NICE - Q4 2022

Transcript

Operator (participant)

Welcome to the NICE conference call discussing fourth quarter 2022 results. Thank you all for holding. All participants are 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 February 23, 2023. I would now like to turn the call over to Mr. Marty Cohen, Vice President Investor Relations at NICE. Please go ahead.

Marty Cohen (VP of Investor Relations)

Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer, and Beth Gaspich, Chief Financial Officer. Before we start, I'd like to point out that some of the statements made on this call will constitute forward-looking statements. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, please be advised that the company's actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in item three of the company's 2021 annual report on Form 20-F, as filed with the Securities and Exchange Commission on April 5, 2022.

During today's call, we will present a more detailed discussion of fourth quarter and full year 2022 results, and the company's guidance for the first quarter and full year 2023. 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 acquisition-related revenue and expenses, amortization of intangible assets, and accounting for stock-based compensation. The differences between the non-GAAP Adjusted results and the equivalent GAAP figures are detailed in today's press release. I'll now turn the call over to Barak.

Barak Eilam (CEO)

Thank you, Marty, and welcome everyone. We're happy to report another quarter of outstanding results with profitable growth momentum. 2022 was another landmark year as we crossed significant milestones, highlighting our success and paving the way for future growth. We crossed $2 billion in total revenue, achieved 60% in Cloud revenue as a percent of total revenue, continued to move swiftly towards a 30%+ operating margin, witnessed a massive expansion in AI adoption, and had the best year ever for both new customer acquisition and new partner onboarding. The strong finish to the year led to a full year 2022 total revenue growth of 30% and 14% in constant currency. Driving these strong results is our continued excellent execution in the cloud, as Cloud revenue increased 27% for the full year 2022, and similarly in Q4.

Our strategy has always been to execute on the top line while expanding profitability. This continued throughout 2022, ending the year with a robust growth in profitability. For the full year 2022, our gross margin increased 50 basis points to 73.1%. Our operating margin was 50 basis points to an industry-leading 28.7%. We reported earnings per share of $7.62, representing growth of 17%. Much of this growth and profitability was driven by further expansion in our Cloud gross margin, which increased 230 basis points to 70% in 2022, demonstrating the superiority of our Cloud architecture that makes us unique in our market.

Moreover, for the full year 2022, we generated $480 million in operating cash and ended the year with a total cash position of more than one and a half billion dollars, giving us the capital flexibility that is unparalleled in our market. NICE is by far in the best competitive position in our industry, operationally, innovatively, and financially, providing us significant opportunities ahead to capture a large and expanding market. These opportunities fall into four categories as we see today. Cloud expansion in a vastly under-penetrated enterprise market, accelerating demand for complete platform as the market standard, the rise of AI, and the financial distress of our competitors. Let me expand on all four. First, cloud. While CX Cloud adoption, which 20%, it is extremely nascent in the large enterprise market.

Over the next two years, we expect to see enterprises make a meaningful shift to the cloud. However, the high end of the market is a completely different ballgame. It requires the ability to address both complexity and scale, and this can only be addressed with our true native seamlessly integrated platform, CXone. That brings me to the next opportunity, which is platform as the new market standard. Superior CX is all about the ability to serve the consumer in the most fluent and seamless way. Enterprises are now realizing that this cannot be achieved by loosely integrating dozens of siloed point solutions, which is the common approach promoted by vendors in our industry.

The only way to achieve ultimate CX success is by adopting of Cloud platform that was purposely built natively from the ground up with a full suite of solutions. This is exactly what we have done over the last seven years as we invested more than 12,000 engineering man-years building CXone to become the leading CX platform. The third opportunity is the rise of AI. In the upcoming decade, the most valuable companies will no longer be software companies, but those that transform into AI companies. Organizations are reaching the limit in their ability to achieve further operational gains with the simple automation offered by current enterprise software solutions. AI is the next transformational wave. To become an AI leader, software companies must have three key assets: a Cloud platform that has been widely adopted, massive amounts of historical data, and industry-specific domain expertise.

NICE is the only one in our industry with these three assets. We have spent the last several years building and deploying Enlighten, fully embedded in CXone, transforming it from a software platform to an AI platform and creating an unbridgeable gap in our AI leadership. Just a few weeks ago, we were the first to release a groundbreaking integration between Enlighten AI and ChatGPT, pioneering human-like interactions in CX conversational AI, demonstrating our unparalleled innovation. The fourth opportunity related to our ability to capitalize on the financial distress that many of our competitors are experiencing. The CX competitive landscape is split between legacy incumbents that are struggling to service tremendous debt and small players who are dependent on continuous, difficult to obtain capital injection.

