NICE Ltd. (NASDAQ:NICE) Q4 2022 Earnings Call Transcript

NICE Ltd. (NASDAQ:NICE) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Welcome to NICE conference call discussing Fourth Quarter 2022 Results. And thank you all for holding. Following management’s formal remarks, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded, February 23, 2023. I would now like to turn the 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 would 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 that 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 2020 Annual Report on Form 20-F as filed with the Securities and Exchange Commission on April 5, 2022.

During today’s call, we will present a more detailed discussion of fourth quarter and full year 2022 results and the company’s guidance for the first quarter and full year 2023. 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 acquisition-related revenues and expenses, amortization of intangible assets and accounting for stock-based compensation. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today’s press release. And I will now turn the call over to Barak.

Barak Eilam: Thank you, Marty and welcome everyone. We’re happy to report another quarter of outstanding results with profitable growth momentum. 2022 was another landmark year as we crossed significant milestones highlighting our success and paving the way for future growth. We crossed $2 billion in total revenue, achieved 60% in cloud revenue as a percent of total revenue, continued to move swiftly towards the 30% plus operating margin, witnessed a massive expansion in AI adoption and had the best year ever for both new customer acquisition and new partner onboarding. The strong finish to the year led to a full year 2022, total revenue growth of 30% and 14% in constant currency. Driving these stronger results is our continued excellent execution in the cloud, as cloud revenue increased 27% for the full year 2022, and similarly in Q4.

Our strategy has always been to execute on the top line while expanding profitability, and this continued throughout 2022, ending the year with a robust growth in profitability. For the full year 2022, our gross margin increased 50 basis points to 73.1%. Our operating margin was 50 basis points to an industry-leading 28.7%. And we reported earnings per share of $7.62, representing growth of 17%. Much of this growth in profitability was driven by further expansion in our cloud gross margin, which increased 230 basis points to 70% in 2022, demonstrating the superiority of our Cloud architecture that makes us unique in our market. Moreover, for the full year 2022, we generated $480 million in operating cash and ended the year with a total cash position of more than $1.5 billion, giving us the capital flexibility that is unparalleled in our market.

NICE is by far in the best competitive position in our industry, operationally, innovatively and financially, providing us significant opportunities ahead to capture a large and expanding market. These opportunities fall into four categories as we see today: Cloud expansion in a vastly under-penetrated enterprise market, accelerating demand for complete platform as the market standard, the rise of AI and the financial distress of our competitors. Let me expand on all four. First, Cloud, while CX Cloud adoption, which 20%, it is extremely nascent in the large enterprise market. Over the next two years, we expect to see enterprises make a meaningful shift to the Cloud. However, the high end of the market is a completely different ballgame. It requires the ability to address both complexity and scale and this can only be addressed with our true native seamlessly integrated platform, CXone.

And that brings me to the next opportunity, which is platform and the new market standard. Superior CX is all about the ability to serve the consumer in the most fluent and seamless way. Enterprises are now realizing that this cannot be achieved by loosely integrating dozens of siloed point solutions, which is the common approach promoted by vendors in our industry. The only way to achieve ultimate CX success is by adopting of Cloud platform that was purposely built natively from the ground up with a full suite of solutions. And this is exactly what we have done over the last seven years as we invested more than 12,000 engineering managers building CXone to become the leading CX platform. The third opportunity is the rise of AI. In the upcoming decade, the most valuable companies will no longer be software companies, but those that transform into AI companies.

Organizations are reaching the limit in their ability to achieve further operational gains with the simple automation offered by current enterprise software solutions. AI is the next transformational wave. To become an AI leader, software companies must have three key assets: a Cloud platform that has been widely adopted, massive amounts of historical data and industry-specific domain expertise. NICE is the only one in our industry with these three assets. We have spent the last several years building and deploying ENLIGHTEN, fully embedded in CXone, transforming it from a software platform to an AI platform and creating an unbridgeable gap in our AI leadership. Just a few weeks ago, we were the first to release a groundbreaking integration between ENLIGHTEN AI and ChatGPT pioneering human-like interactions in CX conversational AI, demonstrating our unparalleled innovation.

