Nice Ltd (NICE) 2021 Q1 法說會逐字稿

Welcome to the NICE conference call discussing first quarter 2021 results, and thank you all for holding. (Operator Instructions) As a reminder, this conference is being recorded, May 13, 2021.

I would now like to turn this call over to Mr. Marty Cohen, VP, Investor Relations at NICE. Please go ahead.

Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer; Beth Gaspich, Chief Financial Officer; and Eran Liron, Executive Vice President, Corporate Development.

Before we start, I would like to point out that some of the statements made on this call will constitute forward-looking statements. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, please be advised that the company's actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in Item 3 of the company's 2020 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 23, 2021.

During today's call, we will present a more detailed discussion of first quarter 2021 results and the company's guidance for the second quarter and full year 2021. Following our comments, there will be an opportunity for questions.

Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles, as reflected mainly in accounting for acquisition-related revenues 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.

We'd also like to remind you that we are hosting our virtual Investor Day on May 25 in conjunction with our Interactions Live User Conference, a special program for analysts and investors going through presentations from NICE's executives and product and technology sessions. If you haven't received a registration e-mail, please e-mail us at ir@nice.com.

I will now turn the call over to Barak.

Thank you, Marty, and welcome, everyone.

As we're nearly halfway through 2021, our world is already changing at an accelerated pace. Consumer experiences will change more in the next 5 years than they have in the previous 15. Next-gen consumers demand channel of choice and seamless experience, and to keep up, enterprises need to raise their game in driving customer satisfaction to maintain loyalty among consumers. To accomplish this, organizations are accelerating their adoption of cloud, digital, sophisticated analytics and AI. This is creating immense opportunities in the market in which we operate and for the solution that we develop and deliver.

We are seeing increased adoption in cloud, digital, automation and self-service, solutions and technologies that we have successfully encapsulated into the broadest, deepest and most complete platforms in both Customer Engagement and Financial Crime and Compliance. These platforms will enable us to capture significant growth opportunities in what we foresee as a more than a $25 billion total addressable market for NICE. We witnessed strong evidence of these growth opportunities throughout 2020, and it is continuing in 2021, as demonstrated by our very strong first quarter results across the board.

Total revenue increased 11% to $457 million, which exceeded our guidance range, and cloud revenue grew 33%, both of which were fueled by CXone. The CXone pipeline in bookings reached record levels in Q1. Unlike cloud transitions by other companies, our overall revenue growth is accelerating due to a combination of 2 drivers to our cloud business: first, cloud conversions of our existing on-premise products, resulting in higher annual revenue per customer; and second, a net new cloud business in CCaaS, digital and self-service, solutions that we did not previously offer in the on-premise model.

In Q1, due to our success in the large enterprise market, our cloud gross margin continued to rapidly increase, growing 470 basis points to 67.6%, and that drove the overall gross margin, which increased 180 basis points to 72.7%. Operating income increased 17% to $129 million, and operating margin grew 130 basis points to 28.2%. This led to a 15% increase in earnings per share to $1.54, which also exceeded our guidance range. And we generated $164 million in operating cash flow in Q1.

The underpinning of the strong financial performance and our ongoing growth are the result of owning the best and broader set of assets we have assembled through both innovations and acquisitions to create CXone. This asset include omni-channel routing, digital, workforce engagement, analytics, AI and automation. We have successfully integrated these best-of-breed technologies into CXone, which is a single, unified native cloud platform delivered to all segments of the market: small, mid and large enterprises. This deliberate and prudent strategy of combining all these assets was recognized by Gartner and many other industry analysts, as NICE is the only company that is a leader in both CCaaS and WEM in Gartner's Magic Quadrant.

As the demand for channel of choice has become mainstream among consumers, the need for digital has never been greater among enterprises. In Q1, we witnessed an increase of 2.5x in digital interactions. This rapid growth in digital demonstrate the fast-growing appetite that enterprises have to digitally transform, and CXone has the broadest set of digital assets in the industry. CXone's native capabilities allow businesses to reach consumers wherever the digital journey begins. Whether a search engine, social network or mobile application, AI powered Smart Digital Self-Service is ready to handle all interactions, either proactive or responsive, to all customer needs.

