Nice Ltd (NICE) 2023 Q3 法說會逐字稿

Welcome to the NICE conference call discussing third quarter 2023 results, and thank you all for holding. (Operator Instructions) As a reminder, this conference is being recorded, November 16, 2023. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.

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 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 2022 Annual Report on Form 20-F as filed with the Securities and Exchange Commission on March 30, 2023.

During today's call, we will present a more detailed discussion of third quarter 2023 results and the company's guidance for the full year 2023. You can find our press release as well as a PDF of our financial results on NICE's Investor Relations website. On our comments, there will be an opportunity for questions.

Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles as reflected mainly in accounting for share-based compensation, amortization of acquired intangibles, acquisition-related expenses, amortization of discount on debt and loss from extinguishment of debt and 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. Information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties and assumptions.

I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. We are pleased to report another strong quarter, exceeding the high end of our guidance range on both total revenue and earnings per share for the third quarter of 2023. Record total revenue of $601 million was driven by another outstanding performance in cloud revenue, which grew 22% to $403 million.

Along with the great topline performance, we continue to further distance ourselves from the competition with our unrivaled profitability. Our operating income grew 15% to $184 million, and operating margin grew [190] basis points to a record 30.6%. Earnings per share came in at $2.27, representing 18% growth. Moreover, cash flow from operations, another unparalleled competitive advantage grew 28% to $121 million in the third quarter.

NICE continues to set the gold standard for the CX market, we always have and we always will. Our cloud revenue growth continues to significantly outperform the rest of the industry and on a much higher cloud revenue base. Our outperformance is attributed to 2 main factors. First, we continue to consistently beat our competitors, especially at the high end of the market and in effect, widening our market share lead. Our command of the high end of the market is demonstrated by the 35% last 12-months growth of CXone Enterprise ARR that we define as customers billing over $1 million annually. Second, we executed on our strategy and expanded CXone into a comprehensive digital engagement and CX AI platform. AI is now a meaningful growth engine by itself with a significant incremental TAM. This powerful growth engine is substantiated by the fact that in Q3, AI was included in 80% of our new enterprise CX deals and was the fuel that drove those deals. Additionally, year-to-date, our CXone AI bookings increased 163% and digital engagement bookings grew 78% compared to the same period last year.

The CX market is experiencing a shift in the demand dynamics that is tailwind for NICE. This favorable shift is unleashing a positive ripple effect. It starts with heightened demand for CX AI. This, in turn, is driving an accelerated demand for platformization because for AI to be effective in the complex world of CX, there is a resolute prerequisite to converge all CX assets into a single platform. This mandates faster decision-making for cloud adoption and migration in a market that is still only 20% penetrated in the cloud. The shift in demand dynamics plays exactly into our competitive strength and differentiation. Digital engagement and CX AI are the fastest-growing segments of our pipeline, increasing sevenfold year-over-year and representing a significant part of our new business pipeline.

The quintessential CX for enterprises is to shift as many customer service interactions as possible to be consumer-led and agent-less. However, most past automation efforts failed and the hurdles to fully automate customer service still remains today. AI now brings a fresh, enabling technology, rejuvenating these efforts. But for AI to be successful, it needs to be CX specific, 100% accurate, fully personalized, non-generic and fully aligned with the brand's goals. Above all, it is imperative to deliver a non-fragmented end-to-end customer journey that is seamless, not backbreaking. Taking the generic AI path with either standard Gen AI or siloed point solutions simply doesn't work. This rude awakening is creating a surge of customers turning into NICE to be their CX AI vendor of choice. Moreover, CX AI represents a significant incremental revenue and TAM opportunity as pricing is evolving from exclusively [seat-based] and expanding to also include the exponentially growing volume of interactions.

In fact, we are already monetizing it in the many deals we signed in Q3. In a 7-digit ACV deal with one of the largest cruise ship operators, digital engagement and CX AI doubled the size of the deal. AI was the main determining factor for our win over multiple competitors that could only deliver [slideware].

In another 7-digit ACV deal, this one with a large BPO, AI increased the deal by 6x. This company, like many other BPOs is expanding its AI capabilities to transform their business model by using more automation. The incumbent cloud provider, which we replaced, could not deliver true CX AI capabilities.

We signed a 7-digit ACV deal with a major European broadband provider and this deal was 100% AI. This customer turned to NICE and our AI portfolio to help them deliver better AI-driven proactive service for a growing customer base.