This fourth opportunity related to our ability to capitalize on the financial distress that many of our competitors are experiencing. The CX competitive landscape is split between legacy incumbents that are struggling to service tremendous debt and small players who are dependent on continuous, difficult-to-obtain, capital injection. This situation is raising growing concerns with enterprises who want to partner with a vendor that offer both long-term financial viability, as well as significant commitment to rapid innovation. NICE is the only vendor in the CX market that is extremely profitable, investing heavily in R&D, and at the same time, has a net cash position of more than $1 billion. Our strong financial position gives us great flexibility to innovate and acquire to further fuel growth while continuing to drive increasing profitability.

These four opportunities were all apparent in our Q4 deals. We signed an eight-digit deal with one of the largest banks in Latin America, which adopted a large part of our CXone portfolio and was the replacement of three legacy on-premise competitors. We are highly recognized by this customer for our success with large enterprise implementations, our extensive digital and self-service capabilities and the ability to deliver their future needs on single, scalable platform. We signed another eight-digit deal with one the largest Canadian insurance companies. We replaced the legacy incumbent as this customer is moving from an on-premise architecture to a full cloud implementation and selected NICE due to the completeness and native functionality of our digital and self-service capabilities in CXone, providing this customer the ability to grow the digital footprint with a single vendor.

In yet another ADG deal, a large U.S.-based cellular company is consolidating their complicated on-premise taxes provided by multiple legacy vendors with CXone as their unified Cloud platform. This customer chose NICE for our market leadership and financial stability. We signed a multitude of seven-digit deals in Q4 and including a large insurance company, who is moving to the Cloud with CXone and one of the largest U.S. independent mortgage providers replacing their on-premise legacy vendor that has recently announced the sunset several of their solutions. In another seven-digit deal, we extended our portfolio of digital solutions at a well-known online bank. We won this deal over a digital pure-play vendor as the result of the CXone unified agent experience across multiple channels, which is a distinct competitive advantage of the CXone platform.

We also signed multiple seven-digit deals in international markets, demonstrating the growing demand for cloud in EMEA and APAC. One deal was with a UK-based energy company who was displeased with an existing inflexible on-premise solution, proving increasingly costly to maintain. We won with CXone for the platform superior functionality and support for digital customer journeys, demonstrating faster and operational efficiencies. In the APAC region, we signed our largest CXone deal-to-date which was a seven-digit deal with a multinational Asia-based technology company. The rapid growth required a next-gen digital platform that was more scalable and provides full conversational AI. In summary, 2022 was a year in which we surpassed significant milestones and continued to outperform on all financial measures.

We operate in markets with an abundance of short-term and long-term opportunities. Our platforms are serving the most mission-critical processes of small and large enterprises across multiple verticals. So our financial strength and rapid innovation over the past several years, we opened an unbridgeable gap versus our competitors. We look forward to leveraging our leading position to capture additional market share in 2023 and in the years to come. Before I close, I want to thank our employees for another great year. It is because of you, our identification and passionate desire to succeed that we continue to take NICE to another level of achievement. We are fully energized and ready to charge forward in 2023 and look forward to another excellent year.

I will now turn the call over to Beth.

Beth Gaspich: Thank you, Barak, and good day, everyone. I’m pleased to provide an analysis of our financial results and the business performance for the fourth quarter of 2022 and our outlook for the first quarter and full year 2023. Our financial results in the fourth quarter continued to demonstrate the strength in our business with year-over-year growth for both total revenue and EPS in double-digits. Total revenue for the fourth quarter was $569 million, up 10% year-over-year. In constant currency, total revenue in Q4 was $576 million and increased 12% year-over-year, above the high end of our guidance range. Cloud revenue was $359 million in the fourth quarter, which was an increase of 26% year-over-year. In constant currency, Cloud revenue was $361 million and increased 27% year-over-year.

