NICE Ltd. Q3 FY2023 Earnings Call

Welcome to the NICE conference call discussing third quarter 2023 results, and thank you all for holding. All participants are currently 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 on November 16, 2023. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.

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 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 third quarter 2023 results and the company’s guidance for the full year 2023. You can find our press release and a PDF of our financial results on NICE’s Investor Relations website. Following our comments, there will be an opportunity for questions. We 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 intangibles, 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 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.

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 third quarter of 2023. Third quarter total revenue of $601 million was driven by another outstanding performance in cloud revenue, which grew 22% to $403 million. Along with the great top-line performance, we continued to further distance ourselves from the competition with our unrivaled profitability. Our operating income grew 15% to $184 million, and operating margin grew 119 basis points to a record 30.6%. Earnings per share came in at $2.27, representing 18% growth. Moreover, cash flow from operations, another unparalleled competitive advantage, grew 28% to $121 million in the third quarter. NICE continues to set the gold standard for the CX market - we always have, and we 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 two main factors. First, we consistently beat our competitors, especially in the high end of the market, effectively widening our market share lead. Our command of the high end of the market is demonstrated by the 35% last 12 months growth of CXone enterprise ARR, which we define as customers billing over $1 million annually. Second, we executed on our strategy and expanded CXone into a comprehensive digital engagement and CX AI platform. AI is now a meaningful growth engine by itself with a significant incremental total addressable market (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 demand dynamics that is a tailwind for NICE. This favorable shift is unleashing a positive ripple effect. It starts with heightened demand for CX AI. This, in turn, is driving 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 CX AI are 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 experience is possible to be consumer-led and agentless; however, most past automation efforts failed, and the hurdles to fully automate customer service still remain today. AI now brings a fresh enabling technology, rejuvenating these efforts, but for AI to be successful, it needs to be CX specific, 100% accurate, fully personalized, non-generic, and fully aligned with the brand goals. Above all, it is imperative to deliver a non-fragmented end-to-end customer journey that is seamless, not backbreaking. Taking the generic AI path with either standard generative AI or siloed point solutions simply doesn’t work. This rude awakening is creating a surge of customers turning to NICE to be their CX AI vendor of choice. Moreover, CX AI represents 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 the need in the many deals we signed in Q3. In a seven-digit annual contract value deal with one of the largest cruise ship operators, digital engagement and CX AI doubled the size of the deal. AI was the main determining factor for our win over multiple competitors that could only deliver slideware. In another seven-digit annual contract value 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 model by using more automation. The incumbent cloud provider that we replaced could not deliver true CX AI capabilities. We also signed a seven-digit annual contract value deal with a major European broadband provider, and this deal was 100% AI. This customer turned to NICE and our AI portfolio to help them deliver better AI-driven proactive service for a growing customer base. We signed a seven-digit annual contract value 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 replaced three legacy point solutions vendors and converged everything onto the CXone platform. The bedrock of CX AI 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 undercurrent 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. 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 seven-digit annual contract value deal with one of the largest healthcare providers in the U.K., replacing legacy on-premise providers and converging all their CX operations onto the CXone platform. Other similar platform consolidation deals included a seven-digit deal with a large state government, where we replaced 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 a complete portfolio, and a large U.S. home and security company, where we converged nine different siloed solutions onto CXone. A 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 affecting enterprise, hindering speed of innovation, ability to elevate AI, and the capacity to reduce the cost of ownership. We are only now reaching the enterprise adoption cycle of cloud in the CX market. With extremely high barriers to 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 rich with deals driven by the need of customers to cloudify. A few examples include a seven-digit annual contract value 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 onto a unified platform. There was a seven-digit deal with a large healthcare platform company in which we won against two cloud competitors and replaced the incumbent cloud provider because their DIY cloud infrastructure was too complex, forcing the customer to build most of it themselves. 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 an outstanding and expanding cloud gross margin, leading to our best-in-class 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 LiveVox acquisition, which we announced a few weeks ago. LiveVox is the market leader in CX proactive outreach. LiveVox provides us with a strategic complementary offering that will further extend CXone’s market leadership. The combination of CXone with ContactEngine, which we acquired two years ago, and the upcoming addition of LiveVox creates a conversational AI powerhouse for both inbound and outbound CX. Additionally, the LiveVox premier and loyal customer base provides us significant opportunities to up-sell and cross-sell CXone into that base while also selling LiveVox into our large existing CXone customer base. Moreover, we expect a very synergistic financial outcome that will be accretive to operating income, operating margin, and free cash flow in 2024. In summary, we are 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 CX platform, CXone, the leading CX AI offering, and the most established cloud infrastructure that has enabled us to execute the winning playbook on delivering industry-best cloud growth and profitability. 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 support and well wishes since the eruption of the tragic events that took place in Israel, and for this, we thank you. Eight hundred and fifty of our 8,000 employees are based in Israel, and I couldn’t be more proud of their full commitment and ongoing engagement to our customers, roadmap, and business. On a personal note, my heart goes out to the 239 hostages, including infants and the 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.