We signed a 7-digit ACV deal with a large energy distributor where digital and AI nearly doubled the size of the deal. As part of its overall strategy to incorporate AI for effective self-service, we replaced 3 legacy point solution vendors and converged everything on to CXone.

The bedrock of CX AI is underpinned by the breadth and quality of its underlying CX assets, including data, knowledge and interactions, but its power comes from their convergence. While AI and cloud are the most visible growth drivers in the CX market, platformization is an extremely powerful undercurrent of growth. It enables the convergence of all CX assets and facilitates the transition from a multi-vendor, multipoint solution environment to one that is consolidating onto a single platform. This revolutionary phase of platformization is clearly being driven by CXone with its unique convergence power. We are seeing a tremendous increase in the number of vendors we are displacing in each new customer win. In Q3, we saw a staggering 48% year-over-year increase in new customer portfolio deals.

We signed a 7-digit ACV deal with one of the largest healthcare providers in the U.K. replacing legacy on-premise providers and converging older CX operations on to the CXone platform. Other similar platform consolidation deals included a 7-digit deal with a large state government where we replaced a legacy vendor and a hosted cloud solution, a major international hotel chain in Asia replaced multiple legacy and cloud incumbents due to the lack of a complete portfolio and a large U.S. home and security company where we converged 9 different siloed solutions on to CXone.

The core catalyst fueling demand in the CX market is and will continue to be cloudification. On-premise, hosted and immature cloud solutions are an affliction emanating throughout the enterprise, hindering speed of innovation, ability to elevate AI and the capacity to reduce of cost of ownership. We are only now reaching the enterprise adoption cycle of cloud in the CX market with extremely high barriers of entry, only a few players will emerge. We are the clear leader with CXone having the largest customer base by far and serving the most complex enterprises at scale. After a decade of massive investment to build and differentiate CXone, we are the pre-eminent CX cloud vendor.

Q3 was [rich] with deals driven by the need of customers to cloudify. A few examples include a 7-digit ACV deal with a very large East Coast medical center, where we replaced a legacy vendor and won against other cloud vendors to bring this institution on to a unified platform. There was a 7-digit deal with a large healthcare platform company in which we won against 2 cloud competitors and replaced the incumbent cloud provider because the DIY cloud infrastructure was too complex, forcing the customer to build most of it themselves.

We are winning across the board, fluently, riding a tidal wave of strong demand for AI, platformization and cloud. At the same time, we own the winning playbook on profitability with industry-based cloud architecture that delivers an outstanding and expanding cloud gross margin, leading to our best-in-class industry operating margin.

Our top-notch profitability, cash flow and rock solid balance sheet provides us substantial financial flexibility. This is clearly demonstrated by this year's accelerated buyback program, the announcement of a new and even larger share repurchase plan and our expected 2024 closure of the LiveVox acquisition, which we announced a few weeks ago.

LiveVox is the market leader in CX proactive outreach. LiveVox provides us with a strategic complementary offering that will further extend CXone's market leadership. The combination of CXone with ContactEngine, which we acquired 2-years ago, and the upcoming addition of LiveVox, creates a conversational AI powerhouse for both inbound and outbound CX. Additionally, the LiveVox premier and loyal customer base provides us significant opportunities to upsell and cross sell CXone into that base while also selling LiveVox into a large existing CXone customer base. Moreover, we expect a very synergetic financial outcome that will be accretive to operating income, operating margin and free cash flow in 2024.

In summary, we're extremely excited about the opportunities in our market as we have dug our heels deep in innovation, go-to-market and execution to lead the way now and beyond. As market dynamics are rapidly evolving, pricing models changing and organizations accelerating their modernization efforts, we are well prepared with the market's best CXone platform, CXone, the leading CX AI offering and the most established cloud infrastructure that has enabled us to execute the winning playbook on delivering industry-best cloud growth and profitability. Moreover, we have an unbeatable dedicated senior leadership team with decades of industry experience.

Before I hand it over to Beth, the NICE team takes great comfort in your continued outpouring of support and well wishes since the eruption of the horrific events that took place in Israel. And for this, we thank you. 850 of our 8,000 NICERs are based in Israel, and I couldn't be more proud of their full commitment and ongoing engagement to our customers, road map and business. On a personal note, my heart goes out to the 239 hostages, including infants and elderly being held over 41-days in captivity, and I have only one message: bring them home now. I will now turn the call over to Beth.

