NICE Ltd. Q4 FY2023 Earnings Call

Welcome to the NICE Conference Call discussing Fourth 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 February 22, 2024. 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 fourth quarter 2023 results and the company’s guidance for the first quarter and full year 2024. 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 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 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 once again proud to finish another excellent quarter, fueling our industry-leading fully results. 22% cloud growth, $2.4 billion of total revenue, cloud growth margin of 70.5%, operating margin of 30%, 15% growth in EPS, a rock-solid balance sheet, and record cash generation of $561 million for the year. These results not only outperform our competition by a wide margin, they also put us at the upper echelon of enterprise software. Our cloud growth is the highest in our industry and on a much larger scale, showcasing our accelerating market share expansion. NICE's best-in-class growth margin owing to our unrivaled cloud architecture allows us to substantially out-innovate while consistently delivering increasing profitability. This market-leading profitable growth places NICE in an elite group of enterprise software companies and provides us a robust balance sheet, enabling the NICE team to consistently deliver quarter-to-quarter, shaping the future of our markets while remaining steadfast to our long-term strategy, uninterrupted. 2023 was filled with tremendous growth and expansion across the board, leading to additional successful milestones achieved throughout the year. We continue to increase our market share, adding nearly 1,000 new customers, displacing competitors with each newly acquired logo. We are leading the cloud migration at the high end of the market, with 26% growth in enterprise cloud customers, building over $1 million in ARR. We achieved strong international cloud growth, with over 50% increase in our international cloud revenue. Above all, 2023 will be remembered for two defining landmarks for NICE, taking command of the digital engagement market and charting the course of AI in the CX industry. As we enter 2024, following the great success of last year, it is now concretely clear that AI has become an overarching catalyst, unlocking multiple vectors of growth. Our leading edge AI, with its unique data assets, is increasing NICE's cloud win rates across the board, is the bedrock of our rapid expansion into digital engagement, is the convergence power igniting the adoption of our platform, and it is an endless source for a growing number of brand new AI-based solutions with incremental revenue streams. Let me delve a bit deeper into these four growth pillars. With only 20% of the CX market shifted to the cloud, the most exciting part of this transition is about to happen over the next several years. We are already leading with the highest market share in the cloud, attributed to the breadth and depth, scalability, and overall superiority of CXone. AI is now turbocharging our differentiation, further expanding our win rates. In 2023, we saw a 32% increase in the total ACV of CXone competitive displacements. In fact, we delivered a 40% increase year-over-year in cloud enterprise deals, each with an ACV exceeding $1 million. For example, we signed a seven-digit CXone deal with a very large provider to the financial services industry. This customer used an incumbent solution for multiple years, but their IVA failed to deliver the much-desired automation and AI capabilities. We displaced that incumbent thanks to the completeness of CXone. But above all, it was our enlightened autopilot, providing scalable AI self-service that sealed the deal. AI also drove a seven-digit CXone win with a very large international airline. After many years of settling with multiple legacy on-prem providers, they conducted a comprehensive evaluation to migrate, consolidate, and upgrade to the Cloud. CXone was exceptional in all criteria, and the decision became a no-brainer as soon as they experienced our vast AI offering. Another deal that demonstrated how AI increases our win rate is a seven-digit displacement of an incumbent with a large pharmacy provider. Once again, while NICE was the preferred vendor, it was Enlighten AI that made it clear that we were the obvious choice to become the future Cloud provider for all their CX needs. Moving to the second pillar, 81% of consumer interactions with enterprises are digital, and the volume continues to grow exponentially. Digital engagements provide the potential to be the most successful for consumer satisfaction, bring the greatest cost efficiency for the enterprise, and deliver the utmost tech simplicity. However, most enterprises are still using basic and siloed point solutions to engage with consumers digitally, failing to deliver on this great potential. Over the past few years, we have been strategically trailblazing the digital engagement market, expanding the power of CXone to cover the entirety of digital engagement and fulfilling the void in the market. The momentum of our ongoing innovation accelerated dramatically in 2023 as we infused the digital engagement capabilities with