NICE - Q1 2024

Transcript

Operator (participant)

Welcome to the NICE conference call discussing First Quarter 2024 results, and thank you all for holding. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded May 16, 2024. I would now like to turn this call over to Mr. Marty Cohen, VP, Investor Relations at NICE. Please go ahead.

Marty Cohen (VP of Investor Relations)

Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer, and Beth Gaspich, Chief Financial Officer. Before we start, I'd like to point out that some of the statements made on this call will constitute forward-looking statements. In accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, please be advised 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 2023 Annual Report on Form 20-F, as filed with the Securities and Exchange Commission on March 27, 2024.

During today's call, we will present a more detailed discussion of first quarter 2024 results and the company's guidance for the second quarter and full year of 2024. You can find our press release, as well as PDFs of our financial results on NICE's Investor Relations website. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles, as reflected mainly in accounting for share-based compensation, amortization of acquired intangible assets, acquisition-related and other expenses, amortization of discount on debt and loss from extinguishment of debt, and the tax effect of the non-GAAP adjustments. Differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release.

The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties, and assumptions. We'd also like to remind you that we're hosting our Investor Day on June eleventh, in conjunction with our Interactions User Conference in Las Vegas. The special program for analysts and investors will include presentations from NICE executives and access to the innovations hall, where you'll see several or many different types of demos. If you haven't received the registration email, please email us at [email protected]. I'll now turn the call over to Barak.

Barak Eilam (CEO)

Thank you, Marty, and welcome, everyone. Earlier today, we reported strong first quarter results, starting the year on a high note. We also announced my planned transition as the CEO of NICE. This decision has not been easy for me, as leading this incredible team and serving our customers, partners, and investors for the past 10 years has been one of the greatest privileges of my life. With the company poised for continued success, and after 25 years at NICE, I believe it is the right time for me to step down. The board and I have initiated a search process for my successor to ensure that NICE will continue on our journey of leadership, growth, and profitability.

NICE has been my home for more than half of my life, and I will continue to lead the company with the same passion as I did for my entire career until the end of this year, as well as to support a smooth transition to my successor. And now to our first quarter earnings. We are thrilled to start the year with a positive momentum, evidenced by a robust performance across the board while continuing to outpace the market. We reported total revenue of $659 million, which reached the high end of our guidance range and represented an increase of 15% from the same quarter one year ago. Our industry-leading cloud growth remained a driving force behind our strong top-line performance, showing an increase of 27% year-over-year.

We also continued to deliver great profitability, as demonstrated by a 170 basis point increase in our operating margin, which ended the quarter at 30.3%, marking a significant milestone in our continued delivery of profitable growth. We far exceeded the high end of our guidance for EPS, finishing the quarter at $2.58, which was an increase of 27% compared to 1 year ago. Completing the exceptional first quarter execution, we once again demonstrated superior cash flow generation, totaling a record $254 million in operating cash for the quarter, an increase of 30% year-over-year. Our continued strong performance over the past several years, as well as in the first quarter, are attributed to our unmatched platform strategy.

Building a best-in-class platform that is as comprehensive as CXone demands years of focused effort and massive investments. It cannot be done overnight or mimicked by stitching together siloed and disconnected point solutions. This is even more profound, pronounced in CX because it is a market that is highly specialized and where the barrier of entry is nearly insurmountable. Anticipating the future trajectory of the CX market, our proven strategy, and meticulously architecting CXone from day one to excel as the premier CX platform, combined with unwavering, consistent execution, is now driving our market leadership with the ultimate trifecta: the industry's, the industry's highest cloud win rates, trailblazing digital convergence, and fully leveraging the tremendous CX AI opportunity. Let me elaborate and provide a few examples on each. CXone's dominance as the most enterprise-ready cloud platform is fueling NICE's unmatched win rates.

In every evaluation or RFP, CXone stands out as the most complete, is exemplified for its ease and speed to migration to, its best-in-class seamless integrated portfolio of solution, and boasts unparalleled scalability. In Q1, we once again continued to win the enterprise market, as evidenced by the volume of portfolio deals, indicating a rising trend of enterprises choosing CXone as their future cloud platform over their legacy on-premise or disparate cloud point solutions. For example, in a seven-digit deal, one of the world's largest healthcare companies is continuing to move more of its point solutions due to the scalability of CXone, further displacing multiple incumbent legacy vendors. In another deal that showcases the completeness of CXone, a large pharmacy outsourcer turned to NICE to simplify CX and deliver to its customers a better experience offered by a unified platform. In the process, they eliminated point solution providers.

A large retail supply company was also looking to unify their tech stack because their existing disjointed infrastructure was breaking down. In these deals, the customer selected CXone over the competition due to its proven ease of migration, as provided by multiple references. For nearly three decades, there was a clear separation in the CX space between voice solution providers and digital interaction providers. Conversely, CXone was built as the first and only customer-centric platform, natively converging all touchpoints and all interactions, triggering a rapid paradigm shift in the market over the past couple of years. This shift is now removing the line between these siloed subcategories, resulting in enterprises consolidating their legacy digital CX into CXone.