Thank you, Barak. Q3 was characteristic of our repeated success and consistent execution at NICE, growing our cloud revenue, profitability and cash generation at industry-leading growth rates. Our third quarter revenue and EPS both exceeded the high end of our guidance range.

Total revenue for the third quarter was a record $601 million, up 8% year-over-year, driven by the strength of our cloud business, which now represents a record 67% of our total revenue compared to 60% last year.

Cloud revenue increased 22% year-over-year to a record of $403 million in the third quarter as we continue to see increasing adoption of our CXone platform by large enterprises driven by strong demand from our digital and AI solutions. We continue to consistently add over 200 new logos each quarter demonstrating the large opportunity that remains in displacing legacy on-premise incumbents as well as the preference of customers to adopt NICE's market-leading platform, CXone. We further demonstrated the strength of our business with cloud revenue accelerating sequentially in each of the first 3 quarters of this year.

Services revenue, which represented 27% of total revenue, was $160 million, a decrease of 3% year-over-year. In line with our expectations, product revenue, which represented 6% of total revenue in the quarter compared to 11% of total revenue last year, decreased to $38 million.

Our recurring revenue further increased to a record 87% of total revenue in the third quarter compared to 82% last year and is nearly $2 billion over the trailing 12-months. Recurring revenue is comprised primarily of a combination of cloud and maintenance revenue.

From a geographic breakdown, the Americas region, which represented 84% of total revenue, grew 10% year-over-year. The Americas region has continued to shine primarily from the success of CXone sales in the region. The EMEA region, which represented 10% of our total revenue decreased slightly year-over-year. The downturn in EMEA was primarily due to our strategic shift to a recurring cloud model in contrast to a more non-recurring premise-based product revenue in the prior year. The APAC region, which represented 6% of total revenue, increased 10% year-over-year. The foreign exchange headwinds in APAC and tailwinds in the EMEA region offset each other such that the net currency exchange impact on total revenue was negligible.

With respect to our business units, Customer Engagement revenues, which represented 83% of our total revenue in Q3, were $498 million, a 10% increase. CXone, the most complete customer experience cloud platform is the primary growth driver in customer engagement led by our CX AI, where we booked a record number of Enlighten deals in Q3.

Revenues from Financial Crime and Compliance, which represented 17% of our total revenue in Q3 and totaled $103 million, delivered as expected and was flat year-over-year. Like Customer Engagement, we are executing on our strategy to cloudify this segment of the market, both to the high-end and mid-tier financial institutions through adoption of our cloud platforms, X-sight and Xceed. In Q3, the cloud revenue growth year-over-year was offset by a decrease in product and services. We expect to see this cloud growth materialize in the revenue stream in future periods and for the segment to return to growth as the cloud revenue becomes more meaningful.

Similar to our topline, we delivered yet another quarter of strong profitability. At NICE, we have always maintained a balanced approach to driving topline growth while delivering increasing profitability. In parallel to reporting 22% growth in our cloud revenue this quarter, we continued to invest in the future growth of our cloud business through the introduction of our local sovereign cloud CXone offerings while increasing our cloud margin, demonstrating the positive leverage we have in our operating model.

Over the next few years, we expect our cloud gross margin to expand to at least 75% as adoption of CXone by enterprises increases and we cross-sell our higher-margin applications which are embedded in the platform including digital and AI solutions. Secondly, our CXone cloud architecture provides us with unrivaled economies of scale.

In Q3, operating income increased 15% year-over-year to $184 million, and our industry-leading operating margin increased 190 basis points to a record 30.6% compared to 28.7% last year. This expansion demonstrates our keen ability and focus on continuing to expand our operating profit margin toward our midterm financial target of 35% over the next few years.

EBITDA increased by 16% year-over-year to an all-time high of $203 million in the quarter. Our EBITDA margin in Q3 increased to a record 33.7%, increasing 210 basis points compared to last year.

Earnings per share for the third quarter totaled a record $2.27, an 18% increase compared to Q3 last year.

Our financial and other income was $8 million, resulting primarily from interest income earned from our healthy cash and investment portfolio, offset by some foreign exchange headwinds on the revaluation of our British pound and Euro receivables.