This situation is raising growing concerns with enterprises who want to partner with a vendor that offer both long-term financial viability, as well as significant commitment to rapid innovation. NICE is the only vendor in the CX market that is extremely profitable, investing heavily in R&D, and at the same time has a net cash position of more than $1 billion. Our strong financial position gives us greater flexibility to innovate and acquire to further fuel growth while continuing to drive increasing profitability. These four opportunities were all apparent in our Q4 deals. We signed an eight-digit deal with one of the largest banks in Latin America, which adopted a large part of our CXone portfolio and was a replacement of three legacy on-premise competitors.

We are highly recognized by this customer for our success with large enterprise implementations, our extensive digital and self-service capabilities, and the ability to deliver their future needs on single scalable platform. We signed another eight-digit deal with one of the largest Canadian insurance companies. We replaced the legacy incumbent as this customer is moving from an on-premise architecture to a full cloud implementation and selected NICE due to the completeness and native functionality of our digital and self-service capabilities in CXone, providing this customer the ability to grow their digital footprint with a single vendor. In yet another eight-digit deal, a large U.S.-based cellular company is consolidating their complicated on-premise tech stack provided by multiple legacy vendors with CXone as their unified Cloud platform. This customer chose NICE for our market leadership and financial stability.

We signed a multitude of seven-digit deals in Q4, including a large insurance company who is moving to the Cloud with CXone and one of the largest U.S. independent mortgage providers, replacing their on-premise legacy vendor that has recently announced the sunset of several of their solutions. In another seven-digit deal, we extended our portfolio of digital solution at a well-known online bank. We won the deal over a digital pure play vendor as a result of the CXone unified agent experience across multiple channels, which is a distinct competitive advantage of the CXone platform. We also signed multiple seven-digit deals in international markets, demonstrating the growing demand for Cloud in EMEIA and APAC. One deal was with a U.K.-based energy company who was displeased with an existing inflexible on-premise solution, proving increasingly costly to maintain.

We won with CXone for the platform's superior functionality and support for digital customer journeys, demonstrating faster ROI and operational efficiencies. In the APAC region, we signed our largest CXone deal to date, which was a seven-digit deal with a multinational Asia-based technology company. The rapid growth required a next-gen digital platform that was more scalable and provides full conversational AI. In summary, 2022 was a year in which we surpassed significant milestones and continued to outperform on all financial measures. We operate in markets with an abundance of short-term and long-term opportunities. Our platforms are serving the most mission-critical processes of small and large enterprises across multiple verticals. Through our financial strength and rapid innovation over the past several years, we opened an unbridgeable gap versus our competitors.

We look forward to leveraging our leading position to capture additional market share in 2023 and in the years to come. Before I close, I want to thank our employees for another great year. It is because of your, our ardent dedication and passionate desire to succeed that we continue to take NICE to another level of achievement. We are fully energized and ready to charge forward in 2023 and look forward to another excellent year. I will now turn the call over to Beth.

Beth Gaspich (CFO)

Thank you, Barak. Good day everyone. I'm pleased to provide an analysis of our financial results and the business performance for the fourth quarter of 2022 and our outlook for the first quarter and full year 2023. Our financial results in the fourth quarter continue to demonstrate the strength in our business with year-over-year growth for both total revenue and EPS in double digits. Total revenue for the fourth quarter was $569 million, up 10% year-over-year. In constant currency, total revenue in Q4 was $576 million and increased 12% year-over-year above the high end of our guidance range. Cloud revenue was $359 million in the fourth quarter, which was an increase of 26% year-over-year.

In constant currency, Cloud revenue was $361 million and increased 27% year-over-year. Cloud revenue increased sequentially by 9% quarter-over-quarter, similar to the sequential growth in Q4 last year. Our Cloud growth of 27% for the full year was consistent with our expectations and reflects the resiliency of our business and strong demand for the unmatched breadth and depth of our Cloud solutions. Cloud revenue represented a record 63% of total revenue, up from 55% in Q4 last year. Product and services revenue results were as expected, demonstrating the continued shift of our business to the cloud.