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 third quarter revenue and EPS both exceeded the high end of our guidance range. Total revenue for the third quarter was a record $601 million, 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 million in the third 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. 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 million, 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 million. Our recurring revenue further increased to a record 87% of total revenue in the third quarter compared to 82% last year, and is nearly $2 billion over the trailing 12 months. Recurring revenue is comprised primarily of a combination of cloud and maintenance revenue. From a geographic breakdown, the Americas region, which represented 84% of total revenue, grew 10% year-over-year. The Americas region has continued to shine 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 to a more non-recurring premise-based product revenue in the prior year. 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 million, a 10% increase. CXone, the most complete customer experience cloud platform, is the primary growth driver in customer engagement, led by our CX AI 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 million, delivered as expected and was flat year-over-year. Like customer engagement, we are executing on our strategy to cloudify this segment of the market, both to the high end and mid-tier financial institutions through adoption of our cloud platforms, X-Sight and Xceed. 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 this 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. 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 that are embedded in the platform, including digital and AI solutions. Secondly, our CXone cloud architecture provides us with unrivaled economies of scale. In Q3, operating income increased 15% year-over-year to $184 million, 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 midterm financial target of 35% over the next few years. EBITDA increased by 16% year-over-year to an all-time high of $203 million in the quarter. Our EBITDA margin in Q3 increased to a record 33.7%, increasing 210 basis points compared to last year. Earnings per share for the third quarter totaled a record $2.27, an 18% increase compared to Q3 last year. Our financial and other income was $8 million, 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 million as a result of our strong billings and collections. Over the past four quarters, we have generated more than $550 million in cash flow from operations. The strength of our cash flow provides us with significant flexibility and capital allocation priorities of mergers and acquisitions and share buybacks; accordingly, this year we accelerated our buyback program, and in the past three quarters alone, we deployed $220 million, nearly double the amount utilized for share repurchases for the same period last year. Earlier today, we announced an even larger new share repurchase program in the amount of $300 million. 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 billion. Our debt net of a hedge instrument was $544 million, resulting in net cash and investments exceeding $1.1 billion. In conclusion, our Q3 performance highlights the 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. For the full year 2023, we are increasing our guidance on both the top and bottom line. Full year 2023 non-GAAP total revenue is expected to be in a range of $2.350 billion to $2.379 billion, 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 $8.78, 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 LiveVox, which is expected to close sometime in the first half of 2024. LiveVox should contribute approximately $142 million on a full year basis after assuming some revenue redundancies in the initial year of transition. On the bottom line, LiveVox is expected to be extremely synergistic and, together with the organic profit expansion of NICE, we expect 2024 EBITDA to be close to $900 million and to exceed the $1 billion mark in 2025. I will now turn the call over to the Operator for questions.

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from Samad Samana from Jefferies. Please proceed.

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

Thanks, Samad, for the question and the earlier remarks. Absolutely, I’ll say that one thing I highlighted before is that we see a shift in demand dynamics, kind of this ripple effect; so a lot of our conversations today with customers start with the end state in mind. They want to move to an AI-driven CX environment. They understand that taking the simple route of just deploying a basic generative AI didn’t work for them. They understand that they need to put all the CX assets together as these are the things that are driving AI, and then it drives a much faster decision on the cloudification effort. Specifically on the AI products or solutions that we see that are moving extremely fast, obviously in the Copilot, when we think about AI in the contact center, I would give it 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 the Copilot mode the agent is the first priority of customers, and then starting to find different tasks and use cases and fully automate them with what we call Autopilot. So the two leading products that we see being prioritized by customers are Enlighten and Copilot, and the combination of Enlighten and Autopilot. In terms of contribution, we provided some initial percentages. It’s starting to become a very significant part of our pipeline moving forward. We see the closing rate of AI faster than other parts of our business because of the priority of customers, hence the optimism moving forward.