Cash flow from operations in Q3 increased 28% year-over-year to $121 million as a result of our strong billings and collections. Over the past 4 quarters, we have generated more than $550 million in cash flow from operations. The strength of our cash flow provides us with significant flexibility in capital allocation priorities of M&A and share buyback.

Accordingly, this year, we accelerated our buyback program. And in the past 3 quarters alone, we deployed $220 million, nearly double the amount utilized for share repurchases for the same period last year.

Earlier today, we announced an even larger new share repurchase program and the amount of $300 million. This new program demonstrates our continued confidence in the growth of our business and our solid financial profile. It also reflects our ongoing commitment to return capital to our shareholders as disciplined capital allocation is fundamental to our overall strategy. We expect to fully execute this program by the end of 2024.

Total cash and investments at the end of September totaled $1.652 billion. Our debt, net of a hedge instrument, was $544 million, resulting in net cash and investments exceeding $1.1 billion.

In conclusion, our Q3 performance highlights the strength of our cloud business and the attractiveness of our digital and AI offerings. Our commitment to profitable growth bolstered by our expanding market leadership and best-in-class financial profile enables us to deliver on our growth expectations.

Now for our total revenue and EPS guidance for the full year 2023. For the full year 2023, we are increasing our guidance on both the top and bottom line. Full year 2023 non-GAAP total revenue is expected to be in a range of [$2.359 billion] (corrected by company after the call) to $2.379 billion which represents an increase of 9% at the midpoint. Full year 2023 non-GAAP fully diluted earnings per share is expected to be in a range of $8.58 to $8.78, which represents an increase of 14% at the midpoint.

Finally, I would like to address some preliminary expectations beyond 2023. We are expecting our full year 2024 cloud revenue to grow by at least an industry-leading 18% year-over-year. This is excluding any revenue contribution from LiveVox, which is expected to close sometime in the first half of 2024.

LiveVox should contribute approximately $142 million on a full year basis after assuming some revenue redundancies in the initial year of transition. On the bottom line, LiveVox is expected to be extremely synergetic and together with the organic profit expansion of NICE, we expect 2024 EBITDA to be close to $900 million and to exceed the $1 billion mark in 2025.

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

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

First, I just wanted to say Barak, I just want to extend my best wishes for you and the entire NICE family and all of your colleagues impacted by the tragedy in Israel. So maybe transitioning to the business in the quarter, it's good to see the results. I was wondering if maybe you could help us understand, you highlighted several large deals that AI is driving and the impact to ACV and the dollars booked. Can you maybe just help us understand, within the AI portfolio, the handful of products you highlighted earlier this year at Interactions, maybe which of those products are driving the biggest ACV growth or the biggest commitment? And how much of like that book dollars? Like how quickly are those customers actually turning on the AI features?

Thanks, Samad. Thanks for the question and the earlier remarks. Absolutely. So first, I'll say, one thing I highlighted before is that we see a shift in demand dynamics, kind of this ripple effect. So a lot of our conversation today with customers start with the end state in mind. They want to move to an AI-driven CX environment. They understand that taking the simple route of just deploying a simple Gen AI didn't work for them, then they understand that they need to put all the CX assets because these are the things that are driving AI and then we drive a much faster decision on the cloudification effort.

Specifically on the AI product or solution that we see that are moving extremely fast, obviously, the Copilot. When we think about AI in the contact center, it's -- I would give it like 2 names. There is the concept of augmented intelligence and artificial intelligence. The contact center or the customer service space is still very labor-intensive and the ability to first bring AI to augment in a Copilot mode, the agent is the first priority of the customer and then starting to find different tasks and use cases and fully automate them with what we call Autopilot.

So the 2 leading products that we see being prioritized by customers is the Enlighten Copilot and Enlighten Autopilot and the combination of the 2. In terms of -- just to complete that, I'm sorry, in terms of contribution, we provided some initial percentages.

It's starting to be a very, very significant part -- will take a very significant part of our pipeline moving forward. We see the closing rate of AI, faster than other parts of our business because of the priority of customers. Hence, the optimism moving forward.

Great. And then maybe Beth, a follow-up question for you. Just as I think about some of the growth rates that you're seeing in AI-driven bookings and what you've seen in terms of the cloud business this year, and then just kind of reconciling that with your -- the initial kind of at least 18% outlook for 2024, can you help us maybe think about in that 18%, how are you thinking about seat growth of the number of agents versus AI dollars? Just maybe help us understand better what's being assumed today in that 18% number?

