NICE - Earnings Call - Q2 2025
August 14, 2025
Transcript
Speaker 1
Hello and welcome to the NICE conference call discussing second quarter 2025 results, and thank you all for holding. All participants are 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 August 14, 2025. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.
Speaker 6
Thank you, Operator. With me on the call today are Scott Russell, 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 2024 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 19, 2025. During today's call, we will present a more detailed discussion of second quarter 2025 results and the company's guidance for the third quarter and full year 2025.
You can find our press release as well as PDFs of our financial results on NICE's Investor Relations website. Following our comments, there'll 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. The 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 risk, uncertainties, and assumptions, and I'll now turn the call over to Scott.
Speaker 5
Thank you, Marty, and welcome everyone this morning. We're proud to report another strong quarter, with total revenue exceeding the high end of our guidance range and earnings per share coming in at the high end of that range. In Q2, total revenue reached $727 million, driven by 12% year-over-year growth in our cloud business, as expected, with an NRR of 111%. AI is the heart of our strategy, and we are leading the AI-first transformation in the customer experience market. While others focus on consolidating legacy CCaaS platforms, we're accelerating in a different AI-future-focused direction. This commitment is reflected in our exceptional 42% year-over-year growth in AI and self-service ARR, which grew to $238 million in the second quarter. Our AI automation and augmentation solutions embedded in CXone Mpower are the catalysts behind this momentum.
Enterprises understand that providing a seamless customer experience results in the ultimate reward: loyal and repeat customers. Our one-of-a-kind platform has reimagined this harmonious customer journey and is fueling our outstanding performance in AI, evidenced by our strong Q2 AI bookings, including a six-fold year-over-year increase in Copilot deals. This is just the beginning. Our momentum will only accelerate as we integrate Cognigy's industry-leading CX AI conversational and agentic capabilities upon the closing of the transaction to deliver human-like AI-first customer experiences. Our ability to rapidly innovate and bring industry-leading CX AI quickly to market, both organically and through acquisitions, is a direct result of our continued financial strength, our strong profitability, and rock-solid balance sheet. The core value of the CXone Mpower platform can be explained in two simple ways.
First, we make customer engagement simple and intuitive with a single pane of glass that lets our customers manage all interactions across every point of engagement. Second, the platform intelligently orchestrates across agents, automation, and systems of record in real time. Cognigy will act as a force multiplier to significantly advance and accelerate the capabilities of CXone Mpower. On the customer engagement side, Cognigy's AI agents will be orchestrated natively within our platform, reasoning and responding in real time to make consumer experiences faster, more human, and more personal. On the orchestration side, Cognigy becomes a part of a fully connected platform, gaining access to richer data, more expansive workflows, and shared knowledge and models. This is an environment where Cognigy's AI will thrive, growing smarter with every interaction. It's truly a compounding advantage. As more organizations adopt CXone Mpower, both our platform and Cognigy's capabilities grow stronger together.
With this bold step, we are clearly poised to expand our leadership in the AI-first evolution in customer experience. Some examples of our AI success in Q2 include a standout seven-digit ACV AI win, which came from a major electric utility that chose CXone Mpower, replacing two incumbents. They sought a seamless customer experience and a stronger self-service, needs directly aligned with our strengths. With CXone Mpower, they're gaining a unified end-to-end platform and AI-powered tools like Copilot, AutoSummary, and other self-service solutions that are significantly enhancing their customer service. In another notable seven-digit ACV AI-driven win, a leading global medical device company is using CXone Mpower to boost call containment, enable intelligent routing, and enhance agent support.
Already a strong advocate for a unified approach, they chose Mpower for its ability to extend AI across the customer journey, highlighting how enterprises are leveraging the platform to elevate self-service and drive measurable ROI. In another AI-driven deal, a major financial services provider, SS&C Technologies, and a long-time NICE customer, is adding Copilot after a successful AutoSummary deployment to boost efficiency and enhance agent and customer experiences. This deepening investment reflects growing trust in NICE's AI portfolio and its impact on building a more agile, intelligent workforce. Partnerships have always been a cornerstone of our growth strategy. This year we're proud to welcome exciting new alliances with industry leaders like ServiceNow, Amazon Web Services, and Snowflake. We're also thrilled to extend and reinvigorate our longstanding partnership with RingCentral. Together, we'll continue to collaborate on go-to-market initiatives, leveraging the strength of RingCentral Contact Center, powered by NICE CXone Mpower.
We're also excited to announce our deepened strategic partnership with Salesforce through an enhanced integration between NICE CXone Mpower and Salesforce Service Cloud. Together, we're investing in expanding support for bring-your-own contact center, including customer-managed channels and NICE's industry-leading capabilities. This strengthened collaboration unlocks powerful new functionality and sets the stage for continued joint innovation and growth. At Interactions, the power of our ecosystem was on full display. The energy from our partners, customers, and industry analysts was extremely positive. Customer and partner attendance surged 33% year over year. C-level engagement increased 41%, clear evidence that key decision makers are leaning in with us. The momentum from Interactions is already directly translating into pipeline impact and confirming what we already knew. Interactions is a catalyst for growth and provides a clear validation of our business momentum.