A few weeks ago, we further enhanced our digital offering with the introduction of CXone Expert, following the acquisition of MindTouch. This expands the capabilities of our platform by embedding knowledge into the digital journey. This is another step in extending the breadth and depth of CXone by natively integrating best-of-breed capabilities.

Our extensive investment in the past 2 years in AI led to the introduction of ENLIGHTEN. It is the AI "brain" and the core of CXone that is embedded across our entire platform, greatly enhancing every single solution on the platform. We have seen great success with ENLIGHTEN among large enterprises in telecom, health care, hospitality and other sectors.

With these assets in place, we also have a go-to-market that is unparalleled in delivering CXone to all market segments, small, mid and larger enterprises as well as international. International expansion has been a key strategic initiative for CXone, and we are seeing great results. In Q1, international bookings grew 3x compared to the same quarter last year, as we are seeing great momentum in our international partner expansion program. For small and mid-sized enterprises, we are also working with dozens of channel partners in a rapidly expanding partner ecosystem that includes carriers, referral partners, collaboration vendors, CRM providers, value-added resellers and system integrators. We continue to see strong growth in bookings with our partners and witnessed a 38% growth in new logos in Q1, with many of those coming through the channel.

We also have a large ecosystem of DEVone partners that are building solutions for our fast-growing CXexchange marketplace. There are over 150 solutions in the marketplace and over 400 APIs to extend CXone for CRM, web, mobile apps, AI and automation, among many other categories.

Our route to large enterprises has been our domain expertise for many years. This domain expertise, together with a large global enterprise sales organization, are reasons why we are clearly differentiated from our competitors in this segment of the market and why we continue to see growing momentum here. Q1 exhibited further evidence of this.

In Q1, we signed many 7-digit ACV CXone deals with new customers. New customer deals included a large hospitality chain, where we replaced the incumbent on-premise legacy provider. We won this deal for the "all-in-one" aspect of the CXone platform and the ability to easily add digital channels and analytics down the road. We signed a 7-digit ACV deal with a large Federal Government Agency, which requires a scalable model for the cloud and FedRAMP authorization. There was a 7-digit deal with a leading dental insurance company, as they will be replacing their on-premise legacy systems from the incumbent. They will be moving forward with more automation, cutting-edge workforce engagement and digitally transforming their business with NICE. We also signed a very large ACV deal with a well-known online publishing company.

In addition to new customers, we signed many large expansion deals, which demonstrate the power of our platform, as these customers continue to expand their relationships with NICE by adding on solutions easily and seamlessly over time. Large expansion deals included a 7-digit ACV deal with a leading business process outsourcer and a large health care company, where we expanded and replaced the incumbent. This health care company expanded with CXone to further advance their cloud transformation project in the contact center.

Other 7-digit expansion deals included one with a major airline for a portfolio of our solutions, including analytics, as they are preparing themselves for a major post-pandemic business resurgence. We also signed a 7-digit expansion deal with a major social media company, which will deploy several solutions from our workforce engagement portfolio as well as analytics.

We are also seeing tremendous momentum for CXone internationally, with some very large international deals that were signed in the quarter. There was a 7-digit ACV deal with a very large Latin American telecom company group, which is a new customer. We won this deal due to the flexibility, agility and extensibility of our cloud platform and replaced the incumbent who could only offer a hosted version of the on-premise product.

There was a 7-digit deal with a preeminent telecom company in the APAC region. Also in APAC, we signed a 7-digit deal with a major telecom company for a portfolio of our solutions. In the U.K., we signed 7-digit deals with the government agency for RPA and a telecom company for analytics.

In financial crime and compliance, we continued to sign large deals, including 7-digit deals with a very large bank for compliance, a major brokerage firm for fraud and robotics automation, an international bank for a portfolio of our fraud and AML solutions, among many others. We also continued to witness increasing success in the mid-tier financial institutions with our Xceed platform.