Sure. Thank you for the question, Samad. We shared that our expectation next year in terms of our initial outlook for cloud growth is at least 18%, and we believe we have the opportunity to further accelerate that as we're looking towards 2025.

And that confidence is coming both from the large enterprise wins we've already announced during this course of this year, combined with all of the AI and digital bookings that we've seen. And we should highlight that those AI and digital capabilities are really unlocking a new incremental revenue stream that's captured in that growth opportunity for us.

So we have factored in the expectation of the digital and AI, both that we've seen and our results to date as well as the strength of the pipeline we have looking into next year. Of course, with the expectation of our forecast in the cloud, we continue to have a pricing model that is a blend of both agents, but as I highlighted, it's unlocking the potential now, and we're seeing more and more of that in digital and AI.

Our next question comes from Tyler Radke from Citi.

The cloud revenue, certainly nice to see the sequential acceleration this quarter. I'm curious the issues that you called out last quarter in terms of some of the weaker consumption that you saw in the SMB, did that play out as you expected or was that better than you feared? And then how are you thinking about specifically that cohort ramping up into Q4 given the holiday seasonality and any further guidelines we should be thinking about in terms of Q4 cloud revenue growth?

Thank you for the question, Tyler. We highlighted that last quarter, and it's been a tighter economic cycle this year. So we have seen that on the SMB side of our business, there has been slower and less usage than what we have seen in years past. But we do know we've gone through similar cycles like this in the past. And this type of tightening around usage is temporary.

We see signs of that. And see that as the overall environment, economic environment is opening up that, that is going to be an impact that is now starting to shift as we head into 2025.

And any cloud revenue growth for Q4?

Yes. With respect to our cloud revenue, we have shared in the past, the expectation of our range for the year. And we do expect to land within our guidance range at approximately around the 22% growth in cloud revenue for the full year. And as we've seen both in the current quarter and really throughout that this year, that 22% is considerably higher than any of our peer group and of course, it's on a much higher cloud revenue base, which is more than $1.6 billion in recurring revenue in the cloud.

Great. And a follow-up for Barak. Just on the LiveVox deal, great to see kind of the goals around that being accretive. I guess just given all the [organic momentum] that you're seeing on the generative AI side with Enlighten and (technical difficulty) and getting that asset folded into the NICE portfolio? And I guess, why does it make sense to do this acquisition now given the opportunity that you're seeing on the core business?

Tyler, thank you for the question. You're breaking up a bit, but I think I got most of the question. In essence, you're asking on the strategic rationale of the acquisition. I hope I got it right.

So absolutely happy to share. I think LiveVox is a great addition to the NICE portfolio. Most of our business is in the inbound business of customer care or customer service. We do have an outbound business, but no doubt, it is a specialized offering by itself. And we started a journey several years back to make sure that we have not just a good offering in the outbound, but something that is revolutionary and bring Conversation AI capabilities also to that area of the outbound.

So we started with some organic development, acquired ContactEngine that brings really a completely new way to think about proactive outreach. And then we were looking in the last few months or almost a year, we were debating between, if you would like, less than handful of good assets and someone that have a superior technology and a customer base in that area. And by no doubt, the leading vendor is LiveVox. So that's the rationale.

Yes, we see, of course, our core strategy is to expand into digital engagement in AI, but at the core of our business, this is a great opportunity to make sure that we cover all of our bases. And we have really not just a complete but a complete and leading offering for every type of customer.

Last, but not least, I will say that as the markets of the large enterprises is now shifting to the cloud, these outbound capabilities are more relevant in their complexity. And it is a very, very complicated type of domain expertise in outbound. This is very typical for the large enterprises. Hence, we start putting those assets together makes sense.

And of course, financially, it looked very, very attractive. So both from a strategic fit as well as financially and the price itself looks attractive, and hence, we decided to go for it.

Our next question comes from Siti Panigrahi from Mizuho.

It's actually Dan on for Siti. I guess it's good to hear about the strong AI bookings trends and 7-figure AI deals. I was just wondering, could we get a sense of some of the early customer feedback you're getting on your new AI capabilities? And then maybe what's the uptake you're seeing for these features between new customers and existing customers?