Our digital convergence power is evidenced by a staggering eight out of every 10 new enterprise customers selecting CXone over the last two years to manage all their customer interactions, including multiple digital touchpoints, and by the exceptional five-fold growth in the volume of digital interactions managed by CXone. In Q1, we signed a seven-digit deal with a large state credit union, which is a great example of the digital convergence CXone is driving. This existing customer began its journey by migrating from a legacy incumbent into CXone, and is now leveraging the platform to consolidate several of its siloed digital point solutions into CXone. In another seven-digit deal, a well-known consumer loan company is consolidating its CX and forging their digital strategy on CXone through the adoption of our digital and AI portfolio to rely increasingly on self-service to help improve customer experience.

While using AI in CX is undoubtedly revolutionary, its impact is quite different than commonly held perceptions. Everything considered simple in CX, such as checking your account balance, password resets, returns, and refunds, as well as thousands of other services and inquiries, are already fully automated. Today, 50 million CX agents around the globe are dealing with the most complex and unconventional service scenarios, almost all of which are non-repetitive tasks. There is a heightened understanding among enterprises that the next level of CX automation can only be achieved by a highly specialized AI platform. This is the exact reason why CXone, with its unparalleled, extensive repository of crucial data, knowledge, and interaction, is the platform of choice for a growing number of small and large enterprises. Accordingly, we saw a remarkable 200% year-over-year surge in the number of Enlighten AI deals in Q1.

We're seeing numerous examples of how the adoption of even just one use case of AI increases the customer ARPU by 40% or more, demonstrating the tremendous monetization potential as we further expand our AI leadership with both existing and new customers. Moreover, in the first quarter, every CX deal above $1 million ACV included AI. For example, in a seven-digit deal, a large agricultural manufacturing company is moving away from its disparate set of point solutions to CXone to unify its technology stack, and in the process, developing a CX AI strategy, as evidenced by the purchase of a portfolio of our AI solutions, including Enlighten Autopilot and others. A similar impetus was behind a seven-digit deal with a large Canadian telecommunication company. A deal in which we won against several competitors, in which the breadth and depth of CXone AI made NICE the obvious choice.

We also won a seven-digit deal with a very large U.K.-based bank, which selected CXone first and foremost as the cornerstone for their CX AI strategy, and we see significant expansion opportunities. In this deal, we replaced the long-standing incumbent AI pure-play point solution provider. AI innovation is flourishing on CXone, as evidenced by a rapidly expanding Enlighten AI portfolio, including Copilot for agents and supervisor, Autopilot, AutoSummary, Actions, XO, and others, in addition to the thousands of CXone AI models. The speed of AI innovation on CXone is allowing us to deliver capabilities at a record pace. A good example is the recently released Enlighten XM, which went from inception to general availability in three months. Moreover, the innovation to customer adoption curve is the shortest we've ever seen.

As an example, we introduced Enlighten Copilot less than a year ago at Interactions 2023, and in just a few months, we signed dozens of new and existing enterprise customers who are already using it today. In summary, Q1 was marked by significant financial achievements, multiple large customer wins, and rapid innovation, all of which were sourced from the platform power of CXone. Our years of massive investment, building CXone as the leading platform in the CX market, continues to drive our success for 2024 and beyond. We are operating in a market that is still nascent in the areas of cloud, digital, and AI. Given that these areas still hold considerable growth potential, and coupled with the power of CXone platform, we see significant long-term opportunities for sustained growth and profitability.

Before I finish, I would like to share that we are very excited for our annual user conference, the largest in the CX industry, taking place in Las Vegas, which is only a few weeks away. It is a perfect opportunity for all attendees to witness the platform power of CXone from our own experts, as well as from an impressive list of leading enterprises. Our agenda features marquee customers that adopted CXone as they migrated to the cloud, converge all CX assets, and are already seeing the benefits of NICE CX AI, including Sony, Hunter Douglas, The Standard, Henry Schein, Hyatt, Fifth Third Bank, LexisNexis, Hyundai Capital, Consumer Cellular, Realtor.com, KeyBank, Banco do Brasil, United Way, Google, Concentrix, Chewy, PayPal, and many, many others.

I would like to take this opportunity and invite all of you to our annual Investor Day on June 11th, which is taking place in conjunction with Interactions. We look forward to seeing you there. I will now turn the call over to Beth.

Beth Gaspich (CFO)

Thank you, Barak. At NICE, we stand out as an industry leader that repeatedly demonstrates sustained, balanced growth. Our strong start to 2024 displays our continued success with exceptional Q1 results in all key financial measures: revenue growth, increasing profitability, and healthy cash flow generation. Total revenue was a record $650 million, up 15% year-over-year. Non-GAAP EPS of $2.58 exceeded the high end of our guidance range, and we have generated more than $620 million of operating cash over the last 12 months. Cloud revenue, which now represents a record 71% of our total revenue, compared to 64% last year, increased 27% year-over-year, in line with expectations, to a record $468 million.