AI. This is now the fastest expanding part of our business, reflected by an astonishing 6x growth in the volume of digital engagements managed by CXone daily, cementing it as the industry's fastest-growing platform. Our digital success in 2023 is also substantiated by a 53% increase in digital bookings. Our AI-driven digital engagement wins continue to accelerate in Q4. In a seven-digit ACV deal, one of the world's largest hotel chains, presently undergoing a digital transformation, came to us for our best-in-class AI digital engagement offering. They selected CXone to be their end-to-end platform, replacing multiple Gen1 digital pure play providers. While consolidation of the siloed digital touchpoints was their top priority, it was our state-of-the-art AI capability, natively embedded in CXone, that fast-tracked their decision. These same positive trends repeated themselves time and again in Q4, including a seven-digit ACV win with a large insurance provider in the APAC region and a seven-digit ACV deal with a well-known commercial provider of integrated security solutions, among many others. AI convergence power supercharging platformization is the third growth pillar. Similar to other enterprise software segments, CX buyers are pivoting 180 degrees from multiple point solutions to building and simplifying their tech stack by standardizing on a single platform. While the value proposition of a platform is well understood, its adoption is now gaining significant traction because it is the only viable way to implement AI that works. Platforms don't appear overnight. It takes strenuous planning with ongoing strategic decision-making, along with a significant decade-long engineering investment. CXone is the only platform in the CX market that was built on these principles from day one, and we have seen the fruits of that investment significantly materialize. AI now adds a new tailwind for customers and prospects to standardize on CXone. In Q4, bookings from new customers adopting CXone as a platform increased to 100%. In these deals, customers selected CXone with three or more applications, displacing at least two incumbent point solutions. One of those AI-driven platform wins was a seven-digit ACV deal with a global provider of technology for commercial real estate. We're uplifting the experience of millions of their customers and thousands of their users by deploying CXone as an AI platform, eliminating several incumbent legacy solutions. This theme of AI initiative spearheading platform decisions appeared in multiple other seven-digit ACV competitive wins in the quarter, including one with a large Northeastern utility company where we replaced two incumbents and a large European technology consulting company undergoing complete CX modernization driven by AI. Lastly, while AI powers a superior win rate in codification, digitalization, and platformization, it is also a source for a growing number of AI-driven use cases, each contributing to an incremental revenue opportunity. Unlike for individuals, the AI adoption cycle for enterprises is complex, and it is even more so for CX, which is a highly specialized market. We are experiencing a spike in the number of customers and prospects approaching us after trying to leverage general-purpose generative AI technologies unsuccessfully. They come to us with a clear realization that Enlighten, with thousands of CX-specific models that are constantly expanding and evolving from billions of interactions, is the only viable option. We are defining how AI is adopted for CX as demonstrated by an astounding 375% increase in Enlighten bookings in Q4. We signed a seven-digit ACV deal with one of the world's largest home furnishing companies for Enlighten Copilot and autopilot. In this deal, we replaced the incumbent and competed against two other large cloud and two pure play AI vendors, with NICE winning due to its all-encompassing single platform in CXone and its AI excellence. The wave of adopting Enlighten AI, including Copilot and autopilot, led several other seven-digit ACV deals, including one with a marquee business service company, one of the largest banks in the world, and a very large telecommunications company. As we plow steam ahead into 2024, our energy and momentum are at a level higher than I've ever witnessed before, with a record-setting pipeline. At the heart of our expanding win rate is our first-class global sales team with unmatched domain expertise, augmented by the industry's largest partner network. This ecosystem continues to grow as partners are always drawn to market winners. In 2023, 75% of our business was closed with all new partners. The foundation of the great results of 2023 and the just-stream-like momentum we are carrying into 2024 is our 8,400 NICErs, the most energetic, dedicated, and talented group of employees in our industry. I want to thank them for their continued commitment to making NICE the world-class company that it is today. I also want to take this opportunity to thank you, our customers, partners, and shareholders. We appreciate the confidence you place in us and your unwavering support. For us, this great journey to date is only just the overture. The main act is yet to come. I will now turn the call over to Beth.