Another area where we see significant and accelerating growth potential is across our international markets. Enterprises are increasingly adopting end-to-end solutions, with AI adoption gaining momentum. The demand for comprehensive and intelligent AI platforms like CXone Mpower is growing rapidly. We're also seeing strong traction with our sovereign cloud deployments of our platform, particularly in countries like Germany and France. These dynamics play directly to NICE's strengths and are fueling continued international growth, as reflected in the large-scale deals we're now closing in these regions. As we shared last quarter, together with our partner Route 101, we've secured a landmark agreement with the UK Department of Work and Pensions, or DWP, home to one of the European continent's largest customer service operations, with a total contract value exceeding $100 million.
This major win saw us successfully displace two key competitors as the organization selected CXone Mpower to support tens of thousands of agents. In a seven-figure plus ACV international win with a leading German health insurer, AOK Plus chose CXone Mpower over an incumbent, citing our unified platform and sovereign cloud as the key differentiators. The deal included a fundamental for future AI adoption and marked a major competitive displacement with our seamless end-to-end solution standing out against rivals' fragmented third-party approach. We also signed a significant seven-figure ACV deal with a leading UK-based insurance company, displacing three legacy vendors as a part of a major transformation to modernize their customer service operations. They selected CXone Mpower as the foundation for this initiative and adopted both AutoSummary and Copilot as they embark on their AI journey.
In summary, I joined NICE at the beginning of 2025, which I'm sure everyone remembers, and I was truly excited about the immense opportunity in the coming years. As I outlined at the beginning of this year, I've been keenly focused on specific strategic focus areas to drive NICE forward. I'm really pleased to report we are making strong progress across the board. I committed to leading the AI revolution, and we've delivered both organically with 42% growth in AI and self-service revenue, or ARR, and inorganically through our acquisition of Cognigy. We emphasize the importance of strategic partnerships to scale our impact, and in a short time, we've launched collaborations with ServiceNow, Amazon Web Services, Snowflake, and Salesforce, with more to come, while also deepening our relationship with RingCentral.
International expansion was another key priority, and this year we've signed one of the largest deals in our history, alongside accelerating cloud adoption in international markets, which Beth will elaborate on shortly. Importantly, we're achieving all of this with disciplined operational rigor, maintaining industry-leading profitability while thoughtfully deploying capital through acquisitions and share repurchases. Before I hand it over to Beth, pending the closing of Cognigy, I want to remind you that we're planning our Capital Markets Day in New York in October. We're looking forward to sharing a deeper look at what lies ahead for NICE as we head into 2026 and beyond, including midterm financial targets and the latest developments surrounding the Cognigy acquisition. I'll now hand the call over to Beth.
Speaker 1
Thank you, Scott. I'm pleased to share another quarter of strong financial execution. Total revenue of $727 million increased 9% year over year, resulting from a combination of healthy growth in the cloud paired with strong product revenue contribution stemming from the financial crime and compliance segment. Cloud revenue performed in line with our expectations, with 12% year-over-year growth contributing $541 million and representing 74% of our total revenue. Our solid cloud growth in the second quarter was driven by our CX AI and self-service ARR, which increased 42% year over year to $238 million and now represents 11% of our cloud revenue. This strong momentum highlights the underlying strength of our core Empower AI offering, which we believe will be further amplified with the expected acquisition of Cognigy.
The growth is primarily driven by the strong momentum seen with our key AI solutions, including AutoSummary, Copilot, knowledge management, and proactive AI, which are predominantly built on a consumption model. Our cloud NRR for the trailing 12 months of Q2 remained at a healthy level of 111%, highlighting the durability of our customer relationships and ongoing cross-sell and upsell momentum. Our expertise in delivering scalable enterprise-ready software continues today in both our cloud and premise offerings, as demonstrated in our Q2 results. In addition to the solid performance of our cloud business, product revenue outperformed in Q2, increasing 29% year over year, driven by a successful pull forward of term renewal activity that was originally anticipated in the third quarter and included in our third quarter expectations and successfully pulled into Q2, stemming from our financial crime and compliance segment.
Our services revenue, which represented 19% of our total revenue, declined 5% in line with our expectations. From a geographic breakdown, the Americas region, which represented 84% of revenue in Q2, increased 9% year over year, with double-digit cloud revenue growth and strong product revenue, which was partially offset by a decrease in services-related revenue. Our international business demonstrated strong revenue growth in the second quarter, as our cloud business continues to drive this expansion with our demonstrated success of large enterprise-scale wins. In the Asia-Pacific region, one major deal signed in Q2 of last year with Services Australia has successfully ramped and is now contributing to our quarterly cloud results. Meanwhile, we're excited about a second significant win with the UK Department of Work and Pensions in the EMEA region, where we expect revenue contribution to begin ramping in Q2 of 2026.
Our international revenue contribution increased from last year, and we expect this trend to continue. EMEA revenue increased 11% and 15% on a constant currency basis year over year. APAC revenue increased 17% year over year and similarly on a constant currency basis. Together, our international revenue increased 13% year over year and 16% on a constant currency basis. Our international business continues to represent significant long-term growth opportunities for us. These regions remain underpenetrated in terms of cloud adoption, and now we're seeing tangible traction as investments in sovereign cloud and strategic partnerships become more meaningful in our results. Turning to our business segments, customer engagement revenue, which represented 82% of our total revenue in the quarter, was $597 million, increasing 8% year over year, driven by the strong growth in our cloud business in all geographies, which offset the continued transition of our premise-based business.