That's a great question. Thanks for that. So first of all, the feedback is phenomenal. I'm personally engaged with many of those customers and executives. I can tell you it gets visibility and open doors at the most senior level of large enterprises. And most of the deals that we talked about are with brand new customers. We talked about the fact that this quarter, 80% of our new customers -- new customer deals were sold both driven by AI, but also sold with AI solutions and the deployment that we started already for past deals is just going in absolutely great way.

And it allows us, by the way, to start enjoying for more and higher consumption from these customers that started sometime relatively small, and the consumption is growing, and the volume of interactions is going -- exponentially growing. But as you said it yourself, we have thousands of existing Cxone customers that have already all the assets in place and turning AI for them is actually a very, very fast act and we have a dedicated sales team that is tasked with doing exactly that and cross-selling into the base.

Our most crowded marketing events, webinars and any other lead generation event is with respect to AI and a lot of that is indeed with our customer base because they're already very familiar with Cxone, and they see it as an easy add-on to their existing environment.

Our next question comes from Meta Marshall from Morgan Stanley.

Helpful information upfront just on kind of the early opportunity being more augmented agents and then kind of -- but they're also being an AI piece as well. Just wondering how you guys look at the opportunity between augmented and true kind of virtual agents just as you guys go forward?

And then just maybe as a second question, given you guys believe that LiveVox could be accretive within the first year, just where are areas where you see kind of those greatest synergies coming from?

Sure. So I'll start with the first question. I've been in the industry for now 25-years, the industry of the CX market. And I've seen our market way before the AI days trying to drive automation. Because at the end of the day, it is a very labor-intensive market, 90-some percent of the cost is still with labor, with agents.

And there is obviously a desire to go for automation. But the historical path most vendors and companies took about automation, it's either/or. It's either that you have something with an agent that is fully manual, done by the agent, with some technology or fully automated task. And the approach we have been taking with AI, and that's the reason that we have launched Copilot and Autopilot together, the Enlighten Copilot and Autopilot is the ability to move in this continuum and deliver a continuum experience for customers.

And that makes sense, and that makes automation much more viable. So this is why the concept that I talked about first -- not first, but to start with an augmented intelligence to the agent, make them much more powerful, but at the same time, take those parts and the interactions that can be fully automated, move them to full automation, but also the ability to toggle between them.

We've all been probably as consumers through the experience that you start with an agent or you start with a bot, and as soon as there is a certain ambiguity about the intent, you are stuck at that point and your experience is deteriorating. The ability with Cxone, that is a unified platform that have all the convergence assets and provide AI for both agents and for full automation, that what allows you to break this 20-some years of failures in automation and bring it to life. So that's with respect to that. Your question about LiveVox, I'll hand it over to Beth.

Yes. So with respect to the impact, we expect LiveVox to have a considerable amount of synergies and be highly synergetic to really drive an accretive nature to both our profitability and our cash flows. And we have that confidence as there's quite a few overlaps as you think about another public company as it pertains to G&A-related costs.

And of course, we still operate in the same space as well. So we also have synergies when it comes to go-to-market and the product as well. If you look back on our track record of making acquisitions over the past several years, you can see we really have a great track record and a strong muscle in showing the -- and delivering on the ability to drive healthy synergies into our operating model, and that's what we expect with LiveVox as well.

Our next question comes from Pat Walravens from JMP Securities.

Great. Barak, we're praying for you, your families and especially for the safe return of the hostages. If you look at the Gartner Magic Quadrant, you and Genesys are the 2 clear leaders in the space. Can you walk us through what the competitive dynamics are like with them? When do you usually win and when do you usually not win? How does it work?

Thank you, Pat. So there is -- the competitive landscape is more than just us and Genesys, but needless to say, Genesys is one of our competitors. We believe we are winning. We have a superior winning rate over Genesys. In many cases, Genesys and others are the incumbent and they are -- because of their financial considerations trying to hold on to their customer base and maintenance base. That's number one.

And second, I think giving once again the financial considerations like a very high debt and the way that the company is being held in terms of ownership and I think they are very short-term oriented in terms of their investment and the long-term viability of the company for customers.

So I think that gives us superiority. Our investments specifically and expanding into digital engagement in AI, it's something that we haven't seen there. And it gives us, these days, a significant advantage. And when it comes to just simple price war, we will do what it takes to win the customer, but we win not just on price, we win on the value proposition and customer understanding that NICE is here for the long run.

We don't have an exit plan. We don't need to transact the company. We don't try to -- 5 times a year go around and sell the company like others do. So our management attention is 100%, 7 days a week, 24 hours a day just focusing on our customers and our business.