The growth was driven by the ongoing strength of our organic cloud business, as well as the inclusion of LiveVox, a leader in outbound engagement. This new addition to CXone further enhances the breadth of our platform, which particularly attracts large enterprises and is consistent with the trends we are seeing, where customers are moving to NICE to eliminate siloed niche vendors and converge on CXone for all their complex CX-specific needs. Our existing install base continues to migrate to the cloud, which is one of the drivers of our cloud revenue growth. As expected, this migration results in a shift from maintenance revenue, which is included in our services revenue, to cloud revenue. In this transition, we generally see an uplift ranging from 2-10x in a customer's ARR.

Accordingly, services revenue was $149 million, represented 23% of total revenue and decreased 7% year-over-year. Product revenue from on-premise sales, which represented 6% of total revenue in the quarter, compared to 8% of total revenue last year, was reduced. However, it exceeded our expectations, resulting mostly from several customers electing to purchase some of our on-premise offerings. With the ongoing expansion of cloud business across both our segments, our recurring revenue further increased to 88% of total revenue in the first quarter, compared to 85% last year. 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 85% of total revenue in Q1, grew 18% year-over-year.

The Americas region has continued to excel primarily from the success of CXone sales in the region. Outside of the Americas, we continue to see an accelerating shift from selling on-premise solutions to our cloud platforms. This transition to the cloud masks the underlying strength of the cloud growth we are experiencing in our international regions. The EMEA region, which represented 10% of our total revenue, increased 7% year-over-year. The APAC region, which represented 5% of total revenue, decreased slightly year-over-year. The year-over-year changes for both our international regions resulted from healthy growth in cloud revenue, which offset a decline in on-premise related revenue. The foreign exchange headwinds in APAC and tailwinds in EMEA offset each other, such that the net currency exchange impact on total revenue was negligible. Both our business segments started the year on a high note.

Customer engagement revenues, which represented 84% of our total revenue in Q1, were a record $551 million, a 17% increase. CXone, the most comprehensive enterprise-grade CX Cloud platform, is the growth driver in customer engagement, increasingly led by the growing contribution from our digital and AI offerings. Revenues from financial crime and compliance, which represented 16% of our total revenue in Q1 and totaled a record $108 million, increased 8% year-over-year, driven by the increase in cloud revenue and strong on-premise product contribution. From the close of the LiveVox acquisition in late December last year, our teams have been laser-focused on our planned integration activities. This purposeful attention resulted in an immediate, positive, healthy contribution to our profitability from the start of 2024.

Our cloud gross margin totaled 69.8% in Q1, a slight decrease compared to last year, as we continue to invest in global expansion of our cloud platforms. Thanks to our scalable cloud architecture, we continue to expect to reach our target of 75% cloud gross margin in the next 3-5 years as a result of the increasing enterprise cloud adoption, which is correlated with an increase in the attach rates of our digital and AI solutions. In Q1, operating income increased 22% year-over-year to an all-time high of $200 million, and our healthy operating margin increased 170 basis points to 30.3%, compared to 28.6% last year.

The strong profitability was driven by our continued best-in-class growth of cloud revenue, coupled with cost synergies from our recent acquisitions and a strong muscle in driving operating leverage. Earnings per share for the first quarter far exceeded our expectations, totaling $2.58, a 27% increase compared to Q1 last year. Cash flow from operations in Q1 was a record $254 million, an increase of 30% compared to last year. Our last 12 months operating cash flow totaled $621 million, yielding an exceptional 25.2% cash flow margin. The strength of our cash flow generation and outstanding balance sheet enables us to capitalize on M&A opportunities, like our recent acquisition of LiveVox, and to execute on our $300 million share buyback program to return capital to our shareholders.

In Q1, we repurchased shares totaling $42 million. We plan to complete our $300 million share buyback program by the end of this year. In Q1, we also used $87 million to pay the last portion of our 2017 convertible notes. In the last two quarters alone, we completed the acquisition of LiveVox, repaid the remaining principal on our 2017 convertible notes, and repurchased a healthy number of shares. We made all these significant cash interactions while simultaneously generating our best ever infusion of cash from operations and ultimately increasing our cash balance from last quarter. With total cash and investments at the end of March totaling $1.503 billion, our net cash and investments exceeded $1.045 billion.

In conclusion, our first quarter performance exhibited the continuous strong financial health of our business, driven by the growing demand for our CX AI offerings, successful integration of LiveVox, and strategic execution of delivering consistent, profitable growth, along with outstanding cash generation. We are pleased with our strong first-quarter opening for the year, and looking forward, we expect to continue delivering on an industry-best financial performance throughout 2024. Now, I'll close with our total revenue and non-GAAP EPS guidance for the second quarter and full year 2024. For the second quarter of 2024, we expect total revenue to be in the range of $657 million-$667 million, representing 14% year-over-year growth at the midpoint.

