NICE - Q2 2022

Transcript

Operator (participant)

Greetings, and welcome to tonight's conference call discussing second quarter 2022 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 today, August 18, 2022. I would now like to turn this call over to Mr. Marty Cohen, VP of 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 to the company to differ materially is contained in the section titled Risk Factors in Item three of the company's 2021 annual report on Form 20-F, as filed with the Securities and Exchange Commission on April 5th, 2022.

During today's call, we will present a more detailed discussion of second quarter 2022 results and the company's guidance for the third quarter and full year 2022. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles as reflected mainly in accounting for acquisition-related revenue and expenses, amortization of intangible assets, and accounting for stock-based compensation. The difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release, and with that, I'll turn it over to Barak.

Barak Eilam (CEO)

Thank you, Marty, and welcome everyone. We are pleased to report another outstanding quarterly performance at NICE. Our continuous steadfast growth on both the top and bottom line, which is unquestionably scarce in the tech industry, is further proof of our unique ability to deliver consistent double-digit revenue and profitability growth. For Q2, we reported $531 million in total revenue, representing a 16% increase year-over-year and a sixth consecutive quarter of mid-teens growth. Cloud revenue increased 27% in Q2 with a cloud exit ARR of over $1.3 billion. Our cloud growth at current scale is greater than it was when our cloud revenues were half the size.

Furthermore, our best-in-class cloud profitability, which increased 240 basis points year-over-year to 70.1% continues to expand and is accretive to both our growth and operating margins. In Q2, we drove further growth in our operating income, which increased 19%, as well as our operating margin, which increased 80 basis points year-over-year to 29%. The strong operating results led to 18% growth in EPS, which rose to $1.86 for Q2. Moreover, our rock-solid balance sheet with a sizable net cash position, which is a capital strength that is unequaled in our industry, give us the fuel to seize additional growth opportunities that will further extend our leadership. The continued growth in our reported results reflect the strength of our business and the fact that we are winning the market.

We expect to continue to win as the tide has turned in our industry, creating a tailwind for NICE in the current environment. First, organizations are much less eager to adopt point solutions and are stepping away from companies that are financially unstable, preferring to go with large vendors that offer broad cloud platforms. Second, enterprises are further shifting investments into technologies that allow them to tackle increasing labor costs, but even more so to overcome the shortage of labor. Third, most of the legacy on-prem incumbents in our market carry significant debt, are unable to innovate, and have practically no ability to expand inorganically. Lastly, as access to capital is becoming more limited, niche companies with unsustainable business models are now struggling in the market.

These tailwinds, together with the fact that our solutions are mission-critical in all the markets in which we operate, puts us in an advantageous position. Our forward-looking strategy and tight execution are perfectly aligned with the convergence of platformization, cloudification, and digitalization, creating the strongest transformational force that we have seen in our market. The wave of platformization is the result of enterprises awakening in realization that point solutions are actually preventing them from managing complexity at scale. NICE is a platform company. CXone is winning the platform play in our market due to its unmatched breadth and depth. It gives us the unique ability to land beachheads faster, provide a long runway for upsell and cross-sell, and attracts the most complete ecosystem. A great example of large enterprise platform deal in Q2 was a seven-digit ACV deal with a very large energy company.

An existing NICE Analytics customer wanting to transform their entire approach to customer journeys, selected CXone as their platform of choice moving forward. CXone replaced multiple disjointed point solutions from legacy incumbents. In the process, we upsold digital and other CXone native solutions, further demonstrating the significant growth and uplift opportunity we continue to have within our large enterprise customer base. Cloudification is entering a new age of cloud at scale, as large enterprises are at the cusp of their transformation. This new age will illuminate the few vendors that can deliver cloud at scale. NICE's core DNA is at the high end of the market. CXone has the biggest global cloud deployment, the largest number of enterprise customer, and is being adopted by NICE's unmatched large enterprise customer base. In fact, we saw a 70% increase in the number of large-scale portfolio deals.