Revenues from financial crime and compliance, which represented 18% of our total revenue in Q2 and totaled $130 million, performed well ahead of our expectations, growing to 19% year over year. This was due primarily to a significant increase in product revenue that I previously highlighted, as well as continued strong cloud revenue growth. Moving to profitability, our total gross margin was 69.3% compared to 70.7% last year, a slight decline primarily due to increased cloud spend. In tandem with the success of our international business, we are increasingly investing in our cloud infrastructure across multiple regions. Our operating income in Q2 increased 9% year over year to $220 million, and our best-in-class operating margin totaled 30.2%. Earnings per share for the second quarter were $3.01, a 14% increase compared to last year. Our cash flow from operations in Q2 was $61 million.
The decrease year over year is due primarily from a non-recurring tax expense in the quarter and timing of some large anticipated customer collections, which shifted to receipt a few days post-quarter end. Following our largest ever quarterly share repurchase in the first quarter, we repurchased shares totaling $31 million in Q2 in line with our repurchase plan for the year. Our balance sheet remains robust, with total cash and investments at the end of June totaling $1,632,000,000, while total debt stood at $460,000,000, resulting in net cash and investments of $1.2 billion. We expect to repay this debt at maturity in mid-September.
In summary, we are pleased with a strong first half to 2025, marked by solid execution and continued momentum across our key strategic growth catalysts: rapid AI adoption, embracing both automation and augmentation, continued cloud adoption in the large enterprise and international market segments, and expansion opportunities within our large install base. These results, along with our strong balance sheet and cash generation, provide us the financial flexibility to invest decisively in innovation, both organic and through acquisition. Looking ahead, we're excited about the opportunity to share more financial details with the anticipated acquisition of Cognigy, including our general midterm outlook at our upcoming Capital Markets Day. Now, I'll close with our guidance for total revenue and non-GAAP EPS for the third quarter and full year 2025.
It's important to note that our planned acquisition of Cognigy is expected to close during the fourth quarter of 2025, subject to regulatory approval, and therefore this guidance excludes any planned impact from this proposed transaction. For the third quarter of 2025, we expect total revenue to be in the range of $722 million to $732 million, representing 5% YoY growth at the midpoint. We expect the third quarter of 2025 fully diluted earnings per share to be in a range of $3.12 to $3.22, representing 10% YoY growth at the midpoint. For the full year, we are reaffirming our prior revenue guidance. Full year 2025 total revenue is expected to be in a range of $2,918 million to $2,938 million, which represents an increase of 7% at the midpoint. We continue to expect YoY cloud revenue growth of 12% for the full year.
We also continue to expect our non-GAAP operating margin to increase an estimated 50 basis points YoY. We are raising the full year 2025 non-GAAP fully diluted earnings per share guidance, which is now expected to be in a range of $12.33 to $12.53, which represents an increase of 12% at the midpoint. I will now turn the call over to the operator for questions. Operator? Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure that your phone is not on mute when called upon. Thank you. Your first question comes from Meta Marshall with Morgan Stanley. Your line is open.
Great, thanks. Maybe a couple of questions. How are you guys thinking about the level of investment? What is the correct, appropriate level of investment to make right now? You've clearly talked about a lot of new burgeoning partnerships and exciting things with AI. Looking to get a little bit more commentary on how you're thinking about operating margins and the puts and takes there in the near term. Second, what gives you confidence in that 12% growth target for the year on cloud, given what you've seen in the first half? Thanks.
Speaker 2
Thanks, Meta. I'll start kind of addressing your question. In terms of the level of investment, you can see the level of investment that we've made around the cost of cloud that we've highlighted now and that you see in our gross margin in the first half of this year. We're really pleased with how that's paying off. We're already seeing the international revenue expansion there, where much of that additional investment was made to really invest in that international business that we have. We're seeing great momentum there. With respect to what it means in terms of operating margins in the near term, as I shared, we still expect to see a 50 basis point year-over-year increase over last year's results in the current year of 2025.
Of course, as we step into 2026, that's part of what we plan and look forward to sharing more in terms of level of investment at our Capital Markets Day that we're looking forward to. With respect to your other question around the cloud revenue expectation, we came into the year saying we see a comfort to deliver on the 12%. We have successfully done that, solid performance with 12% in both Q1 and Q2. I'll add that we expect that 12% to continue to be delivered in the third quarter as well. We have a good line of sight on our business in Q3. As we look on the fourth quarter, and I've highlighted in prior calls, we had a higher level of seasonality than what we've typically seen in the fourth quarter of last year. We're keeping that in mind that we have this higher baseline for comparison.
Overall, we're very pleased. I think you can also see the great growth that we're experiencing in the AI with the increase to the 42% year-over-year growth in our AI and self-service ARR. We expect that to continue to contribute as well. There are other areas of our business where we have not seen the same level of strong performance this year. One of those that we would just call out is around Livox. During the course of 2024, Livox was performing in line with our expectations. As we stepped into this year, we are seeing some softness in that business. We're still very excited about it as an asset, but it is creating a bit more of a weight on the 12% expectation for the year, which is why we're maintaining, again, full confidence around it and optimism, looking forward to 2026.
That does create a little more uncertainty in terms of the fourth quarter.