Thank you, Barak, and good day, everyone. 2023 was another record year for NICE, capped off by an impressive fourth quarter with strong momentum going into 2024. Both the fourth quarter and full year 2023 once again demonstrated that our financial results shine in the enterprise software market with best-in-class cloud growth in the CX industry coupled with our ever-expanding profitability and cash generation. Before I move to our fourth quarter results, I’d like to start by reiterating that the financial results for Q4 do not include any contribution in the P&L from the LiveVox acquisition, which will only contribute to NICE's results starting in 2024. In Q4, both total revenue and EPS came in well in excess of our expectations. Total revenue for the fourth quarter was a record $623 million, a 10% year-over-year increase driven by the ongoing strength of our cloud business, which now represents a record 69% of our total revenue compared to 63% last year. Cloud revenue increased 20% year-over-year and 6% sequentially to a record of $429 million in the fourth quarter, as we continue to see increasing adoption of our CXone platform by large enterprises driven by demand for our digital and AI solutions, which serve as key differentiators in clinching deals and driving our high win rates. Digital and AI are among the key drivers of growth for our business. The opportunity that we provide with these expanded capabilities makes our cloud offerings the preferred choice for enterprises that desire to deliver cost efficiencies while simultaneously increasing consumer satisfaction. The further adoption of digital and AI acts as significant opportunities for incremental revenue streams into the years ahead. Services revenue, which represented 26% of total revenue, was $162 million, an increase of 1% year-over-year, given higher professional services revenue resulting from large enterprise adoption. In line with our expectations, product revenue from on-premise sales, which represented 5% of total revenue in the quarter, compared to 9% of total revenue last year, decreased to $32 million. With the ongoing expansion of cloud business across all our segments, our recurring revenue further increased to a record 88% of total revenue in the fourth quarter compared to 85% last year and crossed the $2 billion threshold for the full year 2023. Recurring revenue is comprised primarily of a combination of cloud revenue and maintenance revenue, which is a component in our services revenue. From a geographic breakdown, the Americas region, which represented 84% of total revenue in Q4, grew 10% year-over-year. The Americas region has continued to excel, primarily from the success of CXone sales in the region. The EMEA region, which represented 10% of our total revenue, increased 2% year-over-year. The increase in EMEA was due to significant growth in cloud revenue, offsetting a decline in on-premise related revenue, primarily from the financial crime and compliance segment. The APAC region, which represented 6% of total revenue, increased 11% year-over-year. The foreign exchange hedge wins in APAC and tailwinds in EMEA offset each other, such that the net currency exchange impact on total revenue was negligible. The international market is highly under-penetrated compared to cloud adoption in the U.S. This represents a significant growth opportunity for NICE, as we have already made considerable investments in our partnerships, data centers, and go-to-market efforts to capitalize on the growing interest in our cloud offerings across the globe. Cloud revenue now represents nearly half of our total international revenue. With respect to our business segments, customer engagement revenues, which represented 84% of our total revenue in Q4, were $523 million, a 12% increase. CXone, the most complete customer experience cloud platform, is the growth driver in customer engagement led by our enterprise-grade CX AI. Revenues from financial crime and compliance, which represented 16% of our total revenue in Q4, totaled $101 million, delivering as expected and decreasing slightly year-over-year. We are continuing to execute on our strategy to cloudify this segment of the market, both to the high-end and mid-tier financial institutions through the adoption of our cloud platforms, X-Sight and Xceed. In Q4, the cloud revenue growth year-over-year was offset by a decrease in costs and services. We expect to see this cloud growth materialize in the revenue stream for financial crime and compliance in future periods, and for the segment to return to growth as the cloud revenue becomes more meaningful. Our focus on the continued expansion of our profitability is unwavering and was demonstrated once again in our robust results in the fourth quarter. Our outstanding cloud growth margin reached a record 71.1% in Q4 thanks to our scalable cloud architecture. Our complete CXone platform continues to deliver an ever-expanding cloud gross margin as a result of higher attach rates as we go up market, which contributes incremental cloud profitability. In Q4, operating income increased 15% year-over-year to $187 million, and our healthy operating margin increased 140 basis points to 30% compared to 28.6% last year. Earnings per share for the fourth quarter totaled a record $2.36, a 16% increase compared to Q4 last year. Cash flow from operations in Q4 was $180 million, and for the full year was a record $561 million, an increase of 17% compared to 2022. Our industry-leading free cash flow generation and profitability are the direct reflection of the consistent focus we maintain on delivering increasing operating leverage in our business. Due to our sales wins and laser-focused expense management, we achieved a 26% free cash flow margin in Q4 and 20% for the full year 2023. The strength of our cash flow generation enables us to execute our capital allocation priorities of M&A, like our recent acquisition of LiveVox, to continue to cement our market leadership and to execute on our share buyback program to return capital to our shareholders. Accordingly, in 2023, we accelerated our buyback program, purchasing $288 million of shares, nearly double the amount purchased in 2022. At the end of last year, we announced the introduction of an even larger plan of $300 million, which we expect to complete by the end of 2024. We successfully completed the acquisition of LiveVox near the end of December 2023. Our balance sheet was consolidated on the closing date and reflects the acquired assets and liabilities of LiveVox. Accordingly, total cash in investments at the end of December totaled $1 billion and $408 million. This healthy year-end cash position is post-the-closing and outgoing proceeds for the acquisition of LiveVox. Our debt, net of a hedge instrument, was $544 million, resulting in net cash and investments exceeding $864 million. In conclusion, our fourth quarter performance caps off a strong year for NICE, reflecting the foresight of our comprehensive strategy of seamlessly implementing CX AI with quality, accuracy, and security on a single platform at scale. Our new bookings in Q4 served as a positive reinforcement of the growing demand we are seeing for our CX AI solutions, and we are excited to continue the strong execution of our strategy across all our business segments in 2024. Before I conclude my remarks, I would like to highlight a few expectations relative to our 2024 outlook. We are reiterating our expectation of cloud growth of at least 18% in 2024, excluding the contribution of LiveVox. We expect LiveVox to contribute approximately $142 million to total revenue, which will be attributed to our cloud revenue line from the start of 2024. We assume some revenue redundancy in the initial year of transition and expect this acquisition to show growth in 2025 and beyond. Our total cloud revenue is expected to exceed $2 billion for the full year 2024. We expect our effective tax rate throughout 2024 to be in the range of 20% to 21%. Now I'll close with our total revenue and non-GAAP EPS guidance for the first quarter and full year 2024. For the first quarter of 2024, we expect total revenue to be in the range of $650 million to $660 million, representing 15% year-over-year growth at the midpoint. We expect the first quarter 2024 fully diluted earnings per share to be in a range of $2.40 to $2.50, representing 21% year-over-year growth at the midpoint. Full year 2024 total revenue is expected to be in a range of $2,715 million to $2,735 million, which represents an increase of 15% at the midpoint. Full year 2024 fully diluted earnings per share is expected to be in a range of $10.40 to $10.60, which represents an increase of 19% at the midpoint. I will now turn the call over to the operator for questions.