In summary, after a strong start to the year, with the best assets in place, an unmatched go-to-market and partner ecosystem, a record pipeline and robust bookings and mostly untapped $25 billion fast-growing TAM, we believe we are in the best competitive position to capture many opportunities in 2021 and beyond.

I would like to take this opportunity and invite all of you to our annual Investor Day in conjunction with our Interactions user conference. Interactions Live is the CX industry's largest virtual event, with over 25,000 customers and partners in attendance and a great lineup of keynote speakers.

I will now turn the call over to Beth.

Thank you, Barak, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the first quarter of 2021 and provide our outlook for the second quarter and full year.

Total revenue for the first quarter accelerated to 11%, reaching a record of $457 million compared to $411 million in the same period of last year. For the first time, total revenue in Q1 exceeded total revenue in Q4, demonstrating our shift to a predominantly cloud company with about 80% recurring revenue. Total revenue growth was again driven by our impressive cloud revenue, which grew 33% year-over-year. As expected, due to our ongoing transition to the cloud that is growing rapidly, we expect to have a long-term trend of overall higher revenue growth.

Cloud revenue represented 50% of our total revenue in the quarter compared to 42% last year, and recurring revenue stood at 78% of total revenue in the quarter compared to 75% last year. Our cloud revenue is primarily being driven by CXone in all segments of the market. While we are clearly differentiated and continue to achieve great success in large enterprises, we are also seeing tremendous achievements, both internationally and in the mid-market as well. In the quarter, 50% of our revenue was generated from cloud, and the other half of our revenue was comprised of our product and services, which accounted for 15% and 35% of total revenue, respectively.

Moving to our business unit breakdown. Customer engagement revenues, which represented 81% of our total revenue in Q1, totaled $369 million for the first quarter, a 13% increase compared to the same quarter last year. In our other business unit, financial crime and compliance revenues were $88 million for the first quarter, which was an increase of 6% from Q1 last year and represented 19% of our total revenue.

Breaking down total revenue by geographic region, we saw double-digit growth in the Americas and EMEA regions. Americas, which represented 82% of our revenue in Q1, totaled $374 million and grew 11%, while EMEA revenues represented 12% of total revenue and grew 16% to $56 million. APAC revenues, which represented 6% of our total revenue in Q1, totaled $27 million and grew 6% compared to Q1 last year. Part of our growth strategy is to expand our cloud reach internationally. This ongoing expansion of CXone across multiple regions is one of the key growth drivers for our continued cloud growth.

Our gross profit grew 14% to a quarterly record of $332 million in the first quarter compared to $292 million for the first quarter of 2020. The gross margin increased to 72.7% compared to 70.9% in Q1 last year. The increase in gross margin is mainly attributed to the growth from CXone.

In the first quarter, cloud gross margin was 67.6%, an increase of about 470 basis points, which was largely the result of increased scale in our cloud business. As our cloud business continues to grow, we expect further expansion in our cloud gross margin.

In Q1, operating income increased to $129 million compared to $111 million in Q1 2020, and operating margin was 28.2% compared to 26.9% last year due to an increase in revenue, coupled with stable operating cost ratios.

Earnings per share for the first quarter totaled $1.54, an increase of 15% compared to Q1 last year, resulting from the improvements in gross and operating margins. We experienced another strong quarter in operating cash flow, which totaled $164 million in Q1, an increase of 6% compared to last year.

Total cash and investments at the end of March 2021 totaled $1.561 billion. Net of debt of $685 million, our net cash totaled $876 million. Our strong cash flow generation and healthy balance sheet continue to provide us with the flexibility to capitalize on opportunities consistent with our growth strategy and capital allocation plans.

I will conclude my remarks with guidance. For the second quarter of 2021, we expect total revenue to be in the range of $445 million to $455 million. We expect the second quarter 2021 fully diluted earnings per share to be in a range of $1.45 to $1.55.

For the full year 2021, we are increasing the range of our guidance for total revenue to be in the range of $1.800 billion to $1.820 billion. We are also increasing the range of our guidance for the full year 2021 fully diluted earnings per share to be in a range of $6.19 to $6.39.