Product revenue, which represented 9% of total revenue in the quarter, decreased 24% to $49 million, and services revenue, which represented 28% of total revenue, was $161 million, a slight decrease year-over-year. Recurring revenue, which mainly comprises our Cloud and maintenance revenue, increased further year-over-year to a record 85% of total revenue in the fourth quarter, compared to 80% in the same period last year. From a geographic breakdown, the Americas region, which represented 83% of total revenue, grew 12% year-over-year. The EMEIA region, which represented 11% of our total revenue, increased 1% year-over-year and 11% in constant currency. APAC, which represented 6% of total revenue, grew 2% year-over-year and 5% in constant currency.

The growth in both EMEIA and APAC revenue in the quarter was driven by the growing adoption of our Cloud solutions. Moving to our business unit breakdown. Customer engagement revenues, which represented 82% of our total revenue in Q4, were $467 million, an 11% increase and 12% increase in constant currency compared to last year. CXone, our customer experience Cloud platform, is the engine driving our growth in customer engagement, both by establishing new logo beachheads and by selling into our installed base. Revenues from financial crime and compliance, which represented 18% of our total revenue in Q4 and totaled $102 million, increased 6% year-over-year and 9% in constant currency.

In all segments of the markets where we operate, our Cloud platforms remain our number one strategic focus and growth driver, resulting in our expectation that our Cloud revenue will continue to become a greater percentage of total revenue. We expect that product and services will continue to fluctuate on a quarterly basis as the concentration of our Cloud business continues to reach new highs. To profitability. At NICE, we continue to distinguish ourselves in our markets as a company that consistently delivers strong triumvirate results of growth in our revenue, profitability, and operating cash generation. Our gross profit grew 10% year-over-year to $413 million. Total gross margin in Q4 was 72.6% compared to 73% in Q4 last year.

Cloud gross margin increased 230 basis points and was a record 70.5% in Q4. Our expanding Cloud gross margin is a testament to the efficiency of our Cloud infrastructure, coupled with increasing enterprise adoption of our high-margin portfolio of Cloud software solutions. In Q4, operating income increased by 12% year-over-year to a quarterly record of $163 million, and our industry-leading operating margin increased to 28.6% compared to 28.2% last year.

This quarter, our financial and other income was $10 million, driven by a combination of interest income earned from our cash and investment portfolio, combined with a strong favorable impact from exchange rate movements. I would like to highlight that financial and other income includes revaluation of non-US dollar denominated balance sheet accounts at the end of each quarter, which can increase quarterly fluctuations. In Q4, EBITDA increased by 14% year-over-year to a quarterly record of $184 million, bringing our annual EBITDA to just under $700 million. Our industry leading EBITDA margin in the fourth quarter increased to 32.4% compared to 31.5% last year. Earnings per share for the fourth quarter totaled a record $2.04, an increase of 18% compared to Q4 last year.

Cash flow from operations in Q4 was $177 million, an increase of 57% compared to last year. For the full year, our cash generated from operations totaled $480 million. Last quarter, we continued to repurchase shares in the amount of $25 million and a total of $145 million for the full year 2022, which is nearly double the amount repurchased in 2021. We plan to further accelerate our share repurchases in 2023 and complete the $250 million program announced last quarter by the end of the current year. Total cash and investments at the end of December totaled $1.572 billion.

Our debt, net of a hedge instrument, was $542 million, resulting in net cash and investments of $1 billion. Before I conclude my remarks, I would like to highlight a few expectations relative to our 2023 outlook. Our guidance is based on the US dollar. At this point in the year, based on forward foreign exchange rates, we do not anticipate a material impact to our total revenue for the full year 2023. We anticipate our Cloud revenue to continue to grow at a healthy rate in a range of 22%-25% in 2023, with secular growth of 25% in the next several years, stemming from the significant increase of Cloud penetration in the large enterprise market. We expect to continue to deliver the strong operational excellence, which has been a constant mainstay of our strategy.

We have consistently delivered operating income growth in double-digits. We expect similar double-digit growth in our full year operating income for 2023. We expect our effective tax rate during the year to be between 21% and 22%. Our first quarter and full year 2023 revenue and EPS guidance is as follows. For the first quarter of 2023, we expect total revenue to be in the range of $559 million-$569 million, representing 7% year-over-year growth at the midpoint. We expect the first quarter 2023 fully diluted earnings per share to be in a range of $1.92-$2.02, representing 9% year-over-year growth at the midpoint.

For the full year 2023, we expect total revenue to be in the range of $2.345 billion-$2.365 billion, representing 8% growth at the midpoint compared to full year 2022. We expect the full year 2023 fully diluted earnings per share to be in a range of $8.28-$8.48, representing 10% growth at the midpoint compared to full year 2022. I will now turn the call over to the operator for questions. Operator?

