Thank you, Barak, and good day, everyone. I am pleased to provide an analysis of our financial results and business performance for the second quarter of 2023 and our outlook for the third quarter and full year 2023. Our financial results in the second quarter grew double digits on both the top and bottom lines as our total revenue came in at the high end of our guidance range and EPS exceeded the high end of our guidance range. Total revenue for the second quarter was a record $581 million, up 10% year-over-year driven by the strength of our cloud business, which now represents a record 66% of our total revenue compared to 59% last year. Cloud revenue increased 23% to a record of $382 million in the second quarter as we continue to see increasing adoption of our CXone platform by large enterprises.

The year-over-year growth in our cloud revenue resulted from a healthy mix in 3 key areas: expansion of our vast installed base through upsells; cross-sell adoption of our rich portfolio of applications; and new customer additions. Services revenue, which represented 27% of total revenue, was $159 million, a decrease of 5% year-over-year. Product revenue, which represented 7% of total revenue in the quarter compared to 10% of total revenue last year, decreased 23% to $40 million. This shift in the mix of our revenue is expected and is part of our cloud-first strategy as our customers increasingly transition from on-premise to cloud. Our recurring revenue further increased to a record 86% of total revenue in the second quarter compared to 83% last year.

Recurring revenue is comprised primarily of a combination of cloud and maintenance revenue. From a geographic breakdown, the Americas region, which represented 83% of total revenue, grew 9% year-over-year. The EMEA region, which represented 11% of our total revenue, increased 14% year-over-year and 13% in constant currency. The APAC region, which represented 6% of total revenue, increased 7% year-over-year and 9% in constant currency. The foreign exchange headwinds in APAC and tailwinds in EMEA offset each other such that the net currency exchange impact on total revenue was negligible. Moving to our business unit breakdown. Customer engagement revenues, which represented 83% of our total revenue in Q2, were $481 million, a 12% increase. CXone, the most advanced digital and AI market-leading customer experience interactions cloud platform, is the continuous primary growth driver in customer engagement.

Our emergence as an AI and digital leader in this space was evident in the new bookings in the quarter with a 70% increase year-over-year in digital bookings and will be a clear revenue growth driver of our business looking forward. Revenues from financial crime and compliance, which represented 17% of our total revenue in Q2 and totaled $100 million, delivered as expected a decrease of 2% year-over-year. Similar to customer engagement, our strategy to cloudify the segment of the market is gaining momentum through adoption of our cloud platforms, X-Sight and Xceed. We are progressing well on the cloudification of the financial crime and compliance customer base with a significant revenue uplift from every customer that has been converted. We expect to see this growth further accumulate in the financial crime and compliance revenue stream in future periods.

Now to profitability. Our gross profit grew 7% year-over-year to $416 million. Total gross margin in Q2 was 71.6% compared to 73.3% in Q2 last year. The decrease in total gross margin is attributed to the decrease in product gross margin as a result of a change in the product revenue mix. Cloud gross margin increased 20 basis points year-over-year to 70.3% in Q2. We expect our cloud gross margin to continue to expand over time as our financial crime and compliance, public safety and CXone international expansion gain scale. We continue to see further enterprise adoption of the CXone platform as well as increasing volume-based usage from both digital and AI. The ongoing growth in our cloud revenue combined with the expanding cloud gross margin will also lead to an expansion of our overall gross margin.

In Q2, operating income increased by 10% year-over-year to $170 million. And our industry-leading operating margin increased 20 basis points to 29.2% compared to 29% last year. EBITDA increased by 10% year-over-year to $187 million in the second quarter. Our best-in-class EBITDA margin in the second quarter increased to 32.1%, increasing slightly compared to last year. Earnings per share for the second quarter totaled a record $2.13, a double-digit increase of 15% compared to Q2 last year. Our financial and other income was $11 million, resulting from interest income earned from our healthy cash and investment portfolio and the foreign exchange revaluation of our balance sheet. Cash flow from operations in Q2 increased fourfold to $65 million compared to the prior year as a result of our strong billings and collections.