Great, thank you.
Speaker 5
The only thing I would add to that is, you know, on the cloud revenue growth, our core platform, CXone Mpower, is really strong. So is AI. You can see that in the ARR numbers. When you think about the backlog, you think about the pipeline, you think about the way forward. You know, we have confidence with that, but no doubt some short-term challenges around the headwinds that Beth mentioned around Livox, but that doesn't change the outlook that we have.
Speaker 1
The next question comes from CT Panagrahi with Mizuho. Your line is open.
Thank you. Congrats on a good quarter. Just wanted to, Beth, dig into the margin side, mainly your cloud gross margin. It came down below 70%. I assume that's the AI investment. How should we think about the gross margin going forward for cloud? In the same context, could you help us understand the 50 bps margin expansion? Where do you see most of the leverage this year?
Speaker 2
Yeah, thanks for the question, Siti. In terms of the margin, you'll see that we were a little bit sub 70% both in Q1 and Q2 of this year. I've actually remarked previously that that was expected. It is intentional. We are investing to drive accelerated growth, and that is the plan. A lot of that was focused in the first quarter a bit more in some areas around the acceleration of our go live timeframe that we had highlighted. Some of that came into play in the first quarter, as well as, again, really a focus on the international momentum and business there, where we're putting in certain infrastructure that's necessary to drive the growth in those regions.
As we look on the back half of this year, first of all, we did have some, and we always, there is always some timing difference, meaning that we had some large spend, I would say, on the marketing side in the first half of this year around our annual Interactions conference. We also had our rebranding exercise. As we look at the back half, we should see some leverage in terms of the OpEx around some of those things with a bit less spend as we've spent more in the first half. Also is the gross margin.
While we don't expect the gross margin to change dramatically, and you should expect in the coming quarters to kind of see that flattish overall cloud gross margin profile, we do believe that there's some opportunity to see some elevation that will lead to that higher operating margin in the second half of this year. I think the other thing we would highlight is if you look on our historic results, one of the things we are very strong around is our muscle at driving operating leverage. We've intentionally made these investments now, but we fully expect to use that muscle to drive margin expansion on the gross margin over time as well.
Thanks, Beth, for that clarification. Thank you.
Speaker 1
The next question comes from Tyler Rabte with Citi. Your line is open. Tyler Rabte, your line is on mute.
Speaker 6
Operator, why don't you move on to the next question, please?
Speaker 1
Thank you. The next question comes from Arushi Jaluria with RBC. Your line is open.
Speaker 5
Oh, wonderful. Thanks so much for taking my question. Maybe I want to start with the expanded or renewed RingCentral partnership. Definitely was very pleased to see that. Can you expand a little bit in terms of what led to that, especially with RingCentral? They came out with their own CCaaS solution and were signaling themselves as being a competitor, and this seemed like a little bit of a reversal from that. Maybe you could talk about how the deal came together and if there's been any changes in revenue share or royalty or anything like that. I've got a quick follow-up.
Thanks, Rishi. I'll take this one. It was really pleasing that our organizations that had a longstanding successful partnership were able to renew with renewed focus. First of all, I think it's an acknowledgment that, and I know that the RingCentral team also spoke about this, we've got the leading CXone Mpower CCaaS platform in the enterprise segment. We are the market leader, and with our AI capabilities and the strength that we're building in that portfolio, combined with RingCentral's market-leading UCaaS capabilities and communication capabilities, it's a natural partnership. I think once we worked through how we were going to better collaborate, make it effective, and combine together, it was obvious that a collaboration was in benefit not only to our two organizations, but for our customers. The second thing that I would highlight is partnerships in the enterprise technology space are not always about exclusivity.
There is always going to be areas where there's overlaps of portfolio and capabilities. Between our two organizations, we took a mature approach to this. What brings us together and the combined value is tremendous for our customers. Yes, while they have certain capabilities, and frankly, we do a bit of overlap with some of theirs, our combined proposition to the enterprise segment is a no-brainer. I think what it can do is give confidence to our existing customers, as well as future customers that want to leverage the combined portfolio that we both bring. That gives us confidence in the way forward.
All right, really helpful. Thanks, Scott. Beth, I appreciate the color you've given in terms of cloud growth and some of the underperformance in Livox. Maybe can you expand a little bit on what is causing that underperformance? If we look forward, obviously the cloud deal has yet to close, as you said, closing at some point during Q4. Are there any kind of takeaways or things that we should maybe think about as that deal closes to maybe prevent underperformance? That you can do to just kind of drive better performance or prevent something like what's happening with Livox from happening there? Thanks.
Speaker 2
Thank you for the question. With respect to Livox, I think there's always certain assumptions you're making around the retention of your customer base and the ongoing health of some of those relationships. What we've seen this year is some churn in some of the customers that was larger than anticipated. The momentum that we had expected, combined with the new business, is not getting the same level of uptick in the growth as anticipated. Overall, it is creating some dilution in our organic growth that we expected to see in the cloud.
We're certainly really excited about the upcoming acquisition of Cognigy, of course, pending the regulatory approval, and it's something that we anticipate will create momentum not only from just the integration of their capabilities into CXone Mpower, but also what that means for driving a positive momentum along with the rest of our business, which will be sold together with that as part of the overall platform. I think, pending the timing and the close of that acquisition, that should, again, give us some potential upside opportunity that we could see during the course of this year.