The ability to deliver this type of deals is a prerequisite to address the needs of the large enterprise market in the cloud and is a high barrier to entry. Digitalization has exponentially advanced the speed requirement for organizations. This requirement for speed has pushed digital 1.0 solutions into obsolescence, opening a big void that can only be filled by a next-gen digital approach. NICE has evolved into a digital-first company. CXone is a next-gen digital consumer-led platform that uniquely leverages AI and massive amount of historical data, allowing enterprises to exceed the speed of the real-time consumer. In Q2, we saw rapid growth in our digital revenue, increasing 88% year-over-year.

These winning elements, platformization, cloudification, and digitalization, are manifested in our CXi framework and opening up opportunities for us to go upmarket in large enterprises, expand internationally, and deliver next-gen digital to our customers. Let me start by sharing some of the wins in the large enterprise market in Q2. We signed a seven-digit deal with one of the largest insurance companies in the U.S. to help facilitate their ongoing transformation to the cloud. They selected NICE for our cloud capabilities and our commitment to innovation, all the while further establishing NICE as a continued strategic partner for the future. We signed a seven-digit ACV deal with a very large healthcare company. This was a competitive displacement of a CCaaS vendor, which failed to deliver scale, had a clear lack of advanced feature, and had issues with integration and implementation, all of which is not uncommon among point solution providers.

The customer chose to move to our advanced platform with a full suite of solution natively integrated in CXone. We signed an eight-digit deal with a major U.S. bank, which is experiencing higher transaction volume, especially around digital, and therefore needed to extend their functionality. There was a seven digit deal with one of the largest retailers in the U.S., taking our cloud solutions. Our international expansion is in full force in a market that is still underserved for cloud and digital. Large international deals included a seven-digit cloud deal with a leading U.K.-based entertainment company. Since 95% of their customer interactions are digital, they needed a platform with strong capabilities, and the customer found our digital offering far superior to others. We also signed a seven-digit deal with a leading Dutch-based media company.

With two incumbent solutions in place, this customer consolidated on to CXone as we replaced the incumbents and beat other competitors vying for the deal. In another seven-digit deal, a large German-based financial institution expanded with NICE, replacing an incumbent solution and further cementing NICE as a trusted partner. Our next-gen digital and conversational AI solutions are breaking down the silos existing in multi-vendor environments. Only CXone merges all interactions to a single platform, which is the essence of our CXi framework. In Q2, we continued to sign many deals reflecting the success of our industry-leading next-gen digital capabilities. For example, we signed a seven-digit competitive replacement deal with a well-known BPO.

In addition to releasing this elasticity and scalability of the CXone platform to better manage their seasonal shifts in demand, they wanted to add digital capabilities from a single provider and to partner with NICE for our next gen CXi framework. Similar thinking was behind a seven-digit deal with a large cable company, which is moving off its legacy solutions and standardizing on CXone to help facilitate its cloud and digital transformation. We signed a seven-digit ACV deal with a large auto dealer making a strategic investment to expand more in digital to help facilitate the rapid growth and transformation they are driving from in-person to online. Yesterday, we announced another significant milestone to our fast-growing global distribution ecosystem. This partnership give us top-tier Microsoft Azure IP call center status, and CXone is now available natively on Azure.

These expanded partnerships provide full flexibility for customers to seamlessly deploy CXone on their public cloud of choice. Furthermore, it puts the full distribution power of Microsoft behind CXone. In closing, we have come to a pivotal moment in our industry. Software leaders need to have strong financial profiles, have the ability to grow profitability, and deliver a true cloud-native platform with a full suite of solutions aimed in industry with a shrinking number of viable solution providers. As measured by our rock-solid financial profile, our market-leading cloud platforms, our cutting-edge innovation, and our domain expertise, we have proven time and again that we are that leader in which enterprises want to partner with. I will now turn the call over to Beth Gaspich.

Beth Gaspich (CFO)

Thank you, Barak Eilam, and good day everyone. I am pleased to provide the analysis of our financial results and business performance for the second quarter of 2022 and our outlook for the third quarter and full year 2022. Our second quarter financial results were outstanding, outperforming the high end of our guidance on both the top and bottom line. Total revenue for the second quarter increased 16% year-over-year to $531 million, and non-GAAP fully diluted EPS increased 18% year-over-year to $1.86. Our total revenue growth is primarily attributed to the growing contribution from cloud revenue, which represented a record 59% of total revenue, up from 54% in Q2 last year and increased 27% year-over-year to a total of $311 million.