Cloud revenue increased sequentially by 9% quarter-over-quarter, similar to the sequential growth in Q4 last year. Our Cloud growth of 27% for the full year was consistent with our expectations and reflects the resiliency of our business and strong demand for the unmatched breadth and depth of our Cloud solutions. Cloud revenue represented a record 63% of total revenue, up from 55% in Q4 last year. Product and Services revenue results were as expected, demonstrating the continued shift of our business to the Cloud. Product revenue, which represented 9% of total revenue in the quarter, decreased 24% to $49 million and Services revenue, which represented 28% of total revenue was $161 million, a slight decrease year-over-year. Recurring revenue, which mainly comprises our Cloud and Maintenance revenue, increased further year-over-year to a record 85% of total revenue in the fourth quarter compared to 80% in the same period last year.

From a geographic breakdown, the Americas region, which represented 83% of total revenue, grew 12% year-over-year. The EMEA region, which represented 11% of our total revenue, increased 1% year-over-year and 11% in constant currency. APAC, which represented 6% of total revenue, grew 2% year-over-year and 5% in constant currency. The growth in both EMEA and APAC revenue in the quarter was driven by the growing adoption of our Cloud solutions. Moving to our business unit breakdown. Customer engagement revenues, which represented 82% of our total revenue in Q4 were $467 million, an 11% increase and 12% increase in constant currency compared to last year. CXone, our customer experience cloud platform is the engine driving our growth in customer engagement, both by establishing new logo beachheads and by selling into our installed base.

Revenues from Financial Crime and Compliance, which represented 18% of our total revenue in Q4 and totaled $102 million, increased 6% year-over-year and 9% in constant currency. In all segments of the markets where we operate, our Cloud platforms remain our Number 1 strategic focus and growth driver, resulting in our expectation that our Cloud revenue will continue to become a greater percentage of total revenue. As a result, we expect that Product and Services will continue to fluctuate on a quarterly basis as the concentration of our cloud business continues to reach new highs. Now to profitability. At NICE, we continue to distinguish ourselves and our markets as a company that consistently delivers strong triage results of growth in our revenue, profitability and operating cash generation.

Our gross profit grew 10% year-over-year to $413 million. Total gross margin in Q4 was 72.6% compared to 73% in Q4 last year. Cloud gross margin increased 230 basis points and was a record 70.5% in Q4. Our expanding Cloud gross margin is a testament to the efficiency of our Cloud infrastructure, coupled with increasing enterprise adoption of our high-margin portfolio of Cloud software solutions. In Q4, operating income increased by 12% year-over-year to a quarterly record of $163 million, and our industry-leading operating margin increased to 28.6% compared to 28.2% last year. This quarter, our financial and other income was $10 million, driven by a combination of interest income earned from our cash and investment portfolio, combined with a strong favorable impact from exchange rate movements.

I would like to highlight that financial and other income includes revaluation of non-U.S. dollar-denominated balance sheet account at the end of each quarter, which can increase quarterly fluctuations. In Q4, EBITDA increased by 14% year-over-year to a quarterly record of $184 million, bringing our annual EBITDA to just under $700 million. Our industry-leading EBITDA margin in the fourth quarter increased to 32.4% compared to 31.5% last year. Earnings per share for the fourth quarter totaled a record $2.04, an increase of 18% compared to Q4 last year. Cash flow from operations in Q4 was $177 million, an increase of 57% compared to last year. For the full year, our cash generated from operations totaled $480 million. Last quarter, we continued to repurchase shares in the amount of $25 million and a total of $145 million for the full year 2022, which is nearly double the amounts repurchased in 2021.