Speaker 5
Yeah, the thing that I would add to what Beth mentioned, Rishi, is two things. First of all, Livox's capability, notwithstanding the short-term challenges and slight headwinds that we saw in 2025 in the first half, as an asset around outbound capabilities, is strategic for us to be able to deliver the full scope of customer experience for our customers. It's a really important asset. The way we view it is, okay, we've got an integral capability that will be architected and is in the process of being built into the core CXone Mpower platform with both our world-class inbound capabilities, but it's Livox's outbound capabilities. That's a strategic advantage. Short-term hit, long-term gain is the way that we're viewing that. The only thing that I would say is back to the Cognigy point that Beth made, is subject to closing, of course.
We very much look at that in a long-term strategic growth. This is not about short-term revenue, quote unquote. This is about long-term sustained growth for our company and for value for our customers.
All right, really helpful. Thank you so much.
Speaker 1
The next question comes from Tyler Radke with Citi. Your line is open.
Okay, great. Hopefully, you can hear me now. I appreciate you taking the question. First question for you, Beth. I just wanted to follow up on some of the Livox commentary and specifically kind of how to think about the puts and takes of those headwinds on the business in Q3, Q4. I certainly understand there's some unanticipated churn that's impacting the model. Are you saying that the 12% may not be achievable now by Q4? Potentially, there's some offsets to that. Obviously, AI revenue did accelerate this quarter. Just help us understand, do you think the 12% is no longer a good target kind of each quarter for the full year? Are you able to offset that churn with strength in the rest of the business?
Speaker 2
Let me start by saying, you know, I've reiterated or we've reiterated our expectation. We're fully confident that we will achieve 12% year-over-year growth for the full year. As you've seen, we have delivered that in Q1. We delivered on that in Q2. We delivered on that as well, and we're expecting to deliver on that as well in Q3. We're very confident around our ability to achieve that benchmark as well. As we look in the fourth quarter, if you do the math, obviously, because we've had 12.4% growth in Q1, 12.3% in Q2, expect 12% in Q3, that would expect a slightly lighter growth in the fourth quarter. The comments that I made about Livox, by the way, are not specific to Q3 and Q4.
That is something that has already been embedded, you know, really in the quarter that we're sitting in now in terms of the growth. I think the point being is, one, we're completely confident and very highly staying with the 12% confidence level for the full year in delivery. With Livox, we're calling it out as something that, you know, we came into the year also with the expectation we'd be able to potentially outperform higher than the 12%. Highlighting Livox is one of the reasons that we are seeing some pressure on the overall cloud growth.
Great. A follow-up for Scott, just on the large deal front. I think last quarter you announced a nine-figure deal with a large European customer. What are you seeing just on the large deal pipeline? Have the sales cycles remained consistent? Do you have additional sort of nine-figure stuff in the pipe for the second half? How are you thinking about the revenue ramp from some of these large deals that you've signed over the past year?
Speaker 5
Yeah, it's a great question. First and foremost, we do see large deals, larger deals in our pipeline going forward, not only in the second half of this year, but also into 2026. In terms of the buying behavior, I think there's two comments that I would make. The market is definitely moving. There's been a lot of discussion in the CX market and in the CCaaS market about the on-prem shift to the cloud. There are some vendors that are only running that playbook. What is clear is large organizations need to know that when they shift, they are enabling AI capability. They've got to be able to have self-service. They've got to be able to have augmented service.
They've got to be able to then have a combination of capabilities that are delivering the enterprise scale, the reliability that you get with a large contact center on these nine-digit deals, but you've also got the ability to coexist and do that seamlessly with an AI platform that is able and only we're the ones who are able to do that. What we're seeing is that buying shift is involving more and more insights around the AI capabilities of the core platform and how they are able to leverage those as a part of their transition and their move of increasing demands from consumers that have got an expectation of instantaneous response, instantaneous resolution, and an ability to be able to do so through their interaction with their brands. That comes into the deal mix.
It's not delaying cycles, but it is certainly a bigger part of the evaluation as they're considering their entire CX platform. We definitely have a strong pipeline of large deals with major customers that fit our strength in the enterprise segment, not just internationally, but also in North America.
Thank you.
Speaker 1
The next question comes from Arjun Bhatia with William Blair. Your line is open.
Hi, team. I'm William Blair. I'm for Arjun Bhatia. Thanks for taking your question. As your AI portfolio evolves, have you noticed a change in the pace of migrations of on-prem contacts into solutions to the cloud? In other words, curious to hear if you're seeing increased demand for being on the cloud and preparation for AI and agentic AI.
Speaker 5
Great question. It sort of links a little bit to what I mentioned before, Arjun, but let me give a little bit more color. When customers are evaluating, they're sitting on legacy on-prem platforms. We talked about this. You can determine whether it's 35% or 40% of the market from on-prem moving to the cloud, but there is still a significant customer base that are on on-prem platforms that are moving to the cloud. What is clear is that they are evaluating the AI capabilities of that platform as a part of that move. That is different than 12-18 months ago. 12-18 months ago, they were looking at a cloud move.