Thank you. Today's first question is coming from Samad Samana of Jefferies. Please go ahead.

Hi, good morning, and congrats on the strong close to 2023. Barak, maybe first question for you. You spent a lot of time in the prepared remarks talking about the impact of AI, the traction that the company is seeing. I was curious, when you think about customers and the engagement that you're having, are you seeing them add additional budget to spend on AI products above and beyond what they would have normally spent in a CX engagement? So, for example, if a typical deal was $100,000, are you seeing them spend 20%, 30% more because of the additional AI products? And is that new budget? We're just trying to figure out maybe if there's additional dollars being allocated in CX because of this.

Yes, thanks for the question, Samad. The short answer is absolutely yes. I'll give more color about it. First of all, it's important to say that every conversation that we have today, regardless of what we end up doing with the customer, starts with AI, both in terms of the way we position it, but of course, where the customer focus is. And they understand that in order to have AI, they need to obviously move to the cloud, adopt the platform, have all channels on it, and look at digital and voice together, etc. That was important to emphasize. Going back to your question, yes, there is more budget funneling to it. First of all, because generally, there are more budgets available to AI, and it's easier for any type of executive to get approval for AI. There is somewhat of an AI format, if you would like, in enterprises right now, but specifically in CX, the value proposition is very clear. We need to remember that still 90% of the spending in CX goes to labor. With all due respect to all the technology that is surrounding this customer representative, still 90% of the cost is in labor. AI has a very straightforward position; it has two parts. The first part is augmented intelligence, where it augments the agent, making it ten times better, obviously much more efficient, so more money can move from labor into technology. The second part is full automation with AI that allows them to reduce headcount on one hand while applying a healthy amount of that savings with a greater ROI, about 25% or so, into the technology side for AI. So I would say that if you look at CX as a whole, potentially there is no new budget, but there is a major shift from labor to technology. For us, this is definitely a new incremental budget.

Great, and then, this may be for you or Beth either way. But you've now closed the LiveVox deal. I'm curious maybe how the initial phases of the integration are going. How are you thinking about integrating their workforce into yours? And maybe what's the initial feedback and how should we think about that timeline of integrating the two businesses together more seamlessly?

Yes, so I'll start saying it's early days. We're just a month and a half or so after the closing, but it's going extremely well. From day one when we started to meet with the company, of course, even before the signing and the closing, we saw both the potential as well as the two cultures and the great talent LiveVox brought with them and the deep domain expertise that they bring to the table without too much redundancy in that domain expertise to what NICE does. So we integrated them together. They're very happy to be with NICE. I just met a lot of them at our sales kickoff, which was phenomenal. They're all extremely excited to be a part of NICE. And we also see the excitement of our customers and prospects. We see the potential within the LiveVox customer base that was very happy to hear that this is now one company. We see the potential at our NICE customer base that suddenly understands we have such superior capabilities when it comes to proactive outbound and bringing AI into outbound. Above all, it allows us also to further increase our win rate when it comes to completely brand new prospects that are neither LiveVox nor NICE customers.

Great. Thank you, Barak, so much for taking my questions.

Thank you. The next question is coming from Tyler Radke of Citi. Please go ahead.

Yes, good morning. Thanks for taking the question. So, Barak, you talked a lot about some pretty impressive enterprise win statistics, whether it was the million dollar ACV, customer growth, international cloud revenue, really strong. As I look at your cloud revenue performance this quarter, the sequential growth in Q4 was a bit below where we saw the sequential growth a year ago. So can you just help frame for us kind of the timing of some of this booking strength, when you expect that to flow into the cloud revenue? Can I understand there's implementation and things take some time to ramp up? And I guess related to that, Beth, any further color in how we should think about the shape of cloud revenue throughout the year, certainly appreciate the 18% reiteration of organic cloud guide, but just how we should think about the quarterly progression there, given the strong bookings you saw here in Q4? Thank you.

Yes, thank you, Tyler. I'll actually start by addressing your question. I think first, as we talk about our cloud revenue performance for the fourth quarter as well as the year, I can say in general, we are extremely pleased with our performance. We delivered 22% growth for the full year and 20% growth in the fourth quarter. If you look at the comps out there relative to the other players in the CX markets, we're greatly outperforming. When you look at the sequential growth throughout the course of 2023, the contribution that we made to our cloud revenue in absolute dollars each and every quarter continued to increase. And it's really reflective of just the strength of our overall business and the great win rates that we had during the course of last year. As we are stepping into 2024, we're very pleased again with what we see and the momentum there, and the opportunity ahead of us. We've given some very clear expectations that we expect to see 18% growth in cloud revenue for the full year of 2024. But today we're actually nearing the end of February, and so we can say with strong confidence that we expect that 18% to be steady and really play out uniformly in terms of the quarterly growth year-over-year each and every quarter. We, as part of our business, are constantly monitoring the usage data of our customers. And so we can see that demand and the growth expectation are stabilized, which further kind of widens the positive gap that we see relative to other players in the market as we step into this year.