We expect the second quarter 2024 fully diluted earnings per share to be in a range of $2.53-$2.63, representing 21% year-over-year growth at the midpoint. For the full year 2024, we are maintaining our previous revenue guidance and raising our EPS guidance. We reiterate our full year 2024 total revenue, which is expected to be in a range of $2.715 billion-$2.735 billion, an increase of 15% at the midpoint. We now expect full year 2024 fully diluted earnings per share to increase to a range of $10.53-$10.73, which represents an increase of 21% at the midpoint. I will now turn the call over to the operator for questions. Operator?

Operator (participant)

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Samad Samana (Managing Director)

Hi, good morning. Thanks for taking my questions. Barak, sad to hear that you'll be leaving us in a little bit less than a year, but maybe let's start there. I know that the press release gave some details, that it was a planned transition, but can you give us any sense of how long that you've been considering this, and maybe why now? And then kind of in conjunction with that, what characteristics are you looking for in the next CEO? Is it somebody who's scaled a cloud software business? Is it a different type of skill set? What would the ideal future CEO look like? Operator, can you hear the management team?

Operator (participant)

I'm not hearing anything right now. One moment while we check for technical difficulties. I'm sorry, ladies and gentlemen. We're now back.

Barak Eilam (CEO)

Samad, I apologize, in the middle of your question, the line dropped on our end. Can you please repeat the last part of your question?

Samad Samana (Managing Director)

Yeah, no problem. So, I was basically asking how long you'd been contemplating the transition, and then just asking the question about looking forward, are you looking for, in the next CEO, somebody who's scaled a software business to certain levels? Are you looking for somebody with a different type of skill set? Just as you envision what the next CEO of NICE should look like, what are the characteristics that the company is looking for?

Barak Eilam (CEO)

Thanks, Samad. I appreciate the question. Again, I apologize everyone, the line on our end dropped. So as you read in the press release, we always believe in full transparency, and this is exactly what you saw today. We're very transparent about how we are conducting this transition in a very organized way with no rush. And I believe that, you know, after 10 years as the CEO and 25 years with the company, the right way for me to transition is doing it in such a way from a very strong position of the company. NICE is an outstanding foundation, both operationally, financially, a leadership position in the market, business momentum.

My plan is to stay as the CEO till the end of the year and use this time together with the board to conduct a proper search for my successor, both internally and externally. And then, by the way, to stay engaged with the company for at least part or a big part of 2025, and consult on anything that is needed on the strategic aspect and support the company. I love NICE, this is my home, and I'll continue to support the company, and I'm not rushing to any other place at the moment.

In terms of who are we looking for, we're looking for the right salesperson to take the company to the next level, someone that have experience in the scale of NICE in enterprise software. We believe that we can have a very good list of candidates, both internally and externally, and eventually the board, and I'll support them, will make the decision to make sure that there is the right fit, both in terms of the ability to execute moving forward, but not less important, will continue the great culture we have with NICE and supporting and working together with the 8,500 NICErs around the globe.

Samad Samana (Managing Director)

Appreciate that. And then, Beth, maybe just a follow-up for you. Just, if I think about the, the first quarter, the cloud revenue was, a little bit better than expected. Can you just remind us, are we still tracking to that 18% organic cloud revenue growth for the year? And, and any update on maybe whether that's tracking ahead of plan and how we should think about organic cloud revenue for the rest of 2024?

Beth Gaspich (CFO)

Yeah, thanks for the question, Samad. So, yeah, we're highly pleased with the start of the year and the cloud growth that we're seeing. As we look forward throughout the course of this year, our cloud revenue expectations haven't changed.

Samad Samana (Managing Director)

Understood. Thank you, guys.

Barak Eilam (CEO)

Thank you, Samad.

Operator (participant)

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Meta Marshall (Managing Director)

Great, thanks. Maybe first question for me, just, any commentary on LiveVox integration and just, you know, how that's proceeding, both from how you guys are, seeing kind of revenue opportunities as well as opportunities to kind of optimize, costs. And then, just as a second question, just in terms of any commentary around kind of macro understanding, it hasn't had much impact to the portfolio, but just, with smaller customers, I think we've seen a pickup in headwinds this quarter, if you've seen anything, worth noting. Thanks.

Beth Gaspich (CFO)

Thanks for the question, Meta, and I think I'll start. I think first of all, we'd say, you know, we're extremely proud that we have started off really on a great note this year with the integration of LiveVox. It's going seamlessly, right according to our plans, and you can see that in our financial results. You know, I think the overall financial results are very consistent with our expectations, and you can see that, you know, we talked about the synergy opportunity last year in advance of the close of the deal, and we've delivered on that right out of the gate this year. So that's already, you know, reaping the benefits from the synergies we've been able to realize.