Great, and then maybe Beth, a follow-up question for you. 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 reconciling that with the initial outlook for 2024, can you help us think about in that 18%, how are you thinking about seat growth, the number of agents versus AI dollars? Just help us understand better what’s being assumed today in that 18% number.

Thank you for the question, Samad. We shared that our expectation next year in terms of our initial outlook for cloud growth is at least 18%, and we believe we have the opportunity to further accelerate that as we’re looking towards 2025. That confidence stems from the large enterprise wins we’ve already announced during the course of this year, combined with all the AI and digital bookings that we’ve seen. 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 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, but as I highlighted, it’s unlocking the potential now, and we’re seeing more of that in digital and AI.

Great. Thank you for taking my questions.

Thank you.

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

Hey, good morning. Thanks for taking the question. The cloud revenue, certainly it’s nice to see the sequential acceleration this quarter. I’m curious about 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? 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.

Thank you for the question, Tyler. We highlighted that last quarter, and it’s been a tighter economic cycle this year, 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 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 recovery as the overall economic environment is opening up, and that will impact our growth as we head into 2025.

And any guidance on cloud revenue growth for Q4?

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 range at approximately around the 22% growth in cloud revenue for the full year. As we’ve seen both in the current quarter and 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 $1.6 billion in recurring revenue in the cloud.

Great. A follow-up for Barak on the LiveVox deal, great to see the goals around that being accretive. Given all the organic demand that you’re seeing on the generative AI side with Enlighten, why does it make sense to do this acquisition now, given the opportunity that you’re seeing in the core business? Thank you.

Hi, thank you for the question. You were breaking up a bit, but I believe I got most of the question. In essence, you’re asking about the strategic rationale of the acquisition, so absolutely happy to share. I think LiveVox is a great addition to the NICE portfolio. Most of our business is in the inbound customer care or customer service. We do have an outbound business, but it's a specialized offering by itself. We started a journey several years back to ensure that we have not just a good offering in the outbound, but something that is revolutionary and brings conversation and AI capabilities to that area of the outbound. We started with some organic development, and acquired ContactEngine, which brings a completely new way to think about proactive outreach. We were also looking in the last few months for a few good assets, and LiveVox has superior technology and a customer base in that area. So that’s the rationale. 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 ensure that we cover all of our bases and we have a complete and leading offering for every type of customer. Last but not least, as the markets of the large enterprises shift to the cloud, these outbound capabilities are becoming increasingly relevant in their complexity, and this is a very complicated type of domain expertise in outbound. This is typical for large enterprises, hence we thought putting those assets together makes sense, and financially, it looks very attractive. So both from a strategic fit as well as financially and the price itself looks attractive, and hence we decided to pursue it.

Thank you.

Thank you.

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

Hey, it’s actually Dan on for Siti. Thanks for taking my question. It’s good to hear about the strong AI bookings trends and seven-figure AI deals. I was just wondering if we could get a sense of some early customer feedback you’re getting on your new AI capabilities, and maybe what’s the uptake you’re seeing for these features between new customers and existing customers.

That’s a great question, thanks for that. First of all, the feedback is phenomenal. I am personally engaged with many of those customers and executives. I can tell you it gets visibility and opens doors at the most senior levels of large enterprises. Most of the deals we talked about are with brand-new customers. We discussed the fact that in this quarter, 80% of our new customer deals were driven by AI and also sold with AI solutions. The deployment that we started already for past deals is progressing extremely well, allowing us to enjoy more and higher consumption from these customers that started sometimes relatively small, and the consumption is growing, and the volume of interaction is growing exponentially. But as you said yourself, we have thousands of existing CXone customers that have all the assets in place, and turning AI for them is actually a very fast process. We have a dedicated sales team tasked with cross-selling into the existing base. Our most crowded marketing events, webinars, and other lead generation events are related to AI, and much of that is indeed with our own customer base because they are already familiar with CXone and see it as an easy add-on to their existing environment.

Okay, thank you.