We plan to further accelerate our share repurchases in 2023 and complete the $250 million program, announced last quarter, by the end of the current year. Total cash and investments at the end of December totaled $1.572 billion. Our debt, net of hedge instrument was $542 million, resulting in net cash and investments of $1 billion. Before I conclude my remarks, I would like to highlight a few expectations relative to our 2023 outlook. Our guidance is based on the U.S. dollar. At this point in the year, based on forward foreign exchange rates, we do not anticipate a material impact to our total revenue for the full year 2023. We anticipate our Cloud revenue to continue to grow at a healthy rate in a range of 22% to 25% in 2023 with secular growth of 25% in the next several years stemming from the significant increase of Cloud penetration in the large enterprise market.

We expect to continue to deliver the strong operational excellence, which has been a constant mainstay of our strategy. We have consistently delivered operating income growth in double-digits, and we expect similar double-digit growth in our full year operating income for 2023. We expect our effective tax rate during the year to be between 21% and 22%. Our first quarter and full year 2023 revenue and EPS guidance is as follows: for the first quarter of 2023, we expect total revenue to be in the range of $559 million to $569 million representing 7% year-over-year growth at the midpoint. We expect the first quarter 2023 fully diluted earnings per share to be in a range of $1.92 to $2.02 representing 9% year-over-year growth at the midpoint. For the full year 2023, we expect total revenue to be in the range of $2.345 billion to $2.365 billion, representing 8% growth at the midpoint compared to full year 2022.

We expect the full year 2023 fully diluted earnings per share to be in a range of $8.28 to $8.48, representing 10% growth at the midpoint compared to full year 2022. I will now turn the call over to the operator for questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Samad Samana with Jefferies. Please proceed with your question.

Samad Samana : Hi, good morning. And thanks for taking my questions. Maybe Barak, one to kick off with you. There has been a lot of chatter around AI and the opportunities there in the contact center in particular. And you mentioned it a little bit in your prepared remarks. But I’m just curious, what are attach rates looking like for ENLIGHTEN and how is that impacting the overall deal size or win rates that you’re seeing? And how is NICE monetizing that opportunity?

Barak Eilam: Yes, thank you, Samad. I appreciate the question. So, I highlighted not just on this call, I think we shared with you our journey when it comes to AI for the past three years, this has been a strong and leading pillar in our innovation in the past three years and we came out with ENLIGHTEN several years back and more innovation. And we have, we believe, the most robust and significant natively-built AI platform out there. And as I mentioned in my earlier remarks, 2022 was the landmark year for AI as we experienced massive adoption of AI based on ENLIGHTEN. So, first, in terms of the attachment rates, we see it’s growing in a dramatic way. We see it across the board in multiple verticals and in all sizes of customers, both existing and new, by the way.

Second, it serves as a key differentiator for us. I think that AI, while it’s still in the early days on what it can do for the CX business, there is no realization of enterprises, and I find myself when meeting with customers, most of them already tried something and realize that just implementing kind of a silo or a point solution of AI doesn’t really deliver the solution, it doesn’t scale and it doesn’t provide the full complexity. Now that it serves a more complex scenarios and then when they see what we can offer with ENLIGHTEN and recently, including the integration of ChatGPT, it’s a completely different ballgame. In terms of monetization, I’ll give you kind of two comments on that. One, it increases our deal size in a pretty meaningful way because if you think about it, we spoke historically a lot about the number of seats, which represents where the core of our business was in the past, but AI open up the potential total addressable market for us as we move from share of seats to share of interactions.

And you think about overall interactions that are not necessarily attended by a person, we’re talking about a very significant amount of interactions that are growing in an exponential way. So that’s one way to think about the opportunity and also what we see in the business. And the second thing is to think about a particular deal where it might be even a relatively small contact center footprint with new hundreds of seats, but all of a sudden, if you think about the digital footprint and the introduction of conversation AI, it can be a pretty, almost a mega customer for us. And the last thing I was saying a good example will be the deal that I mentioned in Asia Pacific, which was our largest in our history when it comes to CXone, which was exactly what happened for a customer that had a very, very small contact center, but a very dramatic digital footprint with the true need for conversational AI.