Operator (participant)

Thank you. We'll 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'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you. Our first question is from Samad Samana with Jefferies. Please proceed with your question.

Samad Samana (Managing Director)

Good morning. Thanks for taking my questions. Maybe Barak, one to kick off with you. There's been a lot of chatter around AI and the opportunities there in the contact center in particular. You mentioned it a little bit in your, in your prepared remarks, but I'm just curious, what are attach rates looking like for Enlighten and how is that impacting the overall deal size or win rates that you're seeing and how's NICE monetizing that opportunity?

Barak Eilam (CEO)

Yeah. Thank you, Samad. Appreciate the question. I highlighted not just on this call, I think you, we showed you our journey, when it comes to AI for the past three years. This has been a strong and leading pillar in our innovation in the past, three years. We came out with Enlighten several years back and more and more innovation. We have, we believe the most robust and significant, natively built, AI platform out there. As I mentioned in my earlier remarks, 2022 was a landmark year for AI as we experienced massive adoption of AI.

Based on Enlighten. First, in terms of the attachment rate, we see it's growing in a dramatic way. We see it across the board in multiple verticals and in all sizes of customers, both existing and new, by the way. Second, it serve as a key differentiator for us. I think that AI is while it's still in the early days on what it can do for the CX business, there is now realization of enterprises. I find myself, when meeting with customers, most of them already tried something and realized that, you know, just implementing a kind of a siloed or a point solution with AI doesn't really deliver the solution. It doesn't scale, and it doesn't provide the full complexity nor that it serve a more complex scenarios.

Then, when they see what we can offer with Enlighten and recently including the integration of ChatGPT, it's a completely different ballgame. In terms of monetization, I'll give you two kind of two comments on that. One, it increases our deal size in a pretty meaningful way because if you think about it, we spoke historically a lot about, you know, the number of seats, which represent where the core of our business was in the past. AI open up the potential total addressable market from us as we move from share of seats to share of interactions. You think about overall interactions that are not necessarily attended by a person, we're talking about a very significant amount of interactions that are growing in an exponential way.

That's one way to think about the opportunity and also what we see, in the business. The second thing is to think about a particular deal where it might be, you know, even a relatively small, contact center footprint with few hundreds of seats. All of a sudden, if you think about the digital footprint and the introduction of conversational AI, it can be a pretty, almost a mega, customer for us.

The last thing I say, you know, a good example will be that deal that I mentioned in Asia Pacific, which was our largest in our history when it comes to CXone, which was exactly what happened for a customer that have a very, very small contact center, but a very dramatic digital footprint with the true need for conversational AI.

Samad Samana (Managing Director)

Very helpful. Then, Beth, maybe a follow-up for you. Just the Cloud revenue guidance for 22%-25% growth for the full year, that's a pretty strong starting point. I'd say the only question I have is how should we think about maybe what's assumed in that guidance from a macro perspective or a timing of 2022 book deals going live, just given that the range at the midpoint is kinda below that 25% long-term growth rate that you've given? Just how should we think about what went into that guidance or what's assumed for 2023 specifically?

Beth Gaspich (CFO)

Yeah. Thanks for the question, Samad. So as you highlighted, we provided a range of Cloud revenue growth expectation between 22%-25% for the year of 2023. Of course, that's following a really impressive growth we had in our cloud of 27% for the full year last year and 26% in the fourth quarter. We saw that, you know, relative to our closest competitor, our growth rate was considerably higher on the Cloud business. Of course, we're at a scale that's nearly double, you know, some of our nearest competitors.

With respect to, you know, what we expect in terms of how that will play out, the range was provided as it does include some caution relative to the overall macro environment in 2025. We do believe we have line of sight to the higher end of that range, of course, we'll continue to update that as the year progresses.

Barak Eilam (CEO)

Maybe just to-

Samad Samana (Managing Director)

Great

Barak Eilam (CEO)

to add one more word here, Samad, on the growth moving forward. Beth mentioned the scale that we have. We saw also the sequential growth from Q3 and Q4 that was similar to last year at 9%, which shows that, you know, we continue to accelerate well in the cloud. I think that the message with this guidance, vis-à-vis what we hear and see from the competitive landscape is that we are taking market share.

Samad Samana (Managing Director)

Great. Thank you both for the color. Appreciate it.