Product revenue, which represented 10% of total revenue in Q2, increased 14% to $53 million, and services revenue, which represented 31% of total revenue, was $167 million and was flat year-over-year. Our recurring revenue increased to a record 83% of total revenue in Q2 compared to 82% last year. From a geographic breakdown, the Americas region, which represented 84% of total revenue, grew 21% year-over-year. Our revenue mix is predominantly in the Americas, where most of our business is based on the U.S. dollar. Therefore, we generally have little impact from foreign exchange on our total revenue growth. The EMEA region, which represented 10% of our total revenue, decreased 18% year-over-year, or 12% on a constant currency basis.

The decrease in EMEA is mainly attributed to some large on-premise deals that were signed in Q2 of last year, making for a tough comparison, while cloud revenue continues to accelerate in the international markets of both EMEA and APAC in Q2 this year. APAC, which represented 6% of total revenue, grew 22% year-over-year, or 25% at constant currency, driven by strong growth in our cloud revenue. Moving to our business unit breakdown, we experienced another strong quarter with both our business segments growing in double digits. Customer engagement revenues, which represented 81% of our total revenue in Q2, was $429 million, a 13% increase compared to last year. CXone continues to serve as the main engine behind the growth in customer engagement.

That includes digital and conversational AI capabilities that can help drive efficiencies for customers of all sizes and in all verticals. Our cloud growth comes from a combination of upselling into our existing install base from our expansive portfolio of solutions on our cloud platforms, as well as continuing to add over 200 new logos each quarter. Revenues from financial crime and compliance, which represented 19% of our total revenue in Q2 and totaled $102 million, increased a record 31% year-over-year, driven by strong growth in both our cloud and premise business. Our gross profit grew 17% year-over-year to $389 million. Gross margin increased 110 basis points to 73.3% compared to 72.2% in Q2 last year.

The increase in gross margin in the quarter was mainly attributed to an increase of 240 basis points in the cloud gross margin, which crossed the 70% mark for the first time to a record 70.1% in Q2. The continuous growth in our cloud gross margin stands out in our industry, demonstrating our strong ability to drive profitability at scale while simultaneously driving continued impressive cloud revenue growth. In Q2, operating income increased by 19% year-over-year to a quarterly record of $154 million, and our industry-leading operating margin increased to 29%. Earnings per share for the first quarter totaled a record $1.86, an increase of 18% compared to Q2 last year.

We have a great track record of growing both revenue and profitability, which has always been the standard in the way we run our business and which to this day has proven to be very successful as well as contributing to our exceptional competitive advantage. Cash flow generated from operations for the first half of the year totaled $209 million, a decline from last year, mainly due to some timing differences in the quarter. We continue to use the change in the market environment, coupled with access to our strong cash portfolio, as an opportunity to expand our share repurchases by $34 million in Q2, to a total of $98 million for the first half of 2022, almost 2.5x the amount of shares purchased in the first half of the prior year.

Total cash and investments at the end of June totaled $1.435 billion. Our debt, net of a hedge instrument, was $540 million, resulting in net cash and investments of nearly $900 million. I will conclude my remarks with guidance. For the third quarter of 2022, we expect total revenue to be in the range of $543 million-$553 million. We expect the third quarter 2022 fully diluted earnings per share to be in a range of $1.82-$1.92. We are raising our revenue and EPS guidance for the full year of 2022.

We now expect total revenue to be in the range of $2.168 billion-$2.188 billion, representing 13% growth at the midpoint compared to full year 2021. We expect the full year 2022 fully diluted earnings per share to be in a range of $7.33-$7.53, representing 14% growth at the midpoint compared to full year 2021. I will now turn the call over to the operator for questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would 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 would 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. One moment, please, while we call for your questions. Our first question comes from the line of Samad Samana with Jefferies. Please proceed with your questions.