On the revenue side, you know, we knew that coming into this year, there would be some initial overlap of some of the customers, and that really the revenue opportunity is really looking forward. We are, you know, integrating the sales organization and looking ahead to 2025 and beyond. That's the point when we really expect to kind of put more gas on the pedals with respect to driving the top line. But as I said, we're really pleased. The execution is going exactly as we planned, and we are really happy to see the results of that in our first quarter results.

Barak Eilam (CEO)

I'll take the second question just to follow up. Just to add first on LiveVox, you know, beside the financials, obviously on the product side, we see great excitement from customers, both NICE customers, very happy with the opportunity to adopt the LiveVox solutions and vice versa. And the pipeline, the joint pipeline is looking extremely promising. About the second question about macro, I don't have any kind of breaking news here to share. I think we see the exact same trends that we've seen before in all segments of the market.

We believe, as I said in my earlier remark, that on all of those aspects, winning the cloud, expanding into digital, and of course, the big opportunity in AI, this is the core of investment, the center of investment today of large enterprises. And our prime focus, obviously, the big win, is all of those very large enterprises that are expanding and standardizing on us.

Meta Marshall (Managing Director)

Great. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Tyler Radke (Managing Director / Senior Equity Research Analyst - Software)

Yeah, thanks for taking the question, and Barak, congratulations on 25 years. I guess I wanted to follow up on Samad's question. I mean, obviously, 25 years is an incredible run, but arguably, the company's at, you know, one of the more interesting times in the market here with generative AI taking off. So I guess I'm curious personally, like, what are you hoping to get out of the next, you know, three to five years? What are you gonna do next, you know, in probably what was a difficult decision, but clearly there's a lot of opportunity ahead of the company. So I'm just curious, personally, what you're looking to do next.

Barak Eilam (CEO)

A great question, and needless to say, you described it correctly. It was not an easy decision. It's, I'm still in a very mixed emotion because I do believe the opportunity for NICE is tremendous. There aren't too many companies such a great position and exciting market, amazing team, leadership position. It doesn't get much better than that. Having said that, you know, being 10 years as a CEO, I personally believe that, you know, at some point, the leader, after 10 years, needs to transition and, you know, hand off the torch to someone else. You do it in a way that is not sudden and not in 5 minutes, but rather in a very organized transition, and make sure that there is a strong continuity.

So there is never a good time for it, but I've decided to do it now in this position. What exactly I'm going to do next, that's not my prime focus right now. I'm 100% focused on executing our 2024 plan, finding the successor, and then continue supporting the transition. And what I'm going to do next is something that I'll have to think about it. I'm 49. I'm very bad at golf, so I'll probably have to find something else to do.

Tyler Radke (Managing Director / Senior Equity Research Analyst - Software)

All right. Well, hoping you get your golf score down. But follow-up for Beth. So on the cloud guide, appreciate the reiteration of that for the full year. But I guess, you know, in the quarter, you talked about on-prem strength surprising you to the upside, and the full year revenue target wasn't raised. So you know, I guess, how should we square the lack of a raise on the full year revenue target with stronger on-prem mix in the quarter? And you know, if I look at the calculated organic growth in cloud this quarter, I think it was around 18.5%, depending on the assumption. So that doesn't leave a whole lot of room for slowing organic growth throughout the full year. Just help us understand your confidence in that 18% organic growth for the rest of the year? Thank you.

Beth Gaspich (CFO)

Yeah, thank you. So I think you asked a few different questions, which I'll try to make sure I've addressed. You know, let's start with the full year. I think as we look at the full year revenue guidance, we're stepping out of the first quarter and, you know, we have an expectation of, you know, $2.7 billion in total revenue this year. So it's a substantial amount of revenue. We continue to grow. And I think as we looked at, you know, the first quarter results, you know, we had a $4 million beat coming in near the high end of their guidance.

We said, you know, "Listen, four million on such a large number of 2.7 billion, really don't feel the need in the grand scheme of things that it's, you know, consequential to the overall number." And so that was kind of the decision we made. Let's hold, still early in the year. As you said, I think we're really pleased that we've stepped into the year with a strong performance, and of course, that's our expectation as we look forward as well, across all aspects of our business. And you can see in the cloud growth that we continue to really excel and really are a leader in our market.

Tyler Radke (Managing Director / Senior Equity Research Analyst - Software)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Siti Panigrahi with Mizuho Securities. Please proceed with your question.

Siti Panigrahi (Managing Director)

Thank you. Thanks for taking my question, and Barak, congratulations for a remarkable career at NICE. So my question on the AI monetization, you guys talked about one example, how customer ARPU went up by 40% in monetization. So I'm wondering what kind of pricing model evolving? I know you guys started with agent and IVR, you were talking about usage-based. So what kind of pricing model you're seeing, and you think that will become most prevalent with this AI-powered contact center? And also, if you could talk about, remind us how quickly this AI bookings can translate into revenue.