I will now turn the call over to the operator for questions. Operator?

(Operator Instructions) Our first question is comes from Samad Samana with Jefferies.

Maybe, Barak, one for you in terms of the pipeline for CXone deals. It's great to hear what you -- what the company did in the quarter, but just maybe help us understand what demand looks like as we lapped this time last year, where there was a surge in interest, and just maybe what the deal pipeline looks for CXone for the next quarter and for the rest of the year.

So yes, we see, as you saw in the earlier remarks, great momentum in CXone, and I highlighted that we see it both with a new customer, with a great growth in new logos versus last year of 38% in the quarter as well as expansion. And specifically, I highlighted 2 other things, which is tremendous growth that we see in the international market. So we are expanding and leveraging on the presence that we have over there, and of course, digital.

The pipeline, as I mentioned as well, beyond the booking that was a record high in Q1 looks very, very good in all of those segments, both in new logos, expansions and internationally. So we are -- we feel pretty positive about the market dynamics. We see it, from a segment perspective, in all segments of the market. And we see the enterprise market continue to be very strong, as more and more large enterprises are realizing post the pandemic, as a result of what they had experience last year, the need to further accelerate and bring forward their plans of shifting to the cloud as well as digitally transform. So that's what we see.

On top of that, as I've mentioned, the expansions are not just adding more capacity. We are starting to see the power of CXone with the breadth of solutions that are natively integrated and fully owned by us or a customer easily adding those solutions, and it adds up to our both bookings and billings.

Great. And Beth, maybe one for you. I don't want to steal the thunder from the company's upcoming analyst briefing, and maybe you'll address it there. But just I think cloud revenue is on top of everybody's mind, and it was another strong performance this quarter. But I appreciate product revenue is -- it can be volatile. But how should we think about maybe cloud revenue guidance embedded in that 2Q outlook and for the rest of the year as far as cloud revenue growth rates?

So as we look on guidance for the rest of the year, starting with Q2, we expect our cloud growth to continue to be strong and looking forward for the rest of the year as well. From a longer-term perspective, looking out really over the next 3 years, we expect our cloud growth to be at 25% or greater. And looking at the given year, in 2021 on a full year basis, we expect that our cloud growth will be even greater than that. And that's kind of reflected in the full year guidance.

Great. And then just maybe one housekeeping question. On the services revenue, I know normally, it goes down sequentially from 4Q to 1Q. But just anything worth noting there? Was that more due to a shift to the cloud in this quarter? Or just maybe help us understand that ongoing seasonal trend.

Yes. It's a good question, and of course, it really is reflective of the ongoing shift that we're seeing to the cloud. We had 33% growth in the cloud in Q1. And as expected that over time, we expect that the cloud business and the concentration of cloud revenue is going to continue to increase. And on the other side of that, of course, the largest portion of our service revenue is maintenance.

And in practice, what we see is that as our customers are converting from being on-premise customers and shifting over to the cloud, and most of that's coming from CXone, we generally see a very nice uplift anywhere from 2 to 3x on an apples-to-apples basis. But that uplift we have seen in practice can be all the way up to 9 or 10x, as generally, what you see is that those customers will actually adopt multiple solutions off the CXone platform at the time that they migrate.

Our next question is from Sanjit Singh with Morgan Stanley.

My congrats on a really strong Q1. I wanted to go back to sort of this time last year and some of the initiatives around CXone@home and whether you still think that's a source of potential new leads, whether it's the mid-market or the enterprise. How is that conversion on CXone@home trended going into 2021?

So last year, with the outbreak of the pandemic back in March, we immediately launched CXone@home. It has 2 aspects of it. First of all, we wanted to support customers or prospects that need -- that did not have the ability to move home, but also a way for them to get a taste of the cloud and kind of make this potential [steer this appeal], though it wasn't there. And it resulted with, of course, a lot of momentum.