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

Great, thanks. Helpful information upfront just on the early opportunity being more augmented agents and then that there will also be an AI piece as well. Just wondering how you guys look at the opportunity between augmented and true virtual agents as you go forward; and then just maybe as a second question, given you believe that LiveVox can be accretive within the first year, where do you see those greatest synergies coming from?

Sure, I’ll start on the first question. I’ve been in the CX market for now 25 years, and I’ve seen our market way before the AI days trying to drive automation because at the end of the day, it is a very labor-intensive market. Ninety-some percent of the cost is still with labor, with agents, and there is obviously a desire to pursue automation. What most vendors and companies talk about regarding automation is either/or; either you have a fully manual approach done by the agent with some technology or fully automated tasks. The approach we have taken with AI, and that’s the reason we launched Copilot and Autopilot together, is the ability to deliver a continuous customer experience. That’s why the concept I discussed of augmented intelligence for the agent is crucial, empowering them, while simultaneously automating tasks that can be fully automated, but also retaining the ability to toggle between them. We’ve all likely experienced the situation as consumers where you start with an agent or a bot, and as soon as there's an ambiguity regarding intent, that’s when the experience deteriorates. The ability with CXone, a unified platform that has all the convergence assets and provides AI for both agents and full automation, breaks this cycle of failures in automation and brings it to life. Your question about LiveVox, I’ll hand it over to Beth.

Yes, with respect to the impact, we expect LiveVox to have considerable synergies and be highly synergistic to drive an accretive nature to both our profitability and our cash flows. We have that confidence as there are quite a few overlaps, particularly regarding G&A related costs, and we still operate in the same space. We also have synergies regarding 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 have a great track record of delivering on the ability to drive healthy synergies into our operating model, and we expect that with LiveVox as well.

Great, thank you.

Our next question comes from Pat Walravens from JMP Securities. Please proceed.

Great, thank you. Barak, we’re praying for you, your families, and especially for the safe return of the hostages. If you look at the Gartner Magic Quadrant, you and Genesis are the two clear leaders in the space. Can you walk us through what the competitive dynamics are like with them? When do you usually win, and when do you usually not win? How does it work?

Thank you, Pat. The competitive landscape is more than just us and Genesis, but needless to say, Genesis is one of our competitors. We believe we are winning. We have a superior win rate over Genesis. In many cases, Genesis and others are the incumbents, and they are, due to financial considerations, trying to hold onto their customer base and maintenance base. That’s number one. Second, those high debt and management strategies lead them to be very short-term oriented in terms of their customer investments. This gives us a recognizable advantage, specifically our investments in expanding into digital engagement and AI. We have not seen that reaction there, giving us a significant edge. When it comes to price, we will do what it takes to win the customer. But we don't just win on price, we win on value propositions, and customers realize that NICE is here for the long run. We don’t have an exit plan; we don’t need to transact the company, nor do we attempt to sell the company five times a year like others do. Our management attention is totally focused on our customers and our business.

Thank you.

Our next question comes from Michael Funk from Bank of America. Please proceed.

Hi, good morning. Thank you for the questions. One for Beth to begin. Beth, I think in response to an earlier question about a prior comment regarding weaker SMB consumption, I believe I heard you say that you’re expecting some positive shift, and I hope maybe you could clarify that comment. I then have one follow-up if I could.

Yes, thank you for the question, Michael. Your comment was correct - I did say that during the course of this year and the tighter economy, we have seen some less usage on the CX side of the SMB install base, and that next year with the economy looking brighter, we are seeing signs and expect to see more of that consumption return to what we have seen as normal historical trends. We expect to see that progress further throughout next year.

Great, and then just on AI, there has been extensive discussion over time about how AI potentially shifts a portion of the TAM spending away from human agents towards solutions that companies like NICE provide. Do you have any early or one-off data points or examples in deals that you’ve signed with AI, how that has shifted from say 90% of spend on humans versus 10% for technology, where that stands on the back end of these deals?

Yes, thanks for that. First of all, just to clarify something, we don’t see right now a reduction in human agents in our industry, not to mention the fact that with only 20% penetration of cloud, even if there will be some reduction in the number of agents, we still have a significant opportunity to win market share. Companies are generally looking to avoid adding labor as the number of interactions, digital or otherwise, is increasing and becoming more complicated. This is where they are trying to deploy AI to avoid additional labor costs. It’s also the reason they usually start or concurrently implement both Copilot and Autopilot, acknowledging that there will always be some dependency on human agents. Generally, I believe the AI opportunity is significantly larger in the long run than the one we have just supporting agents. For over 25 years, we have focused nearly all our efforts on the time when consumers interact with agents; now, we’re aiming for a market share expansion beyond that, significantly increasing our TAM, as we successfully integrate previous generations of automation.