Barak Eilam (CEO)

Yeah, thanks. Appreciate the question. I think you characterized it correctly, and I was trying to give, not just in this quarter, also in past quarters, some indications and examples and anecdotes on how this thing is evolving. First, I'll say the speed of innovation, as I've mentioned, is just tremendous. I've never seen anything like that, how fast on the CXone platform, because it has all data and knowledge. It's kind of the natural habitat for AI, how fast we can release capabilities, and then how fast customers are adopting it, both existing and new. In terms of the monetization, you know, most of the contact center industry historically, because it was very much agent-based, most of the pricing is per user.

But you said that correctly, and today we are monetizing on AI predominantly based on volumes or interactions and less about users. So the right way to think about it is that if you have an organization that is adopting CXone with digital channels and with AI, there is a certain user base price for the agent, depending on which bundle or package that they buy, and ours is complete with a lot of capabilities, and we don't have cost of, you know, integrated solutions. It's all natively there. And then the AI, as they start either to augment agents with AI capabilities or any other elements of AI, usually the monetization is per the number of interaction, which are expected, and we're seeing it to grow or continue to grow exponentially. So that's how we envision it moving forward.

That's how it looks, so far. It opens up a tremendous opportunity, because we're not talking just about converting, you know, agent capacity to AI. We're talking about, and we're seeing the expansion of our business to channel and touchpoints that we never played in. So think about all the variety of touchpoints, an organization have. With AI, we are now taking over these areas that before that were not part of our business. Now, how fast it will impact into revenue? It will grow, and we will start at some point, maybe to provide more information about it, but it's becoming a more significant part of our booking at the moment.

Siti Panigrahi (Managing Director)

That's great color. And Beth, very impressive profitability and cash flow. But my question is on the SMB segment. You cited about some weakness in that SMB segment last year. So has it driven fairly stable in Q1, or are you seeing any kind of incremental pressure in the small business side? And remind us-

Beth Gaspich (CFO)

Yeah.

Siti Panigrahi (Managing Director)

What percentage is the SMB for us?

Beth Gaspich (CFO)

Yeah, Siti, thank you. I first of all, we don't actually segment the customer base. We've never broken down the segmentation of our revenue between the customer sides. We can say that, of course, enterprise customers are you know driving more and more of our revenue growth as we move up market and take additional market share. With the you know with respect to the SMB customer base and some of the compression that we were seeing last year, I really mentioned last quarter that we had seen a kind of a stabilization around that compression.

You know, we had seen it heavier throughout the course of 2023, and then of course, towards the end of the year and coming into this year, we've seen that the compression really kind of stabilize. So now we see that we are at a kind of a business as usual stabilization on the SMB side. And so as we've always had, we continue to add, you know, new business both in that install base as a large enterprise, adding new logos and selling more to existing customers as well.

Siti Panigrahi (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Pat Walravens with Citizens JMP. Please proceed with your question.

Patrick Walravens (Managing Director and Director of Technology Research)

Oh, great. Thanks very much, and congratulations on the quarter. And Barak, congratulations to you on your 25 years. I hope that, David and the board are able to find a successor who's as good a fit for NICE today as you were, over the last 10 years. So Beth, my question is for you. Are you having any thoughts about retiring? Because with the CEO transition coming, I'm pretty sure all your investors would agree with me that it would be great to have continuity in the CFO role.

Beth Gaspich (CFO)

Pat, you're trying to age me here. I don't -

Patrick Walravens (Managing Director and Director of Technology Research)

I'm not, I'm not trying to age you. I we just want to keep you around.

Beth Gaspich (CFO)

No, no. Of course, you know, we're all gonna horribly miss Barak, and you know, we're a great team that works together. But no, I don't have any plans of any upcoming retirement. I enjoy working with Barak, but I enjoy working really with all the team here at NICE and love NICE the same way that we all do. So no, no, no change in plans for me.

Patrick Walravens (Managing Director and Director of Technology Research)

Okay, great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Arjun Bhatia (Partner, Co-Head Tech Equity Research, Software Analyst)

Yes, perfect. Thank you. Barak, maybe one for you, to start off with. When you think about where you're seeing bookings growth from Enlighten and on the AI side, how much of that is gonna be focused more on existing customers that wanna add on AI capabilities versus, you know, perhaps new customers that are making a replatforming decision and are saying, "Hey, you know, maybe this is the right time to really switch our contact center strategy and go deeper into AI, now that we are going through this pretty significant rearchitect?

Barak Eilam (CEO)

Great question. Thank you. So I would say, first of all, every conversation today, either because the customer, you know, asked to start it this way or we initiate it, it starts with AI. The reason for that is that, you know, automation and the c-- the desire to have automation in the contact center is not new. You know, I've been, as you said, here before, 25 years, and from day one, it was all about automation. But all the things that were simple in the contact center, I believe are already fully automated. I gave you example on it in my earlier remarks. And automation, up until AI, kind of got stuck, and now there is an opportunity with AI.