Now they're looking at a move that leverages cloud capabilities, but the AI capabilities that are part of that platform are essential, which is why our existing investments around CXone Mpower, our foundational data models, the amazing labeled data, and the assets that we already have, which powers our Copilot, powers our Autopilot, is driving that 42% YoY growth that we saw in ARR in the second quarter. There is also a recognition that self-service through a conversational AI and agentic AI platform that we're obviously looking forward to, subject to closing with Cognigy, is a key element of what customers are looking at. The buying behavior is definitely becoming more detailed around the AI capabilities as well as historic CCaaS capabilities. That is why we're very confident that we're leading the way.
We are the company that has the most complete AI platform together with our existing strength in CCaaS. That is what the market is expecting. They don't want fragmented solutions anymore. They want a unified platform.
That's really good. Thank you.
Speaker 1
The next question comes from Jim Fish with Piper Sandler. Your line is open.
Hey, guys. Thanks for the question. What are you guys hearing from customers on net agent growth versus deployment of AI, particularly given the recently introduced U.S. regulation that's being discussed about mandating sort of AI versus human disclosure at the beginning of an interaction within the United States itself? I've got a follow-up to that.
Speaker 5
In simple terms, our customers are clearly trying to leverage AI capabilities, autopilot for self-service, copilot for augmented service, and AutoSummary and those capabilities. The movement of the AI of the agents moving to AI agents is clearly planned. It's not happening faster or slower than our anticipation. It's happening in line with what we're expecting. What I find interesting is the contact centers and the human agents are doing more. They're able to handle the increased volume of interactions. I think this gets lost sometimes in the view about how many AI agents versus human agents. The amount of interactions that brands are receiving is double-digit growth in terms of the volume. They're having an increased demand from their customers or their consumers, and they need to be able to do that seamlessly and interoperate between AI agent and human agent.
That means that they're able to serve that as that growth of demand increases. The second thing that I would say is an increasing number of our customers are doing revenue-oriented activities, value-generating activities on top of delivering customer service. I would highlight the outbound capability that I mentioned before of Livox, which is just a good example of a really critical capability that we can not only help our customers perform a service task from intent to fulfillment, but as there is a revenue or a sales opportunity that requires outbound, it comes on the same platform. That's what we're seeing. There's no dramatic shift in the number of human agents, but we clearly expect that over time. More and more self-service will drive that.
Yeah, and just to follow up on the number side of that then, Beth, it's nice to see the stability of NRR. Is there a way to think about the expansion level that's coming from cross-selling core solutions versus the AI solutions versus kind of the upsell of net agent growth of your install base? Thanks, guys.
Speaker 2
Yeah, thanks for the question, Jim. I would say, you know, you've seen that our NRR has remained healthy at the 111%, and it really reinforces the health of our existing customer base. I mean, we're on a, you know, more than $2 billion plus cloud ARR, and a large portion of our revenue is continuing to come from our cross-sell and upsell efforts. The AI is really a key growth driver for us. I highlighted earlier, 30% of our cloud revenue when you look at the CX AI and self-service contribution. That is certainly a key growth driver as we look to our customers and what we're selling to our customers, both with our existing install base as well as the new logos that we're bringing on. We're continuing to focus on a combination of all of those with the largest portion coming from the existing install base.
I think what we're also seeing around that is the opportunity of international expansion. The combination of the healthy NRR at the 111%, which is already embedding the effectiveness we're seeing in the cross-sell upsell and bringing on the new logos, like some of the big deals that we've just recently announced, including the one with the UK Department of Work and Pensions in the international region.
Thank you.
Speaker 1
The next question comes from Pat Walravens with Citizens. Your line is open.
Oh, great. Thank you. Scott, to you first. I love the willingness and focus on a mature approach around partnerships. I would love to get a little more of the detail and background on the expansion of the partnership with Salesforce. This is an area where investors have a ton of questions, which is when both Salesforce and NICE are in the same account and, you know, they have Agentforce and you have your AI solutions that are growing so fast, who has the right to deliver which parts of AI where? How do you guys figure that out?
Speaker 5
I appreciate the feedback on the strategic partnerships. I think I've mentioned before, there is a lot of, you know, for enterprises, they're trying to figure out who are the major organizations they partner with as they deliver, you know, business outcomes, whether it be for their employees, for their partners, and in our situation, for their customers. These partnerships matter because it is clear that you need not only the capabilities that NICE brings, our market-leading AI capabilities, the power of the CCaaS platform, the understanding at real detail the interactions, the intents, the nuances of the consumers, the billions of interactions, but also how that seamlessly integrates into the data and insights of not only CRM platforms such as Salesforce, but also other mid-office and back-office platforms. How do we navigate this? There are a couple of really important principles.
Number one, it is our belief, and it is a strong belief validated by the market's response to us, that when it comes to customer service, you need an integrated single pane of glass. Companies do not want fragmentation in front of their customers. They just do not. When you think about AI, it brings enormous opportunity, but it also brings the potential for fragmentation. They do not want fragmentation between their different vendors as they deliver customer service. It needs to be orchestrated. That means leveraging the strengths of the single pane of glass where we handle all types of interactions at huge volumes, but also the interoperability with enterprise platforms such as Service Cloud Voice that Salesforce brings that deliver other capabilities and system of record and updating CRM and sales and other capabilities as they're fulfilling those customer needs.