Operator (participant)

Thank you. Our next question is from Tyler Radke with Citi. Please proceed with your question.

Tyler Radke (Managing Director and Senior Equity Analyst)

Thank you. Good morning. I wanted to touch on the competitive landscape. Obviously, Avaya has been in the headlines with the bankruptcy and, you know, it's probably easy to imagine how you're benefiting from that. I actually wanted to ask you outside of Avaya with some of your other competitors, just what are you seeing there? Are share gains increasing? What do you think is the biggest differentiator today in terms of your product set versus the competitors outside of Avaya? Thank you.

Barak Eilam (CEO)

Sure. No problem. You are correct with your observation, and I mentioned it in one of those four big opportunities we see, both for the show and the short and the long term. I think the CX market has a pretty unique competitive landscape right now, and as I said, it's divided between Avaya and another large player out there that are really struggling to basically servicing debt. We know for a fact that the management team are spending the majority of their time focusing on cash flow and how to service a debt with a very, very high interest rate. As a result of that, they need to take tough decisions that will impact both the short term, but also the long term, as they are limiting the investment that they can do in innovation.

I believe they are taking decisions that are impacting negatively their ability to compete in, again, both the short term and the long term. That's one competitive landscape, and I think it provide great opportunity for us. We see it already that customers and partners are starting to move away from selecting these platforms. The other side of the market, as you've mentioned, are vendors that are either in the last, basically since they started, they basically were banking on a continuous injection of capital. They were either losing money or close to breakeven, and that is no longer the case, and they don't no longer have the ability to do that.

We hear about a lot of cost reduction activities that they are doing. Others that are starting now to experience deceleration, a significant one, in their growth rate and are focusing their effort on profitability. We operated since ever, looking for profitable growth. We have the muscles and the know-how in the company, on how to drive growth, drive profitability. At the same time, we are constantly investing at least 15% of our revenues in R&D, making sure that, you know, we continue to open the gap. Our list of differentiations is just getting bigger and bigger by the day. We think that it will be very, very hard, potentially impossible, for others, especially in this economy, to compete with us in the long run.

I think, one last thing I'll say is that, you know, if you look on, as far as we know, most or all of our competitors, went through several rounds of layoffs, and we are actually hiring people these days.

Tyler Radke (Managing Director and Senior Equity Analyst)

Got it. Thank you. Beth, on the guidance for 2023, you know, you commented that product revenue can have some fluctuations, which, you know, we've certainly seen that in years past. But I'm curious if there's a broader just mix shift that is occurring that you're embedding in 2023, aside from the usual volatility, just given that the cloud guidance was, you know, relatively strong in line to slightly ahead of the street. You know, total revenue was quite a bit lower. Maybe is there, you know, a bigger shift or something you're doing on the sales incentive side to drive a bigger mix shift to cloud? If you could just kind of elaborate on, you know, the product assumptions in that outlook. Thank you.

Beth Gaspich (CFO)

Yeah. Thanks, Tyler. It's a great question, and it is embedded in our guidance for next year. You know, we saw that our Cloud revenue as a percentage of our total revenue mix in Q4 was at a record 63%. We expect that momentum, you know, in our cloud to continue to drive our overall growth. Of course, that means that the mix will continue to be further concentrated as more Cloud revenue. As a natural result of that, of course, that means our premise-based business, and particularly our new product revenue, is expected to see reductions in the current year and looking forward.

Of course, that's completely aligned with our expectations and our strategic focus to do really, continue our transformation fully as a Cloud company across all of our business segments.

Barak Eilam (CEO)

Maybe just to add to that because you asked about the sales incentives. The answer is absolutely yes. We think this is not just a year. We've done it in the past years, but this is time for us to go all in, going back to the comment before about a competitive landscape, and prioritize the cloud in everything that we do. By the way, across all our business lines. We believe it's the right thing for both the mid and the long term. As a result of that, as Beth said, you know, we are going to experience a decrease in product revenue. But it's the right thing for, you know, building ourselves as a very large and fast-growing Cloud company, especially with the fact that our cloud is coming at north of 70% gross margin.

That is not just a top-line play, it also allows us to build an extremely profitable business moving forward.

Tyler Radke (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. Our next question is from James Fish with Piper Sandler. Please proceed with your question.