But at the same time, our customers are very savvy, and anyone that runs a large customer service organization understand the complexity of that business, and it's not easy to automate, and it's not just throwing you know some LLM or GenAI into the mix and hoping for the best. They understand variety of things like the issues of privacy, security, having the right data well integrated. And generally, they understand the notion that you know you need to have a certain highly specialized AI to work in this environment.

So what we see these days is a lot of customers that at the beginning, you know, the hype of the past year, tried to put something into the environment, either a very low return or got into kind of hit a wall. And now they're coming to us because they understand that the power of the platform. And the power of the platform goes to the fact that an employee, any employee can, you know, can find themselves and organize themselves even in somewhat of a messy environment. A messy environment is toxic for AI, and you have to have all the knowledge, the data interactions in a single place, and CXone is a perfect environment for that. So that's what we see, and this is the reason for the, I believe, for the fast adoption.

Having said that, there is also understanding that it's not an overnight. There are different flavors in the journey of AI. There is a phase of augmenting the agent, making them 10x better. And then there is the concept of who's the copilot, whether it's the agent or the AI, become the copilot, an exchange of knowledge between them. And then there are fully, you know, automation opportunities. And to manage that, you need a good partner, and NICE has always been that partner, and that's what we see both with existing customers and new customers.

Arjun Bhatia (Partner, Co-Head Tech Equity Research, Software Analyst)

Perfect. Very helpful. Thank you. And then, Beth, one for you. Just when we're thinking of cloud growth, I know you're reiterating the 18% organic target. How should we think about how much your own on-prem to cloud migrations are driving cloud revenue growth for you? And when you look out throughout 2024, should we expect that to increase, given some of the dynamics that we've talked about with, you know, customers wanting to invest more in cloud and AI? And, you know, just give us a sense for how we should think about the shape of the contribution from your own on-prem migrations.

Beth Gaspich (CFO)

Yeah, sure. In terms of our existing install base, I would say we see a relatively steady state there, you know, each and every quarter, we have a certain number of our customers, legacy customers, that are continuing to move on to our cloud platforms, and particularly, of course, CXone. It's something that we continue to expect to see, and as I said, you know, the indications for this year look like it's generally business as usual. But I think with the introduction of AI and our digital offerings, we're seeing a pipeline that is, you know, adding incremental deal value, and that will also be a reason for customers to probably look to migrate sooner than later.

So as we look into, you know, the following quarters and year, I do think there will come a time that we'll start to see some additional acceleration of the existing install base as those very large enterprise customers start to plan their moves. And just a reminder that if, when we do see those customers migrate, you know, I mentioned it in my remarks earlier today, we generally see a very nice and steady significant uplift in their ARR. You know, it can be anywhere from 2-3x, and we have customers that are 10 times or higher in terms of uplift to their ARR. So it certainly will continue to be a growth driver for us.

Arjun Bhatia (Partner, Co-Head Tech Equity Research, Software Analyst)

Perfect. Very helpful. Thank you.

Barak Eilam (CEO)

Thank you.

Beth Gaspich (CFO)

Thank you.

Operator (participant)

Our next question comes from the line of Jim Fish with Piper Sandler. Please proceed with your question.

Jim Fish (Managing Director and Senior Research Analyst)

Hey, guys, this is Quentin on for Jim Fish. Thanks for taking our questions. Barak, maybe first for you. Underneath the cloud business, can you talk about the drivers of growth here between, you know, how much is coming from expansion of your existing base versus, you know, that conversion of the large enterprise pipeline that you guys have driving net new dollars? You know, any color you can provide on the net retention rates you saw this quarter relative to prior quarters?

Barak Eilam (CEO)

Yeah, thanks for the, thanks for the question, Jim. It's, it's always, for us, a combination of the two, between expansion and, new. The beauty of the market we operate in, that it's still only, I would say, 20-some% in the cloud, so there is a very healthy runway and predominantly at the enterprise market. So our focus is, of course, a lot on our existing cloud customer, the many thousand that we have, but also about land grab of new customer. And the beauty that we constantly see is that customers that, you know, a new customers adopt us in different ways. Some go, you know, all in day one, buy everything, deploy everything, and some department by department, and we continue to see the ARR of these customers growing.

There is no change that we've seen on trend, either on, you know, in ARR or the mix between new and existing customers.

Jim Fish (Managing Director and Senior Research Analyst)

Understood. That's helpful. And then, Beth, maybe for you, maybe to ask it more directly, how much revenue did LiveVox actually contribute here in Q1? And then, you know, with, with a full quarter of wrapping your hands around the business, are you still expecting that $142 million of contribution for the full year, or, or any change to that? Thank you.