What we're really doing is through product, engineering together, building new capabilities where we're able to do that more seamlessly, which removes the friction points for our customers. Where there are overlaps in portfolio, and I need to be candid, with every one of our partners, we have overlaps in portfolio. It's okay. We rely on the strengths of what we're focused on, which is being the best CX AI platform to deliver that single pane of glass system of engagement for our customers. We're also saying we know that we're going to coexist, and we're going to proactively do so with the other companies that are in your enterprise tech space. I think when you do that, it gives companies, our customers, confidence. They now have confidence that when I choose NICE and I choose Salesforce, I've got a seamlessly integrated platform.
I also have the same flexibility if I choose ServiceNow or I choose Amazon and the others. That is the approach that we're taking to this to reduce the friction or the uncertainty for our customers. I'm very confident that will result in not only improved sales, but in improved collaboration between our companies delivering value for our joint customers.
That's super helpful. Thank you. Beth, as a follow-up, when did you guys know that Livox was becoming a drag on the cloud growth?
Speaker 2
Pat, I think that throughout the course of last year, the performance was in line with our expectations, and we were pleased with what we were doing there in the business. As we stepped into this year, we started to see some signs of softness, and that has started to play out. Of course, that's taken into consideration when we reiterate the top-line expectation and the cloud growth. We've started to see some softness, and obviously, we're taking a lot of actions to correct that because we do feel really excited about the opportunity and the potential to turn that around. There is the ability to change that trajectory, but it's been, we've seen it in the last several months.
Okay, great. Thank you.
Speaker 1
The next question comes from Michael Funk with Bank of America. Your line is open.
Thank you for the questions. Beth, one of your competitors mentioned that you're hearing from their customers that the customers expected less strength in 4Q, so softer seasonality than in previous years. Wondering if you're hearing similar comments, and I have one follow-up, please.
Speaker 2
Yeah, thanks for the question. We're not seeing that. I mentioned the high bar that we had last year, which we've taken into consideration, but as we look across our customer base, no, we're not hearing that. In fact, we know that some of the other competitors in our arena actually have concentrated positions in terms of industry verticals, which we don't have. One of the strengths that we've had at NICE is when we look at our customer base, we're well diversified as well across multiple different verticals. That always gives us less exposure to anything that would potentially have a macro impact. We don't see anything like that. We're not expecting it, and we expect to, you know, there's no signs of any kind of softness in seasonality expected.
Speaker 5
Yeah, I need to reiterate, we don't see that softness.
Great. Thank you for the clarification. A bit of a higher level question. I understand you're hoping to do better than 12% this year. Livox is maybe impacting that a bit. Is there a tipping point that you expect or something we can be watching from the outside to signal accelerating growth in cloud revenue, where I think a lot of investors are focused on that moving back higher, hopefully into the teens, mid-teens over time?
Speaker 2
Yeah, I think at Capital Markets Day, that's where we're really looking forward to getting into some further detail and granularity of what we expect to see both organically as we look ahead, but also the impact that we'll see from Cognigy that will be integrated into Mpower. That's the point of really when we're looking forward to give more clarity. As I highlighted earlier, I think we're very excited about this acquisition, and we believe that this will also be yet another reason that we can kind of further increase the positive momentum and the growth that we're seeing in our cloud business.
Speaker 5
Okay, quickly, one more if I could. The Livox churn, was that primarily competitive churn, or is that Livox customers retrenching and pulling back their total spend?
Speaker 2
It was not competitive at all. It was more so, you know, a couple of handful of organizations that actually had decided to kind of create some of their own capabilities in-house predominantly. It wasn't going to a competitor. It was them looking for other options to try and bring those capabilities in-house. I will say that in other scenarios like that, where we've seen customers attempt to do that, it will often come back to us at a later point when they find out that they aren't able to effectively do that. These are a couple of handful of customers that we're talking about there. That's kind of been the experience, but it is not, it's not competitive. It's really kind of these one-off scenarios.
Speaker 5
Thank you, Beth. Thank you, Scott.
Speaker 1
The next question comes from Tim Horan with Oppenheimer. Your line is open.
Speaker 5
I think just two clarifications for you, Beth, and a question. What was the equipment revenue or product revenue pull through this quarter? I think you're saying gross margins should be relatively stable now.
Speaker 2
Yeah, thank you for the question. With respect to the product revenue, the contribution that we were able to successfully pull from the third quarter and our expectation there shifted into Q2. That was contributing about $13 million in terms of revenue contribution, somewhere between $13 to $14 million additional revenue that we pulled from Q3 into Q2. With the gross margin, again, I think you should expect that you'll continue to see it kind of in that 69% to 70% more or less cloud gross margin in the near term. As we step into 2026, and of course, with these deals, these large deals that we've signed continuing to ramp like Services Australia, that's a good example where that customer and the revenue contribution has really just started to trickle into the quarter. We'll also see the benefit where we've made those investments.
We'll start to see the cumulative impact of the cloud on the other side of that that will pull up the gross margin in the future quarters.
Speaker 5
Where are you seeing the most adoption at this point and the most productivity improvements on AI? Can you talk about what it's impacting ARPU? I'm sure there's pluses and minuses. I'm sure the IVR is getting replaced somewhat by IVAs, but there's a whole bunch of other products that are upcoming. Can you just talk about that balance there, ARPU increases versus declines?