Over the past 4 quarters, we have generated more than $0.5 billion in cash flow from operations. The strength of our cash flows provide us with significant flexibility and capital allocation priorities of M&A and share buyback. Accordingly, we continue to execute on the accelerated $250 million share repurchase program to be completed by the end of this year. In Q2, we repurchased shares in the amount of $65 million and executed 53% of that plan as of the end of June. Total cash and investments at the end of June totaled $1.662 billion. Our debt net of a hedge instrument was $543 million, resulting in net cash and investments exceeding $1.1 billion. In closing, we are pleased with our strong Q2 and first half 2023 financial results. In the first half of this year, we continue to demonstrate the strength of our business with notable growth in our overall revenue, cloud revenue, profitability and cash flow generation.

Our consistent approach to drive a healthy mix of both top and bottom line growth is evident, and we remain committed to this excellence looking ahead to the second half of this year. Now before I hand it over to the operator, I will conclude my remarks with guidance. For the third quarter of 2023, we expect total revenue to be in the range of $590 million to $600 million representing 7% year-over-year growth at the midpoint. We expect the third quarter 2023 fully diluted earnings per share to be in a range of $2.10 to $2.20, representing 12% year-over-year growth at the midpoint. We are raising our full year 2023 total revenue and EPS guidance. We now expect total revenue to be in the range of $2.353 billion to $2.373 billion, representing 8% growth at the midpoint compared to full year 2022.

We now expect full year 2023 fully diluted earnings per share to be in a range of $8.40 to $8.60, representing 12% growth at the midpoint compared to full year 2022. This includes our expectation that operating income will continue to achieve double-digit growth. I will now turn the call over to the operator for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Samad Samana with Jefferies.

Samad Samana : So maybe first, Barak, one for you. Interactions was at a very interesting time. It was kind of the height of the AI commentary. I’m curious maybe what customer conversations following the conference have been like, particularly around some of the new products that you mentioned? And how we should think about maybe the pipeline that’s built out of Interactions this year versus prior years, given the interest levels around AI?

Barak Eilam : Thanks for the question, Samad. So yes, we had a very exciting Interactions. Many of you attended it, and it was well attended beyond our expectations. We actually had many, many hundreds of people more than we expected, but I’m glad we could have accommodated everyone. And the content, of course, was great, both what we have provided, but many customers presented in the different breakout sessions. First, I’ll say, and I mentioned it in my earlier remarks is it created a very significant positive momentum into our pipeline. A lot of opportunities we have now in the pipeline that are progressing nicely started at the event. And many that existed before the event either matured further or even allowed us actually to win some deals in the quarter itself and even more so in July and Q3.

So that’s about that. Specifically, there was a very big interest and a lot of conversation with respect to the introduction of the new models of Enlighten, Enlighten Copilot, Autopilot and Actions. And needless to say that earlier this year, there’s a lot of, call it, hype about generative AI. Things are starting to sink-in and enterprises are starting to realize that the right way for them to adopt it, adopt generative AI is not taking something generic that is not necessarily 100% precise or well secured or well connected to their platform. And they need domain expertise and Enlighten in order to introduce it into their CX environment. And as a result, we indeed see the success as I mentioned on the call with Enlighten, record booking in Q2 — Q2 booking of ENLIGHTEN equal or actually more than the previous 5 quarter together.

And we see the momentum continues in the pipeline. So all in all, very successful Interaction, and we are very happy way more successful than previous event that they were successful by themselves as well.

Samad Samana : Great. And then maybe a follow-up for you, Beth. Just looking at the cloud revenue number, growth slowed a little bit. And in terms of dollars added sequentially, it was a bit more modest than you’ve seen from 1Q to 2Q in the last couple of years. I just wanted to maybe understand how we should think about cloud growth. And if there’s anything in the quarter that may be muted that normal seasonality and just how we should think about the rest of the year for cloud revenue specifically.

Beth Gaspich : Yes. Thank you for the question, Samad. We came in with a 23% cloud revenue for the quarter. It was completely aligned with our expectations, and we’re very pleased with that result. In fact, if you look at kind of the competitive environment and some of the other competitors in our space, our growth rate in our cloud is far exceeding what you’re seeing from some of the other players. So we’re very pleased with that growth. With respect to kind of the change from quarter-to-quarter, first, if you look on the last couple of years, you’ll see that, that change between the first quarter and the second in terms of the shift in the growth is pretty typical. And I think looking ahead, one of the things we know is Barak talked about both today and many of the past quarters, we are gaining more and more traction in the large enterprise, which we define as 750 or more agents in the contact centers.