And maybe just to add one more thing, if I may, Tyler, because going back to the sequential growth between Q3 and Q4 is best highlighted. In absolute dollars, we added, if I'm not mistaken, $28 million, and this is organic. Not all companies in our space are public; actually, most of them are not. But the one that is, as far as I know, added $8 million, and they didn't highlight that most of it is non-organic. So I think that speaks a lot about our market share expansion.

Yes. And that's a great segue. Just the follow-up question, Barak, I had around competition. I think last quarter, you talked about winning some deals just from competitors that maybe were shopping themselves around. Was that still in play this year? Did you still see customers kind of default to NICE because of some of the M&A activity that some of your competitors are potentially seeking?

I think we see a very favorable environment for us in terms of the competitive landscape similar to what I highlighted last quarter. The reasons, obviously, I think at the end of the day, the offering that we have in, and that's the number one reason for customers to choose NICE. But yes, the other consideration is we continue to grow our employee base while others are going through multiple rounds of layoffs. As a result of that, the service for customers is one example. We understand that some of our competitors took on even larger debt, making sure that in the long run, that it will probably not yield a lot of innovation. So these are some considerations customers are having. But generally, as I highlighted in the previous quarter and throughout 2023, and in the quarter we just reported, we feel that our win rates continue to expand. And at the end of the day, when you look at the results and our growth that Beth highlighted, both for the past quarter as well as into 2024, it is much higher than what we are aware of the competition and, of course, on a much larger scale.

Thank you.

Thank you. The next question is coming from Meta Marshall of Morgan Stanley. Please go ahead.

Great. Beth, in the past quarters, you had mentioned some macro headwinds for some of your smaller customers. Just wanted to see if you could provide any update on what you're seeing with that portion of the market? And then maybe just a follow-up for you. Just given all the opportunity that you're seeing, how you guys are balancing investment levels and deciding where to invest incremental dollars? Thanks.

Thank you for the question, Meta. I guess, first addressing the macro headwinds, it's something that we discussed that we saw somewhat throughout the course of 2023 and was mostly materializing really on the smaller customer base in the SMB segment of the market. If you looked at the fourth quarter seasonality relative to what we have seen in prior years, we did see an uptick, and we've talked about the sequential growth quarter-to-quarter. But relative to prior years, it was lighter. Again, consistent with what you've seen throughout the course of the year. But I think what's really important, and I highlighted it on the question from Tyler, is that we have now seen stabilization. The fourth quarter was the culmination of three separate months. We are now into the first quarter of February. And so we've seen that macro impact, really, I would say, has stabilized, and that's what gives us that confidence to say that 18% is not just our expectation for the full year, but really something that we expect to see pretty consistently throughout the course of each quarter.

I'll take the second part on the investment base. That's fine. And also, thanks for the question. So in terms of how we prioritize investments, given the demand that we see in the market. I'm a great believer in our innovation. Of course, we continue to invest across the board. But I think the source of why we can invest so well, including and at the same time, increase profitability goes back to our gross margin. We have a gross margin that is north of 70%, very different from what you see in our market. The reason for that is the architecture that we have with great economy of scale and great unit economics. It allows us to invest at least 15% of our revenue every year. If you neutralize capitalization, it's about 15%. This year, it's going to be roughly $400 million that goes back into R&D, allowing us to out-innovate while also providing such guidance on EPS and operating margin and operating income.

Great. Thank you.

Thank you. The next question is coming from Tim Horan of Oppenheimer & Co. Please go ahead.

Thanks, can you provide more detail on how your AI is superior to that of your competitors? Additionally, what significant improvements in AI have you observed over the past three to six months? Thank you.

Thank you for the question. It's a great inquiry. I have been in the industry for about 25 years and have experienced various technology waves, such as hardware, software, the Internet, mobile cloud, and now AI. The speed of innovation we're witnessing now is unprecedented. AI isn’t new for us; we embarked on our AI journey several years ago when we recognized the potential. We are pleased to see it taking center stage, allowing us to deliver our innovations to customers timely. Our success, I believe, is linked to the assets we've been developing for many years, not just recently. We possess extensive data assets. If you seek the key element, it lies in having a robust platform—organized and categorized information in one location, along with ample historical data that connects past and current information, which is crucial for successful AI implementation. Customer experience is complex and cannot be commoditized, which is why enterprises choose us. A compelling example we plan to share at our upcoming Investor Day is how our Enlighten feature performs auto-summaries. This represents a straightforward use case; when compared to other AI solutions or our competitors, the differences are significant, simplifying consumer interactions and saving about a minute in conversation time, highlighting why customers prefer our services. The same holds true for our offerings like Copilot and Autopilot. What I’m sharing now will only improve over the coming month due to the design of our platform, which enhances with each interaction and transaction as it processes.