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

I appreciate that, thank you.

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

Hey guys, yes, this is Quinton on for Jim Fish. Thanks for taking our questions. Beth, maybe first for you, you’ve talked a couple of times already about some lower usage and macro pressures impacting the SMB side this year, but across the entire cloud base, can you talk about how net retention has trended in this quarter?

Thank you for the question. With respect to our expectations, we saw 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 shift from that usage, but we foresee healthy signs and expect that to continue evolving as we distance ourselves from the tighter economic conditions we've experienced this year.

Makes sense. Then Barak, maybe for you, obviously the government sector has always been slow to adopt new technology, especially on the cloud side. You announced a fairly large win with a state government this quarter. Are you witnessing AI and digital opportunities creating that inflection, where now they feel comfortable moving to the cloud? How do you see the balance since you have the FedRAMP certification while others don't, in terms of opportunities in the federal market as we look at 2024?

Yes, that’s actually quite an interesting question that you’ve raised. Historically, we perceived government sectors as being slow to adopt technology. However, our experience and perception have changed since COVID. The early days of COVID illustrated to government agencies that they could move quickly. If we recall, many states adopted new communication channels and various technologies very quickly during that time. That shift in approach seems to be lasting into 2023 and is continuing into 2024, which is very positive for us. Additionally, government budgets remain strong; there's no new wave of recession or budget constraints in the SLED markets, and we are pleased with how that benefit is filtering through our business.

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

Thanks. More of a qualitative question, but can you talk about how much your AI product has improved over the last year? ChatGPT is only about a year old at this point, and I wonder if you’re using it or other forms of reinforced learning, where the product could be significantly better a year from now? Any comments on how that compares to the main competition?

That’s a great question, Tim. I’ve been in the tech sector for over 25 years and have witnessed various cycles of significant technology. Today, we see AI driving a compound effect of innovation, perhaps more than any other technological leap we’ve seen. If you stay out of touch for even a week, it feels like a year has passed. The great thing for our business is we started this journey significantly before, gathering crucial data well ahead of the recent surge in AI interest. We have information from tens and hundreds of billions of interactions and knowledge assets, giving us a uniquely strong position. So, in short, yes, we see tremendous improvements in both accuracy and relevance, and we are steadily expanding our out-of-the-box models to facilitate faster deployment for customers. We currently have over 1,000 Enlighten models for a wide array of customer experience scenarios. We are evolving into a CX AI powerhouse, both in terms of assets and technology. Where relevant, we will leverage generic technologies, like generative AI, while continuing to focus on the unique aspects required for the CX market.

Very helpful. Is it fair to say that six months to a year from now, the product will be dramatically better, and do you think you’re ahead of your competitors?

Absolutely. First of all, it’s 100% true that it will continue to improve every quarter. I also dedicate significant time to ensure it works effectively for our customers and in our labs, observing a cycle of improvement on a weekly basis. In terms of our position relative to competitors, I believe that we are years ahead of our competitors, both sizable firms and point solution vendors. This is tied to the reality that it’s not enough just to possess technology; it’s essential to have a comprehensive platform. Our years of investment in building CXone as a platform capable of managing and converging all assets is what truly facilitates success in AI for us.

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

Yes, thank you. It’s actually Rachel on for Arjun. 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 if you see any other potential catalysts to accelerate the pace of migrations?

Yes, thank you for the question, Rachel. We’ve reiterated numerous times that we’ve built a significant $1.6 billion in cloud revenue largely without tapping into our legacy customer base, predominantly securing a foothold in the market with limited presence. Currently, the market remains about 20% penetrated. AI provides a growth engine by itself but can also be a catalyst for faster migration, as evidenced in our pipelines and discussions with customers. They want AI, and to utilize AI, they understand they need to unify their assets on a single platform, which allows us to facilitate their movement to the cloud.

Great, thank you.

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

Thank you very much, everyone, for joining us. We appreciate your support and partnership, and of course the heartwarming words from everyone. Thank you very much. Have a great day.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for participating.