I think 2 things happened as a result. First of all, we realized as a result of that, that we can get customers on-boarded in a much faster pace. When we started with CXone@home, all of a sudden, customers shifted to CXone in a matter of 24 to 48 hours at scale, which was really phenomenal, and we continue in doing that as we speak. But I believe both this campaign and generally announced in the market, as I said before, it's accelerating the overall moving the market into the cloud. And we see enterprises are getting ready to do that in the next few years versus much further down the road. And we are happy to see that, and I think we -- it will accelerate the progress of the TAM.

Needless to say, there are many other positive dynamics that we see in our business, not all of them related directly to those initiatives or to the pandemic. And these are, as I said, both digital transformation and a lot of injections of AI. And I think that our strategy that we put together several years back and both for internal innovation and all of the acquisitions we have done, including the recent one with MindTouch, allowing us to be the only one in the market out there that can offer customers a full breadth of solutions in a one native cloud platform. Even if they don't need all of that in day 1, customers are very receptive to the notion that it's a future-proof solution, and they don't need to continue to be kind of the system integrator of the industry or buying from a cloud vendor though that are practically acting almost as resellers instead of a platform.

That makes perfect sense. The one thing I wanted to follow-up on was your comment on international bookings growing 3x year-over-year. Just wanted to see and get a sense of how that's expressing itself. I noticed that the product revenue growth grew year-over-year for the first time. So when you think about those bookings, how is that coming through in terms of cloud versus on-prem and just broader CXone traction internationally?

So thanks. My comment on the international, obviously, product was much healthier this quarter, but this particular comment on the 3x was actually about CXone and cloud. So this is where we see the nice increase. It's part of -- it's a result of both those markets, but also our plan about 2 years ago to invest both in the technology and the availability, but also, of course, in the go-to-market and further expand our investments, both internally and expanding our partner network in many of those international markets. And we're starting to see it. So we're starting to see it in the booking. We believe it will become more pronounced in revenue as soon as those bookings convert into revenue in the cloud. I think you're seeing already this quarter some healthy growth rates in some of our international markets, and we expect that to continue.

Our next question comes from Tim Horan with Oppenheimer.

Can you talk about what else you need to do to expand international? Is it product development, go-to-market? And maybe just where are you in that whole process? What stage are you in?

Thanks for that. So we already have a very solid playbook, and today, we are much more confident in that playbook after seeing these results internationally. We have put ourselves at least 2 years ago on kind of prioritizing international markets. They are all relevant, but obviously, they are different in size and different in maturity.

From a technology perspective, because we are a native cloud solution, the trends over public cloud in a positive environment, it's very easy for us to open or to make availability of the platform in any country or continent out there. And today, we have this availability in dozens of different countries. So from a technological perspective, we're there.

Also, since we have built the CXone from the ground up several years back, the ability to localize it, both in terms of language, in terms of also specific features that are needed for specific regulations in different countries is also pretty easy for us.

Thirdly is our relationship with local telcos in order to have availability of both voice and some digital services. We have a very clear playbook for that, and it's a very easy thing to do. So most of the effort right now is on the go-to-market front, and there are 2 aspects to go-to-market. Since NICE historically have very strong presence in some territories. We have leadership in place. We have salespeople in place, presale delivery people. And we have offices in many of those countries. It's mainly of expansion and reopening or anything like that. So that's one investment that we continue to do.

And the second investment is to continue to expand the partner ecosystem. I think there is now -- we're seeing a great realization of partners that are kind of sitting on the fence when it comes to cloud in certain international markets. Finally took a decision that this is not an option, but it's mandatory for them to shift into the cloud. It's something we sell domestically, probably 5 or 6 years ago. Now we're seeing it in international markets. And we're very happy to me -- to be among the first doing it in international markets, and we're in the heart and the mind of many of those partners. And we saw it very, very nicely, and we continue to sign up a lot of those partners on a monthly and quarterly basis.

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

First question, just wanted to double back a little bit on the strength that you saw on product revenue this quarter. Just trying to understand if that kind of exceeded your internal expectations. Kind of what was the drivers of that? And if you're seeing anything unusual in the pipeline where we could maybe see more product strength throughout the rest of the year.