Yeah, I'll cover that one. Look, the growth in our AI is across the portfolio. If I just sort of summarize our three key capabilities: autopilot, which is our self-service capability; copilot, which is obviously augmented; and then AutoSummary, which is also part of augmenting and supporting our live agents, human agents. As I think I mentioned in the opening, we had a six-fold increase in copilot deals. We're seeing obviously strong momentum. You think about it, it's a pretty natural extension or upsell for our customers where they're leveraging CXone Mpower. They use the platform really successfully. They're looking to introduce those AI capabilities. Copilot is a key part of that growth. Autopilot also is really strong. That's where we're very excited about what Cognigy will bring going forward because they are the market-leading conversational AI platform.
Their ability to be able to provide that in a seamless and integrated way with our data becomes very exciting. As it relates to ARPU, Tim, actually no real change. The good news is it's incrementality because we're not seeing an erosion on the ARPU as a result of the introduction of the AI capabilities. I don't expect that to change. In fact, if anything, the value of our platform in serving agents continues to increase with capabilities such as Livox and others, let alone the AI capabilities, which we're able to monetize independently and very successfully.
Thank you very much.
Speaker 1
The next question comes from Thomas Blakey of Cantor. Your line is open.
Hey, guys. Thanks for squeezing me in here. I just wanted to maybe unpack a lot of the details here. Beth, thank you for providing the details you did, especially on the AI and self-service numbers. If we look into the second half, I just wanted to, again, kind of take apart the assumptions in core kind of CCaaS and AI themselves. I know you don't guide by product, but just, you know, if you unpack the numbers that you've given the analyst A and here, there seems to be a little bit of a decel, like in this kind of call it core. Maybe that's all Livox is the answer, but I'd love to just kind of unpack that. On the second question, was Livox kind of impact enough to maybe be a headwind to NRR 111 if there's anything you wanted to call out there?
Thank you very much for taking my questions.
Speaker 2
Yeah, thank you. Thank you for the question. In terms of unpacking the second half and the different pieces of the cloud, AI, as you can see, continues to be really the key growth driver of our cloud. We went from 39% YoY growth in the ARR in the first quarter to 42% this quarter. It's demonstrating the strength and momentum we're seeing there in the sales cycle and those customers coming into the revenue stream. With respect to outside of the AI-specific solutions that are part of the CXone Mpower, you really have a portion of the organic CX business. You also obviously have some FTC business. Both of those businesses continue to be healthy. We're happy with their performance and in line with our expectations.
It is, as we've highlighted, predominantly the Livox business, as well as a few other kind of legacy, more hosted cloud that's very immaterial overall, but that are out there in terms of kind of underperforming that contribute that piece to the overall. We're very pleased with both looking at the core of what we're offering into the market and leading the market and our CXone Mpower platforms and also the platforms we see in our FTC and public safety businesses as well. With respect to your second question around our NRR, there's always a potential for the NRR to move from quarter to quarter. We don't expect it to have a material change, but again, we don't really forecast NRR. We'll continue to keep you posted. We expect to keep it healthy and certainly kind of comparable to the levels you've seen.
Speaker 5
Thank you, Beth.
Speaker 1
The next question comes from Catherine Trevnik with Rosenblatt Securities. Your line is open.
Speaker 2
Thanks for squeezing me in also. Quick question on what potential benefits do you expect to see from ServiceNow, AWS, and Snowflake? I know you covered Salesforce to some extent, but also, when would we see incremental revenue from some of these newer partnerships? Thank you.
Speaker 5
Yeah. All of these partnerships have both elements from a go-to-market point of view as well as, but more importantly, from a product and an integration. Taking engineering work, in the case of Amazon Web Services and ServiceNow in particular, our engineering and our product teams are working together in collaboration, building out the orchestration capabilities. For customers, second half, more importantly in Q4, is when we'll be able to then bring those and make them available to market. We are already seeing pipeline and demand that gives us confidence that that will start turning into revenue opportunities and growth. I think it's more in 2026 when we'll see that. As it relates to the go-to-market, the only other comment I would make is that we often see where customers will ask about the collaboration.
Whilst they understand that the deeper integration between our portfolio is coming and it's a part of the cloud roadmaps for both companies, they want to know what that roadmap looks like because they're building it into their long-term buying decisions. It's not just about short-term integration. Again, we're already seeing the indications on pipeline, even if revenue is in 2026.
Speaker 2
All right. Thank you.
Speaker 1
This concludes the question and answer session. I'll turn the call to Scott Russell for closing remarks.
Speaker 5
Thank you, everyone, for joining this morning. I just wanted to reiterate our confidence in not only the performance in Q2, but our outlook for the full year, as we had stated at the beginning of the call, reiterating our full-year guidance, reiterating the strength of our business that is powered by AI. No matter what the puts and takes are, we're in a position of strength, and you can expect that going forward. Last but not least, Iā
Speaker 1
want to thank Marty and the team for an incredible tenure in leading out of the Investor Relations for NICE. I've been the beneficiary of his leadership over the last six months and wishing him the very best in the future. I know he's been a strong ally and friend for many of you. Congrats, Marty, and we wish you the very best.
Speaker 6
Thank you, Scott. Thank you.
Speaker 5
This concludes today's conference call. Thank you for joining. You may now disconnect.