James Fish (Managing Director and Senior Research Analyst)

Hey, guys. Thanks for the questions here. Barak, for you, obviously, Samad already kind of brought up AI, but I was kinda wondering how you guys are thinking about how AI can actually accelerate or change Cloud conversions in the next few years. Are you starting to see kind of that acceleration interest in the pipeline already because of AI versus kind of what you were seeing over the last, I don't know, 12-18 months? What's gonna differentiate NICE's AI kind of moving forward? Thanks.

Barak Eilam (CEO)

You know, the answer is yes. We believe that A, it is yet another driver for customers that sit on a legacy on-premise platform. AI is definitely one more driver to move to the cloud. It is almost impossible to have an effective conversational AI solution using your on-prem or legacy-hosted solution due to the three assets that I've mentioned, which is the flexibility of the Cloud platform, yeah, and of course, using the historical data in real-time, which can be achieved only in the cloud. Cloud is almost, if you would like, a prerequisite in order to really enjoy the full benefit of AI. Yes, it's another reason why customer move.

We see more and more customer understand that, and understand that it's not just about moving the contact center to the cloud, and they are no longer interested in kind of just like for like, they wanna have like for better. Looking more and more on this shift as a transformational move in order to, on one hand, improving the service they can provide to the customer, move to digital, and at the same time, starting to offer as a force multiplier, if you would like, of a very effective AI in their environment. We believe that the investment, massive investment that we've done in the past five years, including some very important technological acquisitions we've done back in 2020 and 2021, are putting us today in the best position to capture on this opportunity.

James Fish (Managing Director and Senior Research Analyst)

That's helpful. Beth, for you, I mean, what are you guys seeing on the expansion rates on cloud relative to the last few quarters? Can you remind us how much you get relative on the cross-sell side versus the up-sell, and how you're kind of expecting expansion rates to change in 2023 versus what you saw in 2022, just given kind of the macro environment?

Beth Gaspich (CFO)

Yeah. Thanks, James. Yes. When we, when we look at the expansion we see of our customers, given the fact that CXone is really the most comprehensive suite, you know, platform in the industry, it has a significant amount of opportunity for us to go back into the existing base of our CXone customers and continue to sell more and more of the platform. You know, of course, as Barak just talked about, you know, one of those great opportunities for us is around the use of AI and Enlighten that's embedded in CXone, as well as all of our digital capabilities. We see that continued expansion of CXone and what the ARPU would look like for our customers.

In addition to that, of course, we still have our legacy maintenance base, that we also have converting over time to the cloud. Of course, that gives us additional expansion opportunities as well because we typically see a very nice uplift when those customers shift over to using CXone, and that can look, you know, anywhere from 2-3 times upwards to 9-10 times. It's a combination of expansion, both from the existing CXone users as well as the conversion of our existing legacy customer base.

Barak Eilam (CEO)

I will add to that specifically, we saw it in the second half last year and even more so in Q4. Beth mentioned that both our NRR, net retention rate, our ARPU, and our monthly active user all grew very nicely in Q4, and at a higher % than we've seen before. You've seen it in the sequential growth in the cloud between Q3 and Q4.

James Fish (Managing Director and Senior Research Analyst)

Thanks, guys.

Operator (participant)

Thank you. Our next question is from Rishi Jaluria with RBC. Please proceed with your question.

Rishi Jaluria (Managing Director and Senior Equity Research Analyst)

Oh, wonderful. Thanks so much for taking my questions. Barak, I wanted to start by going a little bit further down the AI path. I know we've had a lot of discussion on the call today. I wanted to ask specifically about ChatGPT. You know, you have made some announcements around that. Maybe can you give us the longer-term vision for how you intend to incorporate some of ChatGPT's technology along with your own AI and what that looks like. Maybe how that can end up actually being a competitive advantage 'cause obviously, ChatGPT can be used by other competitors out there. I'm sure being able to combine it with your own AI systems starts to be a competitive advantage.

Maybe a little bit more color there would be helpful. Then I've got a follow-up for Beth.

Barak Eilam (CEO)

Sure. Thanks, thanks for that. Yes, we were the first to announce several weeks back, the integration of ChatGPT. We are always happy to be the first to announce and see others you know, rushing to follow our direction. The reason why we've managed to be the first one is that the fact that we have Enlighten fully embedded in CXone, and we've been working on that for several years, and we have pretty mass adoption of Enlighten, which allows us to relatively easily integrate variety of tools like, you know, Google Dialogflow, that is kind of a different thing, but obviously ChatGPT.