Yes. So products is, of course, less of -- not a recurring business. So we are seeing it might fluctuate from one quarter to the second. Needless to say that our strategy is that we go cloud first. And most of our new customers, if not all of them, are going with cloud. And many of our existing customers, expanding or converting to the cloud. But we have a very large customer base.

In certain markets, they still prefer to continue and buy products in an on-premise fashion until they convert to the cloud. Sometimes it's part of the conversation we have with them and building the road map with them. So it's the least -- or the least predictable part of our business, as you can imagine. But actually, the pipeline is pretty healthy for product as well. But again, the main focus of ours is the cloud and the cloud revenue, and we continue to cater, of course, to the product element, and we expect it to continue to fluctuate from one quarter to another.

That's helpful. So my follow-up, I know you talked about a large -- I believe it was a hotel chain or hospitality group kind of modernizing on CXone this quarter. I'm curious, as you look at the pipeline and you think about maybe industries that were the most impacted last year, do you think -- as things reopen, are you starting to see signs that those impacted industries could be tailwinds to the pipeline going forward? Just kind of curious what you've observed thus far in some of the harder-hit industries from a COVID perspective.

Yes. So when it comes to -- I think what we have learned in our past and it's indicative, I believe, also for the future, that customer service is a mission-critical for companies regardless of the situation of their business. They still have customers. They want to stay in touch with their customers. The customer is the most important asset. So I would say that even at the peak of the pandemic last year, March, April, May, if you think about this particular segment you've mentioned of travel and tourism, all the way through the summer, they still have, although many hotels were closed and airlines had 10% volume versus the usual in terms of flights, et cetera, they still have a ton of need to provide customer service. People calling or people interacting with them about cancellation, questions, inquiries, my frequent flyer status or my frequent hotel status and things like that.

What we have seen specifically in travel and tourism and some other industries is that they are already seeing right now, and maybe it's indicative to what we're going to see in the future in the industry, and they are seeing already a lot of volume of people preparing for the summer months and even for the holidays of this year. And they're experiencing a lot of positive bookings on their business, and they are preparing themselves. So they need more capacity. And they've learned through the pandemic that there is a better way to do it, so they are taking advantage of this -- of the experience to both shift to the cloud as well as -- or starting to offer certain digital services.

And lastly, in many of those cases, their employees are either still working from home, or they're planning to do it in a hybrid model. And for that, they are realizing that they need further advanced capabilities coming from our workforce engagement area.

Our final question comes from Tavy Rosner with Barclays.

First, I wanted to get a sense, when you look at the cloud growth, how much of that growth comes from new customers, I guess, new logos versus converting some of your, I would say, legacy customers?

Yes. So you characterized it correctly that as a company, I think I have mentioned it in my opening remarks, our cloud transformation as a company is quite unique, we believe, in a positive way. But it's not just a reclass of revenue and shifting it from the product to cloud. We are not going to end up this transition just reclassing our customer base, shifting it from the product to the cloud. We have a great opportunity that we're seeing it happening that we have 2 sources of growth to our cloud business.

First is what you have mentioned, and this is converting our existing workforce engagement and other customers who sit on our on-prem business and converting it to the cloud. But the second thing is the result of our strategy 5 years ago to step into the adjacent market of CCaaS, digital and self-service. These are solutions in the market we just did not have presence in, and we're not operating in this segment as an on-premise company. So this is a brand-new revenue for us.

Today, the majority of that business, of the cloud revenue come from the second part, which is brand new CCaaS opportunities. We believe that the conversion of WEM into cloud will accelerate at a certain point. It is somewhat also attached to the CCaaS, say, offering. And as Beth mentioned before, when we see such a conversion, it's not one-to-one, it's actually giving us an uplift and a customer that used to be an on-prem customer of ours. We can easily see 2x or more revenue from that customer as they shift to the cloud.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Barak Eilam for closing remarks.

Thank you all for joining us. We really look forward to see you in a couple of weeks at our Interactions Live event with a great agenda and great interactions we'll have together. Thank you, and have a great day.

This concludes today's conference, and you may now disconnect your lines at this time. Thank you for your participation, and have a great day.