Our next question comes from Michael Funk from Bank of America.

One for Beth to begin. Beth, I think in response to an earlier question about prior comments about a weaker SMB consumption, I think you said that you felt the tightening is temporary. And I believe I heard you say that you're expecting some positive shift or seeing some positive shift entering next year. So hopefully you could clarify a bit on that comment? And then I have one follow-up, if I could.

Yes. Thank you for the question, Michael. And your comment was correct. I did say that during the course of this year and the tighter economy, we have seen some less usage on the CX side of the house and the SMB installed base. And that next year with the economy looking brighter, we are seeing signs as well that we will expect to see more of that consumption going back to what we have seen as historical norms. Of course, we expect to see that further happening throughout the course of next year.

Great. And then just on AI. A lot of discussion over time about how AI potentially shifts more of the TAM spending away from human agents and more towards solutions to companies like NICE provides. Do you have any earlier kind of one-off data points or examples and how in deals that you've signed with AI, how those maybe shifted from, say, 90% of spend on humans versus 10% for technology? Where that's come out on the back end of these deals?

Yes. Thanks for that. So first of all, there is a general -- just to clear out something quite general, we don't see right now whether it's good or bad, we don't see a reduction in number of agents in the industry right now, not to speak about the fact that with 20% penetration of cloud, even if there will be some reduction in number of agents, we still have a very, very long way to go in winning market share on the agents.

What we see is that a lot of companies are dealing -- it's almost like avoiding adding more labor because the number of interactions, digital or not, are increasing exponentially and becoming more complicated, and that's where they're trying to deploy AI in order to avoid additional labor costs. And it's also the reason why they take the journey usually of either starting or doing together both Copilot and Autopilot and our understanding that there will always be a need to a certain extent of the human agent.

Generally, I think that the opportunity that we have in AI is significantly higher in the very long run than the one that we have on just supporting agents. For 25 or more years, we've been as a company focusing 99% of our effort just on the time where the actual consumers speak with an agent or interact with an agent. Today, more and more of our business go beyond that, which is a TAM expansion for us, and we find ourselves taking over legacy vendors that used to be dealing with Gen 1 automation. So all of those together are actually giving us great confidence in our vision and our future and the ability to fight for a much -- fight and win for a much bigger TAM.

Great. Thank you for that and hope you and your employees are all well.

I appreciate that, thank you.

Our next question comes from Jim Fish from Piper Sandler.

This is Quinton on for Jim Fish. Beth, maybe first for you. You talked a couple of times already about some lower usage and the macro pressures impacting the SMB side this year. But maybe as we look across the entire cloud base, can you talk about how net retention has trended in this quarter? And then it sounds like you're kind of embedding some return or kind of a balance as we look to 2024 retention rates. Are we thinking about that correctly?

With respect to our expectations, and let me address the net retention, we saw a quite healthy net retention during the quarter. And as we look further into next year, we don't expect to see an overnight change or shift from that usage, but we are seeing healthy signs there, and we expect that to continue to evolve and return to more normal as we get further away from the tighter economy that we've been in during the course of this year.

Makes sense. And then, Barak, maybe for you. Obviously, the government sector has always been slow to adopt new technology, especially on the cloud side. You guys announced a fairly large win with the state government this quarter. Are you seeing AI and digital opportunities creating that inflection where now they feel comfortable to move to the cloud? And how do you balance kind of -- you guys have the FedRAMP, others don't. So what do you see that opportunity in kind of land grabbing federal as we look in 2024?

Yes. It's actually quite an interesting question that you've asked. And I had -- we had -- we all of us had the same perception about government. And when we say government -- everything from the federal government, state, municipalities, state and local, if you would like, and federal and we had the exact same experience and perception with those are very slow to adopt.

Going back to COVID. I think COVID changed -- I'm not -- I don't know if it's for the -- forever, but at least for the foreseeable future, changed 2 very significant things with respect to technology adoption by state and local. A, the early days of COVID showed government agencies that they can actually move fast.

If we remember the early days of COVID and all of a sudden, we got from different states, they adopted new communication channels. They adopted a variety of technologies in a very fast way, that approach and nature really change the behavior, and we see that continuing well into 2023 and also in the dialogue into 2024, which is very positive.