So have you seen a major improvement over the last year in the features and functionality? Or can you point to what's improved the most? Thanks.

Yes. A few things improved quite a bit. The first one is that more and more customers are adopting it, which helps our domain expertise in the deployment, and how to use it and how to deploy it and best practices. That accumulation of more and more customers helps us quite a lot. The second thing is, since Enlighten is well embedded in the core of CXone, every one of our 3,000 developers working on CXone continues to develop features that are all powered by AI. I'm sitting in those demonstrations of our CXone versions every six weeks, and I remember sitting in them and seeing the many features we are adding. Now this meeting used to be 1.5 hours. Now we take 4 hours because the pace of innovation has just grown dramatically. And I can tell you much more, but that's some highlights of this excitement.

Thank you. The next question is coming from Siti Panigrahi of Mizuho. Please go ahead.

Thanks for taking my questions. Probably one more AI question. Definitely, we're good to see AI capitalizing on some of this customer conversion. So I'm wondering what traction are you seeing with AI within your existing installed base? What is NICE doing to encourage even the installed base to take up AI solutions? And also, are you seeing anything different in AI adoption in the U.S. versus international? Then I have a follow-up.

Sure, thanks for the question. So the answer is yes. We're seeing traction, of course, with new prospects, as I highlighted in earlier remarks, but definitely, within the very loyal and large customer base that we have, it's also very easy for them to add those capabilities. Don't forget that it's in the cloud. It's a platform that updates itself very frequently. Those capabilities can be toggled on very fast. So we have several teams making sure that our existing customers are up to date on all the capabilities, and they add those capabilities, of course, which increases the ARPU and generates the ARR we see from existing customers. In terms of differences in adoption between the U.S. and internationally, the excitement is everywhere and the adoption, or the fact that AI is not triggering, is equally as we see it in other territories and not just in the U.S. Of course, there are some local differences between one territory to another. There are some European regulations and things like that. But generally, I think that since the value proposition and the core needs are so similar, I think we'll see the same traction internationally as we see it domestically.

Great. And then one follow-up on the Microsoft partnership. If I remember correctly, you signed that agreement more than a year ago, probably sometime in 2022. How is that partnership growing? So any update on that?

Yes, we have a great partnership with Microsoft. Yes, it was signed; you're right about the timing. However, I think it was only July that we actually started to see their go-to-market moving into full motion also in terms of their compensation. We have a very large and growing pipeline with them. We had a few wins together with Microsoft in the fourth quarter, and the combination of NICE and Microsoft made a difference and helped us win the deal. I believe it will continue to grow moving forward.

Great. Thank you.

Thank you. Next question is coming from Pat Walravens of Citizens JMP. Please go ahead.

Sorry about that. Barak, what are the top two or three things you need to do to integrate LiveVox?

Pat, I think you're breaking up a bit. I believe your question was about what the key things are that we need to do regarding the LiveVox integration. Was that your question?

Yes, that's correct.

Sure, thanks for that. As you know, at NICE, we have a playbook on how we do acquisitions. Over the past 10 years, we've done 20 acquisitions, small and big. People ask me about why NICE has such great statistics about making acquisitions; there are multiple factors to that. One of them is that before we go and actually close the deal, we have the full PMI, the first 18 months of the PMI fully planned. It's a book with all the details day by day of what we’re going to do with all the relevant functions in the company in the first 18 months. The minute we closed the acquisition, all parties basically move to pure execution mode and follow up in the execution. No questions that remain out there instead of just starting the planning. So we are now, as I said, about two months into this execution. I would say that first of all, from integrating the two organizations, that's behind us. You can also see it in the great profitability that we have guided to this year, not only from LiveVox, but obviously, they are accretive to that as well. On the more strategic part of it, we have combined the go-to-market. There is some further training that needs to be done for all the different sales organizations in the partner network. That is already in motion but, of course, will take a bit more time. And then there are product integrations, very detailed integrations that are planned for the next 12 months. It is already connected and integrated, but we are now making it tighter together, and there is a very solid plan for that for the next 12 months.

That’s great. Thank you.

Thank you. The next question is coming from Rishi Jaluria of RBC. Please go ahead.

Wonderful, thanks so much for taking my question. First, I just wanted to go back to the AI bookings commentary. I know you talked about, hey, look, it's going to take time to flow through to revenue. In those deals, can you talk a little bit about how does the actual revenue and pricing model look like when it comes to AI? I know you've talked in the past about having maybe some level of consumption when it comes to AI. Maybe if you could help us understand that, that would be helpful. And I have a quick follow-up.