I will mention or hint to the fact that don't forget that we also have a pretty unique partnership with Microsoft, which I think, you know, hinting to also certain elements down the road that we can do on this combination. Specifically about, you know, why customers will choose or choosing to adopt ChatGPT for CX purposes for CXone. Is the reason is that if they just try to use ChatGPT as is in the contact center, it's not gonna fly, and that's not gonna help much.

The reason for that is that CX is a pretty unique environment, and we are using a subset of ChatGPT that allows us or allow our customers to benefit from some of the strength of ChatGPT, but at the same time, using our unmatched data repository to have a subset of well-trained ChatGPT with the front end, the unified front end that we have both to the customer as well as, by the way, to the agent in order to access information in a very easy way. Customer really get here a win-win situation between the two, and I can tell you that since we introduced it to the market, we had some alpha customers. With the announcement itself, we have a lot of interest and already engaged with the multiple processes with customers.

As I said before, I believe it's just the beginning, and ChatGPT is just one, I believe, of multiple, you know, generative AI solutions that will come up in the market.

Rishi Jaluria (Managing Director and Senior Equity Research Analyst)

All right. Wonderful. Thanks. That's really helpful. Then Beth, apologies if I missed this earlier, but when we think about the guidance for 2023 and specifically the EPS guidance, can you help us understand what are you assuming in below the line adjustments and financing and other interest and all that? Just trying to, you know, better understand, you know, if we think about the EPS numbers, how much of that is gonna be driven by EBIT margin expansion versus below the line adjustments. Thanks.

Beth Gaspich (CFO)

Yeah. Thanks, Rishi. When we look at our EPS and the operating income for next year, you know, I highlighted on the call that our operating income is expected to continue to grow in double digits as we've seen, you know, for the last many, many quarters. We'll continue to keep that sharp eye and keen eye around driving profitability from our operations. With respect to EPS, of course, we expect that to likewise, to continue to grow in double digits. What you can generally expect, you know, below the line, and as I kind of highlighted on in my remarks, was that, you know, we have a healthy amount of cash on our balance sheets, and we have a nice interest income stream coming from that.

However, in the fourth quarter in particular, it was, you know, kind of at a higher point than what we would typically expect to see as a result of the strong gain that we had from exchange rates. You should keep that in mind when you're looking at, 2023. Really, the main focus is that, you know, we continue to really drive and manage our business, driving that double-digit growth and profitability, and that's what we expect to see continued coming from our operations.

Rishi Jaluria (Managing Director and Senior Equity Research Analyst)

All right. Wonderful. Thank you.

Operator (participant)

Thank you. Our next question is from Michael Funk with Bank of America. Please proceed with your question.

Michael Funk (Director and Senior Equity Research Analyst)

Yeah. Thank you for the question this morning. Couple, if I could. We've heard from others this quarter about pressure in specific verticals, weaker demand. Would love to hear you maybe compare or contrast your own experience given the relatively strong cloud guidance that you gave for 2023.

Barak Eilam (CEO)

We don't see any significant change that I can as, you know, provide it with a certain or to associate it with a certain vertical. As I mentioned before, our net retention rate in Q4 actually went up percentage-wise. I'll mention again the sequential growth. Also the guidance is such that we don't expect or we don't see a weakness in a particular vertical. Obviously, we are cautious and, you know, we're all watching the economy, but we believe we're taking market share, and it gives us strength. Also, you know, for our business, we are well diversified across roughly 11-12 different verticals. As we've seen in the past, even if there is a certain weakness in a certain vertical, it balance itself on another vertical.

We're not necessarily concerned on a particular vertical that is kind of significant for our business.

Michael Funk (Director and Senior Equity Research Analyst)

On returns to shareholders, good to see the commitment to returning incremental capital this year. you know, given your relatively strong net cash position and cash flow generation, how should we think about target leverage, target cash, and potential incremental returns to shareholders going forward?

Beth Gaspich (CFO)

Thank you. You know, we highlighted today earlier that we've just recently announced a new buyback program of $250 million last quarter. You know, today we mentioned that it's our intent that we'll actually fully execute against that $250 million buyback during the course of 2023. It continues to be a priority for us to return to our shareholders. As you mentioned, you know, we're generating roughly about $500 million of cash from our operations each and every year. That represents, you know, about half of that amount generated from our operations. Of course, that means we continue to have a lot of ample powder also to look at acquisition opportunities in addition.