The second thing that we like about government is still related, I believe, to kind of leftover of COVID, they are rich with budgets. Right now there is no any wave of recession or budget constraint in the SLED market. And of course, we are enjoying that as well.

Our next question comes from Tim Horan from Oppenheimer & Company.

More of a qualitative question, but can you talk about how much your AI product has improved over the last year. I mean the ChatGPT is only about a year old at this point, the breakthrough -- are you using that? Has that massively improved the product? And are you using reinforced learning where the product will be a lot better a year from now? And just any comments on how does it compare right now to the main competition?

That's a great question, Tim. I've been in the tech sector for more than 25-years and I've seen a variety of cycles of technology, significant technology all the way from proprietary hardware, software, Internet, mobile, cloud and these days AI.

And those -- those technology -- an enabling technology that creates a compound effect of innovation. But I think that we can all agree that what we are seeing with AI in terms of this rate of compound effect, if you're not staying up to date for a week, all of a sudden, it seems like a year passed by and we see that with AI.

The beauty going back to our business is that since we've started our journey much before. We started several years back. But practically, we started it much before 2 years back because the most important part and the most important thing in order to have AI working well is the data, a variety of assets, including data.

It's data, it's knowledge, it's media, it's interactions and the derivative information from all of those assets. NICE has a unique unbeatable position where we have years of these data in the tens and hundreds of billions of interactions and knowledge assets and other things. So the answer -- the short answer is yes, we are seeing a tremendous improvement in both the accuracy, relevancy and on top of that, of course, we have more and more out-of-the-box models, which dramatically shorten and simplify the deployment for customers.

We have today more than 1,000 Enlighten models for every possible or most possible CX scenarios, and that's what we do for a living. So we are becoming a CX AI powerhouse, both in terms of the assets and the technology. Of course, we -- in order to focus on our core competency, where relevant and when relevant, we leverage some generic technologies like Gen AI and others in order to focus our efforts on the things that are uniquely for us and that are needed in order to take it and make it a viable option for the CX market.

Very helpful. So is it fair to say 6-months or a year from now, the product will be dramatically better? And do you think you're pretty far ahead of your competitors?

Absolutely. First of all, 100% sure it will be even better every quarter. I myself spend a lot of time these days with my passion to technology, and I like to see it working both in customer environment and in our labs, if you would like.

And I see the cycles of improvement that are on a weekly basis. And in terms of us vis-a-vis the competition, I think we are years ahead of our competitors. Both the ones that have -- are a bit more sizable, but also the issue of the point solution. It goes back to my point about it's not enough just to have the technology, it's important to have the platform. And our years of investments, building CXone as a platform that can contain and manage and converge all the assets together, this is what makes AI for us working. This convergence power of CXone is second to none.

Our next question comes from Arjun Bhatia from William Blair.

Yes. It's actually Rachel on for Arjun. (inaudible) everybody else's best wishes to you guys. I wanted to ask, it seems like it's still pretty early days for migrating existing customers to the cloud. Could you talk a little about the opportunity for AI to drive increased conversions or if you see any other potential catalysts to accelerate the pace of migrations?

Yes. Thank you for the question, Rachel. So we said it numerous times in the past. And actually, you can see it in our financials is that we've built already a $1.6 billion -- this year, $1.6 billion, give or take revenue of cloud without tapping much into the legacy customer base of ours and predominantly taking over a market where we did not have any presence in, and this is the ACD market.

And this is where the market is still only 20% penetrated. AI provides -- first of all, it's a growth engine by itself. But I believe, as I mentioned before, it can be a catalyst for those decisions and we see it in both pipeline as well as the discussions we have with customers. Because of that ripple effect that I talked about before, let's start with, they want the AI, in order to have the AI, they understand that they need to converge all assets into one platform.

And for that, of course, the prerequisite is to be in the cloud with a true native cloud solution that is scalable to their environment. So that narrative is true both for competitive customers that we don't have presence. So we replaced the incumbent. Someone asked before about certain competition.

We replaced a lot of those vendors this quarter, including the one that was mentioned before, but it's also true for us starting to tap and accelerate the conversion of the existing customer base -- the on-prem customer base of NICE.

This concludes our question-and-answer session. I would like to turn the floor back over to Barak Eilam for closing comments.

Thank you very much, everyone, for joining us. We appreciate your support and partnership. And of course, the warm -- the heart warming words from everyone. Thank you very much. Have a great day.

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