Samad Samana (Managing Director)

Hi, good morning, Barak and Beth. Maybe Barak, first one for you. On the Microsoft partnership, the expansion, can you maybe double-click on that and just help us understand how much of a difference it makes from a distribution standpoint? What was Microsoft doing before from a go-to-market perspective for NICE and what's changed, and when should we think about starting to impact demand for CXone?

Barak Eilam (CEO)

Yeah. Thanks, Samad, for the question. You know, we announced it yesterday. It's been in the making for quite some time. The relationship with Microsoft is not new. We had a relationship with Microsoft for years. This is a big change in, you know, two parts to it. First of all, CXone is now available in Azure, as I said, which allows the customer even more flexibility than before, as they consider CXone, and some of them prefer, you know, one public cloud versus the other. That's one thing. It adds to the flexibility, and it allows us to address 100% of the market. The second thing, I think, which is even more powerful is in this change in distribution.

There is, you know, Microsoft just announced the Digital Contact Center, which is a framework of what happens when you take teams together with Dynamics and a few other components, and the recent acquisition of Nuance. The core element of the contact center come from, you know, a partner like us and CXone. We already saw it in the last few months as our teams started to work in the field together, that it's a great match and customers like it. There was an appetite on both sides, both us and Microsoft, to kind of officialize it. They wanted to take it to the highest tier of the co-sell relationship that they have.

It means that the sellers of Microsoft are now getting fully compensated on that at the highest rates from partner solutions, and our teams in the field will have the full motivation to cooperate together.

Samad Samana (Managing Director)

That's great to hear. Beth, maybe just a follow-up on guidance. I know the company's given full year cloud revenue. Can you maybe help us understand just what you're thinking in terms of back half seasonality, for cloud revenue, just as we think about modeling the rest of the year and kinda similar question around the product side as well.

Beth Gaspich (CFO)

Yeah, thanks for the question. You know, we're finishing up another strong quarter with the great growth that we're seeing in our cloud growth overall at 27%. As we look forward, you know, I mentioned on the call today, we have recurring revenue of 83%. It's really being driven by the strength of our cloud business. We see great momentum taking on more new logos and large enterprise, a great footprint expansion internationally. That's reflected in looking forward in terms of our guidance for the second half. In terms of seasonality, specifically as it relates to cloud, you know, we mentioned earlier this year that as we looked at the full year, our cloud growth is expected to be around 27% for the year.

As you look at the full year guidance, that is clearly still taken into consideration, and that you can use to kind of back into expected seasonality. When we look on the product side, on the product front, if you look back at last year and the second half of last year, we've had some extremely strong growth in our product revenue. We had 73% growth in Q3 of the product, and 54% in Q4. There was a lot of pent-up demand on the on-prem side of our business that came out in the latter half of last year. We don't expect to see those kind of growth rates, and the pent-up demand, of course, has subsided on the on-prem side of the business.

Both of those factors are taken into consideration, with ongoing, you know, double-digit revenue growth applied in both Q3 and Q4 and the guidance we've provided.

Samad Samana (Managing Director)

Great. Thank you again for taking my questions.

Barak Eilam (CEO)

Thank you.

Operator (participant)

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

Tyler Radke (Director and Senior Equity Research Analyst)

Good morning. A couple of questions to start off on the you know, macro front. I guess, number one, Barak, you talked about just seeing some you know, customers consolidate on larger platforms moving away from point solutions. I guess I'm curious how much of a you know, how much of a new impact is this in the quarter? And do you see this kinda translating into larger deal sizes? Just give us a sense on kinda what's changed in the last 90 days. Then secondly, just you know, in terms of what you're seeing on you know, on deals getting you know, requiring extra levels of approvals or sign-offs, you know, do you see any of that in the second quarter, perhaps over in the EMEA region?

How are you thinking about, you know, just de-risking the guide for the second half, just should the macro environment get tougher? Thank you.

Barak Eilam (CEO)

Yeah, thanks for the question. You know, obviously, we're monitoring that very closely and asking the same question that you're asking. You know, the beauty of our business, and I think we, you know, we've seen it time and again in the past. I'm with NICE for 23 years, been the CEO for the last 8.5 years, and I, you know, have seen different, you know, different environment, different macro environment. What really characterize NICE, I think, is that in all the markets that we operate, our solutions are really mission-critical. So that's kind of one thing to note, and this is why we are, you know, we feel, relatively okay with even with kind of the general concern of the macro environment.