Beth Gaspich (CFO)

So thanks for the question, Jim. And you know, to be clear, last year, we provided direction of the cloud revenue split expectation between LiveVox and cloud revenue that was not coming from LiveVox, just to provide real clarity to the stakeholders in order to understand the expectations of our cloud revenue this year. But consistent with every acquisition we've always done at NICE, once we close a deal, we don't actually separately disclose the financial results of beyond the business segments, which is how we have always conducted our business. So we won't be providing a specific breakdown.

As I commented earlier, just in terms of giving color, I think, as I said, we're quite pleased with our revenue in cloud this quarter, and feel that, you know, the stepping into the year, LiveVox is very much aligned with what we were looking to achieve with that acquisition. So I think we're very pleased, and beyond that, again, we won't be providing any further segmentation. As I've said, we've reiterated that the cloud revenue for the year expectation is unchanged.

Jim Fish (Managing Director and Senior Research Analyst)

Understood. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Please proceed with your question.

Mike Latimore (Managing Director, Equity Analyst of Artificial Intelligence)

Yeah, great. Thanks very much. Yeah, Barak, you mentioned that AI gets you into some touchpoints that NICE has not addressed in the past. Can you just elaborate a little bit on what those touchpoints are? And also, I guess, separately, is there any quantification of cloud bookings growth in the quarter?

Barak Eilam (CEO)

Sure. Thanks, Mike. So, you know, I describe in my, I always describe it as the different drivers of our business, the shift to the cloud of, of CX environments, and then the convergence and the expansion into digital and AI. They are separate, but obviously, they also work together, and they impact each other. So one of the things with our AI capabilities, customers understand that in order to really have, what's is the ultimate goal, the holy grail of CX, to really have a seamless journey for customers, one should not look at the different touchpoints or interactions separately. And it breaks the silos between what was in the market for years. These different set categories of someone provide the voice channel, someone provide the chat, someone the email, someone provide reflect knowledge into search or social engagement.

There is understanding that the core of the interaction is what you need to consolidate on, and we are the core of that interaction. We, you know, managing voice historically is the most complicated channel, and if you solve AI for that, you can solve AI and automation for all the other things. So what we see more so than not is that customers consolidate into CXone, they bring knowledge into CXone, they bring data into knowledge to CXone, and obviously all interactions. And then you have a holistic view of the customer, and then in this environment, AI flourish. So that's the reason, that's the trend that we see. With respect to booking, we don't provide comments on booking. We provide, you know, certain different anecdotes about deals.

As you can see, like in any other quarter, we had many, many deals. We highlight the very large one, many seven-figure deals, of which many of them are brand-new customers.

Mike Latimore (Managing Director, Equity Analyst of Artificial Intelligence)

Very good. Thank you.

Barak Eilam (CEO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Catharine Trebnick with Rosenblatt Securities. Please proceed with your question.

Catharine Trebnick (Managing Director)

All right. Thank you for taking my question. Something less sexy. You introduced a UCaaS solution recently, and can you pretty much give us some--put some thoughts on what the decision was to do that? Does that impact or not impact your relationship with RingCentral? Thank you.

Barak Eilam (CEO)

Yeah, thanks for the third question. I don't think I'm gonna surprise you by saying that the UCaaS market is has been commoditized, and it's no longer a premium capability. It's also easy to deliver. And so, you know, we have a capability, we always have, and we had some requests from customer. Our relationship with Ring are strong, and we operate in certain segments of the market together. In some other segments of the market, we operate in a different way. So no change on that.

Catharine Trebnick (Managing Director)

All right. Thank you very much.

Barak Eilam (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Richard Pullan with RBC Capital Markets. Please proceed with your question.

Speaker 13

Hi, this is Richard Pullan on for Rishi Jaluria today. Thanks for taking my question. So obviously, AI can play a role across the kind of entire call center lifecycle. So I guess, early days, are you seeing any particular use cases that are standing out?

Barak Eilam (CEO)

Yeah, it's, you know, it's a great question. We see a lot of different use cases, and I'm very encouraged by the pace of adoption of those use cases, because as I mentioned before, when we think of AI, we think about it in two different way. We translate it to augmented intelligence and artificial intelligence. So there is the part when it can work side by side with the CX professional that is a human, and there is an automation, a full automation of certain tasks or certain journeys.

So I mentioned on the call several of our solutions that relate to AI, whether it's a Copilot for agents and supervisors, AutoSummary, CXone for a variety of CCaaS capabilities, and the list goes on and on. I didn't want to list everything. So the list will, I believe, will continue to grow, and the minute you have a platform that has, again, all of those assets together, it's really easy to start using more and more use cases.

Speaker 13

Got it. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Eilam for any final comments.

Barak Eilam (CEO)

Thank you, everyone, for joining us. Beth, Marty, and I, and the rest of the management team are looking forward to see you at our Investor Day in Vegas in June 11th. Have a great day. Thank you so much.

Operator (participant)

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.