Thanks for the question, Rishi. So we've talked about it a bit in prior quarters. But what we're seeing is we continue to provide more AI-based solutions is that we are now moving towards, as you've highlighted, both in the agency, in some cases, plus an aspect of the consumption-based instances or interactions that are happening digitally. And in some cases, when our offerings are purely digital, for example, there may be a base fee on the software plus an additional fee for the consumption use, again, based on the interactions. So we are seeing that this is continuing to be more of a hybrid model. And of course, it's one of the reasons why we have such an enormous TAM opportunity ahead of us. We know that the number of interactions happening across the globe are just growing exponentially. As our pricing continues to evolve with more and more increase in sales and bookings of our AI, it is a great opportunity for us to see that incremental revenue in 2024, late 2024 and beyond as we materialize and bring those bookings into revenue.

All right. Wonderful. And just quickly, what does the services attach look like for AI deals versus non-AI deals?

With respect to services, in general, you might have noticed that, in particular, in the fourth quarter, we had a very strong quarter of services, and it was actually initiated by our professional services. So across both of our business segments, we see that customers need support with deploying our AI solutions. As such, there is an opportunity there for a NICE services attach rate. Barak highlighted earlier in the call that we're often going to market with partners in those deals as well. Therefore, there are opportunities both from the collaboration and the growth of our partnership, as well as NICE attach rates from the professional services side of the house.

Wonderful. Thank you so much.

Thank you. The next question is coming from James Fish of Piper Sandler. Please go ahead.

Hey guys. On the cloud side, what are you guys seeing with expansion rates with your existing customers? I was guessing it ticked up a bit versus last quarter. And what are you seeing with migrations of your on-prem base this year versus last year as organizations really try to understand and figure out their AI strategies?

We appreciate your question. There is always a pattern of seasonality, but we are seeing our customers actively expand into the cloud across various segments. The focus is not on if they will transition, but rather when and how. Our existing customer base continues to grow, along with our cross-selling efforts, as Beth highlighted earlier. The rate at which solutions are attached to our core CAR solution is also increasing among our customer base. These trends reflect the ongoing conversion of our existing NICE customers, as well as the broader shift from other on-prem legacy providers. It's important to note that NICE has not participated in the core ACD routing on-prem market. Each time we acquire a new customer in that space, it generates new cloud revenue rather than simply converting existing revenue. While we still have the WM on-prem base, we are maintaining the same migration pace as before, and we believe there is potential for that to accelerate further.

Got it. And Beth, you had mentioned the return to growth for the financial crime compliance unit. Did you mean that for 2024? How should we think about the timing or segment growth rates underneath for what's included in guidance annually? And what's the mix of cloud versus on-prem within financial crimes given you said it's getting to a meaningful level at this point?

Yes, thank you for the question, James. So, first, I'll say that we are, as I said, pleased with the performance of FCC last year. Our expectation in what we've seen in that business is that the cloud business continues to accelerate and is doing quite well. I think with that business, there are certain financial institutions that still have a preference from time to time to purchase on-prem as well. So you can expect that you may continue to see some variability in their revenue quarter-by-quarter. Once we get to the point where it's really more of an apples-to-apples basis with a cloud-to-cloud comparison, I think that is when you'll really be able to visibly see the kind of more linear growth. But we are confident in the momentum that we have in that business, and we will see a nice return to growth. We don't provide guidance specifically for the FCC business on a stand-alone basis. Again, I think we're feeling very positive about that business and its trajectory and certainly know that it will return to growth in the future, whether it's 2024 or beyond. With respect to the breakdown or the split of cloud revenue relative to the on-premise part of that business, we do not currently segment it. As you highlighted, it is becoming more meaningful. And certainly, we're very pleased with the performance of the cloud growth that they have seen resulting from their Xceed and X-Sight platforms. It's something that we are currently reviewing and discussing, and we'll continue to consider whether it may be something that we break out in the future.

Thanks, guys.

Thank you. The next question is coming from Arjun Bhatia of William Blair. Please go ahead.

Thank you. One on the AI front. Barak, I know you mentioned that 80% of customers are still on-prem. I'm sure AI is such a big catalyst to get customers to move over. When you think about the timing, are the early signs of ROI on AI implementations enough to get these customers to move over in the near term? Or do you think there needs to be a little bit more proof points and data points on AI ROI before we see a significant inflection in how these customers move over?

I regularly engage with executives from various sectors and company sizes, and I've noticed a common perception that there's a sense of missing out on AI in customer experience. Many expect substantial savings and rapid advancements from AI, but these expectations might be somewhat overstated, especially in the short term. In customer experience, which remains labor-intensive—90% of expenses are still tied to labor—there's a clear understanding that implementing AI must deliver results that surpass current human performance. Where AI has been integrated, organizations report significant returns on investment, particularly in enhancing user experience, which has excited many with tangible proof of ROI. This growth is being fueled by both user augmentation and automation, moving beyond the outdated view that tasks are either fully automated or not. It's now about improving user efficiency in repetitive tasks while also achieving full automation. This approach instills confidence in companies pursuing AI adoption. To summarize, we observe an increasing number of specific improvements in ROI, and our clients recognize and appreciate this, which makes us optimistic about this year and the future.

Perfect. That’s super helpful. Thank you. I’ll leave it there and congrats on the good results here.