Specifically in Q2 and what we see right now, I can't say that we see a big difference versus before. We do see, as I said, actually certain benefits that we can potentially enjoy from. I think enterprises are much less eager to partner these days, either with very small niche players, that there is a question about, you know, them staying as a standalone or even you know, staying as a viable business. The second thing, there is more concern from big enterprises to partner with some of the large incumbents in our industry that are carrying a lot of debt and are kind of now with this interest level, moving to focus on serving the debt versus, you know, investing more in R&D, and it will be more challenging for them.

All of those tailwinds, I believe, you know, can help us move forward. The other thing, Beth mentioned our great net cash and overall cash position, which is very unique in our industry, if you think about it. Most of our competitors carry a lot of debt or convertible debt that will have to be repaid at some point with a very light, if at all, EBITDA. I think the year to come potentially will give us the opportunities on the inorganic side of the business and further expand our leadership, opening a gap to others.

Tyler Radke (Director and Senior Equity Research Analyst)

Thanks. Follow up for Beth on the expense side, and cash flow. Obviously, you're raising your full year EPS guide. You know, any changes you're contemplating on the hiring side? Secondly, you talked about some timing impacts on the quarter for operating cash flow, but just how should we think about the full year expectations? You know, any changes to your assumption for cash flow? Perhaps from lower, you know, collections, just given the macro environment. Just help us understand how you're thinking about cash flow for the year. Thank you.

Beth Gaspich (CFO)

Yeah, sure. I'll break them up into sort of two pieces and address both the expenses and then this cash a little bit separately. On the expense front, you know, I think for us, it's generally business as usual. We're continuing to hire as we typically do. We have lots of new positions we're adding in the second half of this year. They continue to be focused in the areas that we generally are looking at on the R&D front to continue to drive innovation in the organization and our cloud platforms. Of course, on the sales side to continue to feed the sales engine. You know, that is continuing, and we are hiring as usual.

You know, in terms of other expenses, I think if you think of kind of the OpEx spend generally, you know, the expense-to-revenue ratios for us are generally pretty consistent, and I would say you can kind of expect that in the back half of this year as well. When you look at the cash flow, on the cash side, certainly there are timing differences that happen from quarter to quarter. In Q1, we actually recorded a record in terms of our collection activity with significant amount of collections coming in. This quarter, some of that got pulled into last quarter, of course, and so there's timing differences. For us, we look really on the kind of the longer term trends.

We know that we have healthy cash generation from our business just really reflecting the overall health of our business. What we don't see is any impact from macro. The timing differences that we did have this quarter weren't related to any kind of customer change in behavior. In fact, you know, even during COVID, we actually had very little of that, and predominantly because in the contact center and with CXone, we generally are operating at the higher end of the larger size contact centers as well. We haven't seen any change in behavior, and we expect to continue to see strong cash this year.

Tyler Radke (Director and Senior Equity Research Analyst)

Thanks for taking the questions.

Barak Eilam (CEO)

Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Michael Funk with Bank of America. Please proceed with your questions.

Michael Funk (SVP)

Yeah, thank you for the questions this morning. You've already addressed it in part, but I just wanted to go back to the sales cycle and demand. I understand the sales cycle can be relatively long for contact center. So are you seeing any change in behavior earlier in the funnel from customers?

Barak Eilam (CEO)

No, I can say that we see, you know, there is always anecdotes here and there and maybe, you know, that customer. Those situation appears in every quarter. I can say that, you know, we see any dramatic change in that. Also, don't forget that one of the characteristic of the CX business or the contact center business, and we saw it very nicely during COVID, is that it's not a one vertical industry. Contact center are across about 12 different verticals. Each one has its own ups and downs.

I'll remind you with COVID, you know, travel and tourism was somewhat muted, and all of a sudden now travel and tourism is a very, very hot vertical where they actually have, you know, spike in demand, just as one example out of many. That gives the contact center industry, I believe, good balance. We keep monitoring the sales cycles and, I think by different segments, they are somewhat similar to what we've seen before.