Barak Eilam (CEO)

Maybe I'll add to that also that if you know, look at our. This is not new, but you look at our difference between our non-GAAP and GAAP and, as you know, the main component is stock-based compensation. We are the, you know, we are very effective or efficient, if you'd like, in that vis-a-vis some other companies out there. It's not a big component, which again, goes back to the, we don't dilute further, like some other companies are doing with respect to the total fully diluted shares.

Michael Funk (Director and Senior Equity Research Analyst)

No. Thank you for the question, Beth, and Barak Thank you.

Barak Eilam (CEO)

Operator.

Operator (participant)

Our next question is from Meta Marshall with Morgan Stanley. Please proceed with your question.

Speaker 10

Hi, this is Mary on for Meta. Thanks for taking our question. I wanna ask you about your partnerships. You've invested in partnerships meaningfully over the past couple of years. I was just wondering where you're seeing traction with your partnerships. Thanks.

Barak Eilam (CEO)

Yeah, thanks for the question. I mentioned before that 2022 was indeed a record year for us, not just in terms of the number of new customers, but also in terms of new partnerships. I believe that First of all, you know, it's a very important and being a big part of our go-to-market strategy, and we're highly committed to that, and we see great traction. The traction we're seeing right now is in three main areas. The first one is we further expand internationally. We're assigning more and more partners in all of those international markets. That's one area.

The second is a significant realization of partners of the legacy incumbent or on-premise vendors like Avaya and Genesys that realizing that they need to go with a different vendor that have also the, you know, strong financial viability, and they come to us. That's the second one. The third is the kind of newcomers into the CX space. As I mentioned before, customers are looking more and more to look in the transition to the cloud as more of a transformative move than just a like for like. You see more of the large consulting firms stepping into this market, and we see them making a bigger impact in the market. There, there are some great partnerships that we have with these guys.

Speaker 10

Thank you.

Operator (participant)

Thank you. Our next question is from Tim Horan with Oppenheimer. Please proceed with your question.

Tim Horan (Managing Director and Senior Analyst)

Thanks, guys. I'm gonna stay on the AI theme. Can you talk a little bit about how unique your AI product is or who else you're competing with at this point, and how long did it take you to curate the data to be able to kind of, you know, really put it to use? I guess can you talk about your experiences with ChatGPT, what the product is like, any surprises, how hard has it been to kinda integrate? Thanks.

Barak Eilam (CEO)

Thanks, thanks for the question. You know, one of the things that we're very happy with is that about five, six years ago, we saw the potential of the rise of AI and what can it do or what can it be doing for the CX business. We started to invest and open a division in the company that invested heavily in the research, develop, and development and making sure that it's not just a side siloed solution, but is well embedded in CXone. We have today 500 engineers dedicated to AI solution, and they're working day and night to continue and enhance the AI capabilities embedded in CXone. The core engine is, as we mentioned, always is Enlighten.

We're getting to this point in the market where we have already a very significant mileage and many different customers and more and more use cases, which allows us to take it to the next step. Our experience to date with ChatGPT has been very good. The integration itself is not the difficult part. That's kind of the easy part because CXone is such an open platform, it was relatively easy to integrate it in. The interesting part is actually the data repository. The fact that we have this historical data, you ask about how big is it. It is, I'll say gigantic. We're talking about information derived from tens of billions of historical data per vertical, per use case.

we have demonstrated some of that in the latest analyst day. Happy to do that again in the upcoming investors and analyst day that we have. That's what really allows us to take ChatGPT and make it fully operational in a CX environment. This is a truly big differentiation that we have because just integration is not enough.

Tim Horan (Managing Director and Senior Analyst)

How unique do you think your product is? Can you just talk about the experience, you know, and the quality and, maybe any other findings on, you know, what people are using it for?

Barak Eilam (CEO)

I believe it's very unique, and that's what also we hear from our customers. It goes to the two points or three points that I've mentioned. One is the fact that it's fully embedded in a platform that has been built from the ground up natively with AI capabilities. Second is the amount of data we already injected and the fact that it's easy for us to train the models and build new models in a very, very fast way and constantly tune them in a very seamless way. Not to take away from the domain expertise of those hundreds of people we have in the company, that this is not new for them.

We are engaged today with dozens of different customers of different sizes that are already working to implement that. They're using our AI without GPT, but GPT can be a great add-on to the experience.

Tim Horan (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Barak Eilam for any closing comments.

Barak Eilam (CEO)

Thank you very much all for joining us. We're happy to summarize a great year, and we're looking forward for an excellent 2023. Have a great day.

Operator (participant)

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