Thank you.

Thank you. The next question is coming from Michael Funk of Bank of America. Please go ahead.

Thank you for the questions. A couple, if I could. So first one related to the prior question. One of your competitors said that they think they're seeing a positive inflection in enterprise migration to the cloud. So accelerating movement, accelerating demand trends that really first emerged in the last quarter too. I'm just wondering if you're seeing the same trend, and if you are, why we wouldn't see accelerating cloud growth in 2024?

So we gave some statistics about what we see in the enterprise, and we see this as the fastest-growing part of our business, and it's very impressive. Unlike the other competitors that you've mentioned, in our case, you actually see it in the results, not just in the statements. We saw great growth between Q3 to Q4 in absolute numbers and percentages. We're giving a very healthy guidance and steady growth starting from Q1 all the way to Q4. Of course, there is potential for further acceleration. It's great, and it speaks about the potential in the market because, as we said before, 80% of the market has yet to be cloudified, with the majority of it or a big chunk of it as the enterprise segment where we have a superior win rate.

Great. Thank you for the color. And one more quick one, if I could. Last quarter, you noted that two of your competitors are attempting to sell themselves, actively shopping the market. Is that still your view?

I think that after our call, there are some actual news coming to the market. I'd like to take credit for being able to be the first to let you know. I don't have any other news to provide you this time, but you'll be the first one to know.

Okay. I look forward to the phone call. Thank you.

Thank you. The next question is coming from Michael Latimore of Northland Capital Markets. Please go ahead.

Great. Congrats on the strong results here. With regard to AI, can you give a little more color on maybe the magnitude of the bookings or the revenue? I know it's consumption-based in some situations, so it might be complicated. But at some point in 2024, can we see AI exceed 10% of cloud revenue?

We don't break it down yet. We gave some color on it. At some point, we will break it down. As I've mentioned before, I think it's important to highlight that AI is now well embedded in what we do. There are AI-specific solutions where we can actually call out and say this is revenue fully dedicated to AI, and there is an uplift of AI-infused solutions we see we're doing broadly within CXone. There are many ways to grow about it. Definitely, it's a positive, accretive, incremental part of our business. If and when we think it's worthwhile to break it down and start calling it out specifically, we will do that.

Great. And then with regard to autopilot and Copilot, is there a noticeable difference in demand for one or the other of those? Or do most customers kind of buy both?

It's a great question. Obviously, customers talk to the CX also domain experts in CX. It really depends on the maturity cycle of a customer and what types of services they provide. In many cases, we find ourselves, together with our partners, consulting with them on how to go. They always like the end state, the journey, or where they want to have fewer users but obviously, highly specialized and highly augmented with a Copilot, while seeing money move from labor to technology with autopilot. It really depends on the starting point. Right now, I can tell you it's a mix of many things. We see customers starting with Copilots, and a few months later, they realize they're ready to engage with autopilot. Some start immediately on autopilot because they had multiple sales automation issues in the past, like the deal I mentioned with one of our customers, who used a solution from a CCaaS provider that failed to deliver both on the CCaaS but mainly on what they call IVA. They came to us, and they now have other pilots and they're doing it very successfully. So it's all of the above. We'll try to provide more color about it as we continue to deploy those in 2024.

Okay, great. Thank you.

Thank you. Our final question for today is coming from Chris Reimer of Barclays. Please go ahead.

Hi, thanks for taking my question, and congratulations on the strong results. Actually, most of my questions have been answered already, so I won't take long. I just wanted to touch on the outlook for the year, so much positive commentary and strong momentum with the AI product. Just wondering if you could touch on anything that you think might be a challenge or a concern, if anything? And do you think some of the macro-related weakness we've seen last year in the delaying business decisions? Do you think that's behind us?

Yes. Let me take the macro-related comments first, please. I think with respect to the macro, I talked about it a little bit. We have visibility into our customer usage that we see on a daily basis. So we have a lot of visibility into looking at what their utilization looks like and how seasonality is playing out in real-time. I highlighted earlier that since the fourth quarter, we're now towards the end of February. It has given us the confidence to say that we've seen stabilization in the macro and the impact of that in the full year, and that's our expectation. Of course, none of us have a crystal ball. There is always a possibility that the macro could have other impacts, but it equally implies that we have the opportunity with the macro further improving, which gives us possible upside to the guidance we've provided in terms of cloud expectation. Again, we feel based on that, we feel confident with that 18% we provided as an expectation for cloud revenue, and of course, that's exclusive of LiveVox, and that will play out pretty evenly during the course of the year with upside possibility. And with that, Barak, I'll let you if there's anything else you want to add for the other part of the question.

No, I think you answered we're good. Unless Chris had other questions, we're good. Thank you.

No, that's fine.

Thank you. At this time, I would like to turn the floor back over to Mr. Eilam for closing comments.

Thank you, and thank you, everyone, for joining us today. We're excited about 2024, and we look forward to updating you on the next quarter. Thank you all.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.