Michael Funk (SVP)

Sure. Thank you for that. Just on margin, you know, nice increase in profitability this quarter. What do you expect, though, the next few quarters for cost, sorry, cost of cloud revenue? Just thinking about the inflationary environment, any kind of potential pressure points there.

Beth Gaspich (CFO)

Yeah, it's a good question. You know, we've had some tremendous expansion in our cloud margin. We're very pleased with crossing the 70% cloud margin this quarter. Of course, you know, as a CFO, we're always keeping a close eye on the impact of inflation. We don't expect it to have any kind of significant impact or drag on our cloud gross margin. You know, I will say that we're continuing to expand our footprint internationally, and so, of course, we make investments outside of the Americas to continue to drive that business.

I think in terms of margin expansion, we've taken a lot of expansion and shown that in the improvement in our cloud gross margin over time, meaning that I don't think you should expect to see that same level of continued expansion. Certainly, we believe that we can continue to as we add scale, grow the margin higher over an extended period. There's really no expectation that inflation would negatively impact us in the near term as it relates to our cloud margins.

Michael Funk (SVP)

Just to your comment about geographic expansion, should I take that to mean we could maybe see some short-term pressure on margin as you expand geographically and add capacity?

Beth Gaspich (CFO)

You know, I think that, generally, you know, what you see from us is, pretty consistent growth. You know, occasionally you may get a slight variability from quarter to quarter, but, generally, yes, our expectation is that, you know, a significant amount of business is coming from the Americas, and we're scaling, always driving the ARPU higher in terms of our existing install base, and that'll continue to be reflected in, the growth of our cloud margins.

Michael Funk (SVP)

Thank you for the time this morning.

Barak Eilam (CEO)

Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Chris Reimer with Barclays. Please proceed with your question.

Chris Reimer (Equity Research Analyst)

Oh, hi. Thanks for taking my questions, and congratulations on the strong results. I was wondering if you could talk about the financial crime and compliance solution and just give some color on the opportunities for that product. Where do you see, what kind of growth do you see, and in what regions and in what industries, maybe just for this product?

Barak Eilam (CEO)

Yeah, sure. We had a real record quarter in terms of the growth of financial crime and compliance growing 31% year-over-year. Which is, you know, as far back as I remember, it's a record growth for the financial crime and compliance crossing the $100 million in revenue, which is just phenomenal. I think it speaks a lot to a variety of things. First of all, is the leadership we have in that industry, which is unmatched by any other competitor in that space. It also speaks about the change we see in that industry in a few areas. One of the biggest disruption to banking obviously is digital.

You know, banks in the last few years, we are all consumers, we are consuming our banking in a much more digital format through mobile apps and others, and that has advanced very nicely. The back end itself, all of the back-end processes, are still, you know, kind of left behind. As I mentioned in my earlier remarks, digital means speed. All of those back-end processes around the compliance and fraud and money laundering, they are obviously kind of counterintuitive to speed. There is a very significant wave of a refresh and adopting of new approach and technologies from us that allow banks to also solve, you know, keep the trust with their customers, but at the same time, you know, adopt the back end and compliance processes to digital.

I believe we're just at the beginning of this rejuvenation. At the same time, we are going after bigger opportunities in the mid-market now that we are leading in the cloud, in that business, and we see expansion also internationally. The really last thing is that we are seeing a lot of new, I would say, fintech and fintech-like companies that would like to make sure that they are fully up to date on different regulations, money laundering schemes and fraud. You add all of it together, and this is kind of the reason for the acceleration we see in that business.

Chris Reimer (Equity Research Analyst)

Just in terms of competition, for this type of product, how do you feel you're positioned versus competitors?

Barak Eilam (CEO)

At least, you know, with all the analysts we are working with, we are positioned at the highest end of the fourth quartile as the clear leaders in this industry. What's unique about us that we are probably the only vendor or the only player in this market that offer a full suite, a platform that offer both anti-money laundering solution, fraud and transaction monitoring, covering a very broad life cycle of consumers' risk on the risk profile of consumers. That allows us to really differentiate versus others.

We see more and more banks and others stepping away from adopting point solutions and serving as kind of system integrators between vendors and looking to partner with someone like us that can offer a platform that have both the understanding of how to deliver complexity at scale, but also have a very deep domain expertise in financial services.

Chris Reimer (Equity Research Analyst)

Got it. Yeah. Okay, thanks. That's it for me.

Barak Eilam (CEO)

Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your questions.

Rishi Jaluria (Managing Director and Software Equity Research)

Oh, wonderful. Thanks so much for taking my questions and nice to see continued resilience in the business. Two for me. First, I wanted to start by, you know, what you're seeing specifically on contact center agent side, right? Are you seeing any levels of churn, right? Where the customers themselves are, you know, reducing the number of agents they have or even slowing them down for that matter. You had mentioned kind of a continued focus on leveraging digital solutions. You know, is that happening hand in hand with lower agent count? Maybe how should we be thinking about that? Then I have a follow-up.

Barak Eilam (CEO)

Yeah, thanks. Great question. We don't see you know, a drop in contact center agents. At the same time, the absolute number of contact center agents is not you know, growing dramatically. It moves and shifts between different seasons and maybe some different industries that have some changes in demand. It's not a number we expect to grow in a meaningful way in the future and potentially even be flattened. At the same time, few things that we are seeing in order to you know, service become more complicated experiences or mastering customer experience becoming more complicated. Companies are investing more in the ecosystem of those agents in order to make them much more effective and coach them better and lead them better as they work with consumers.

The spend on technology around the same agents is actually increasing. In completely parallel, there is a significant spike, as organizations try to leap ahead and catch up to the digital consumer. We are all consumers, and I'm sure you understand what I'm referring to. To that end, in order not to add a ton of agents in order to serve in the digital space, the investment in both digital and conversational AI is spiking. I mentioned that year-over-year, we saw a growth 88% in our revenue in digital, and it keeps growing rapidly. One of the greatest advantages that we have is that most enterprises are starting to realize that looking at attended service versus unattended service separately doesn't work.

We're among the only few that can deliver at scale, with one platform, a full orchestration, from an attended and unattended service, with a full suite of solution, whether it's digital or other channels. That's very unique for NICE.

Rishi Jaluria (Managing Director and Software Equity Research)

All right. Wonderful. That's really helpful. Just wanted to get a sense for has there been any change in what you're seeing from customers in terms of the pace of on-premise migrations to the cloud? Has that accelerated? Has it slowed down? Has it kind of maintained? How should we be thinking about the cadence of that for the rest of the year? Thanks.

Barak Eilam (CEO)

I think the pace is the same as it was before. Obviously it's different in different segments of the market. Smaller customers, where it is relatively kind of an easy task for them to move to the cloud, are already well into their journeys. Large enterprises are now at the cusp of their transformation and moving to that. The pace is, I believe, similar to what it was before. I think there are potentially more tailwinds that can develop in the market. One of the largest incumbents in the industry is under significant financial stress once again, which will, you know, we already hear concerns from customers and talked about expediting.

More importantly, there is a realization of large enterprises that their on-prem environment is very, very complicated. When they wanna move it to the cloud, it's an investment for the future, and they have to have it with a partner that can operate at that scale versus buying variety of point solutions. I gave example, at least one out of many examples, of such a customer who already moved to a CCaaS provider that was a point solution that provided many of the solutions for kind of third-party integration and didn't deliver on scale. They came to us, and we won the deal and become the provider there.

Rishi Jaluria (Managing Director and Software Equity Research)

All right. Wonderful. Thank you so much.

Barak Eilam (CEO)

Thank you.

Operator (participant)

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

Meta Marshall (Managing Director)

Great. Thanks. Maybe jumping on that last question. On the displacement of the CCaaS vendor that you were talking about, you know, just at what point in the process did they kind of realize that, you know, they weren't gonna get an adequate solution and just kind of the timeline for you guys to get in there and displace them would be helpful. Just kind of more context on that deal. And then the second question for Beth, just kind of what is leading to the gross margin leverage in the cloud business? Is it more digital-only deals, just efficiency gains, just any more context there for where you're finding the leverage? Thanks.

Barak Eilam (CEO)

Sure. Thanks for the question. I'll start, and then I'll hand it over to Beth on the gross margin. I'll refer to that customer, but I'll say even more on kind of a typical example. In this particular, you know, this customer, a relatively large enterprise, who submitted an RFP, at that point, that vendor, that is a CCaaS vendor, that specialize in, I would say, the core of CCaaS but provide the breadth of the other solutions like WEM, like digital and others, through third parties, with a lot of integrations. They, you know, they started to implement. It took long time. It failed on the scale. It failed to deliver all the promises of what can be delivered only with a natively integrated solution like ours.

The customer approached us, and we said, you know, we can do it immediately, and this is exactly what we did. There is a clear realization of the customer that there is a very big difference between piloting something not at scale or just looking at a slide or not doing proper diligence versus coming to us, adopting CXone as a whole. Everything is developed natively. All the solutions, the advanced one and the core solutions are fully in. It's not third-party integrations. The ability to migrate was extremely fast.

I think that as a result of that, needless to say, we are winning a lot of market, but there will also be a wave, I believe, of customers, large customers, that will turn to from time to time point solution and will come back to or will go back to us or talk to us in order to adopt eventually CXone, which we see it as a great opportunity. About the gross margin, I'll hand it over to Beth.

Beth Gaspich (CFO)

Yeah, thanks for the question, Meta. I think when we talk about our cloud gross margin, I think generally at NICE, you know, we have a long history of really driving margin expansion and all the types of business that we do. As it pertains specifically to the cloud, you know, first of all, it's the way that we actually have built our platforms and our cloud business. We've built them native to the cloud. We do it in a way that it's intentional that we can really scale up into very large customers that we're adding each and every quarter. It starts with how we actually build the solution native to the cloud.

The second I would say is that, you know, we have and are succeeding on selling multiple solutions that have all been natively integrated into the platform. We continue to go back into our existing install base. We're selling more, not only digital, but multiple solutions that we're constantly adding, and we have really the best depth and breadth of a platform offering in the industry. That's also showing in our current margins and gives us a great opportunity to continue to drive that expansion, especially as we go into the large enterprise where they have very complex needs. Another factor I would highlight is just the stickiness of our solution.

We have excellent retention rates with our customer base and our existing installed base that drives that stickiness and keeps that high recurring revenue. I think the last thing I would just add is of course the expense side of that, the expense management that we've always been very attentive to how we spend as an organization, how we consume in the cloud, et cetera. It's really a combination of all of those different factors, the attention to really being able to scale and drive a strong operating leverage.

Meta Marshall (Managing Director)

Got it. Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Pat Walravens with JMP Securities. Please proceed with your questions.

Pat Walravens (Director of Technology Research and Senior Analyst)

Oh, great. Thank you. I'd like to talk about the federal business a little bit. Big picture, how's it going? Secondly, there is that $10 billion deal with the Department of Transportation that the federal government publicly disclosed. I'd just love to hear what you're doing for the FAA there. Thirdly, I think, you know, we're heading into the seasonally strongest quarter for federal, right? How does the pipeline look?

Barak Eilam (CEO)

Yeah, I appreciate the question. You know, we're not commenting on a specific customer deal, but I'll give you some color about the business, both at the federal level as well as the SLED state and local business. First of all, we have great presence in those industries and great reputation and strong customer base, and it's going very well. You know, a couple of years ago, you know, COVID obviously was a great tailwind in that business, and we saw great business with CXone over there.

We also have, as you probably know, and I didn't mention it on this call, but we have our public safety business, which is advancing very nicely into the full supply chain, if you like, of criminal justice. We're advancing in this business extremely well. It's a market that is going through its own digital transformation at a fast pace, and requires a similar solution on the digital side. We are very bullish on this business and continue to perform well there.

Pat Walravens (Director of Technology Research and Senior Analyst)

Okay, great. Thank you.

Barak Eilam (CEO)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I would now like to turn the call back over to Barak Eilam for any closing comments.

Barak Eilam (CEO)

Thank you all very much for joining us, and we'll speak with you very shortly. Have a great week. Thank you.

Operator (participant)

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.