Nice Ltd (NICE) 2024 Q2 法說會逐字稿

Welcome to the NICE conference call discussing second quarter 2024 results and thank you all for holding. (Operator Instructions)

As a reminder, this conference is being recorded, August 15, 2024. I would now like to turn the 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'd like to point out that some of the statements made on this call will constitute forward-looking statements in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be advised that the company's actual results could differ materially from these forward-looking statements.

Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in Item 3 of the company's 2023 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 7, 2024.

During today's call, we'll present a more detailed discussion of second-quarter 2024 results and the company's guidance for the third quarter and full year 2024. You can find our press release as well as the PDF of our financial results on NICE's Investor Relations website. 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 share-based compensation, amortization of acquired intangible assets, acquisition-related and other expenses, amortization of discount on debt and loss from extinguishment of debt and the tax effect of the non-GAAP adjustments.

The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties, and assumptions.

And I will now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. I'm happy to be with all of you this morning and share our great Q2 results as well as some exciting news.

Earlier today, we announced the appointment of Scott Russell at the next CEO of NICE. Scott will join us and step into his role at the start of 2025. I will continue to lead the company through the end of this year and support Scott for a smooth transition. Scott's appointment follows a thorough search conducted by our Board of Directors to look for the best candidate to lead NICE to its next phase of growth and transformation.

Scott brings with him 25 years of experience in enterprise software. Most recently, as Global Chief Revenue Officer and member of the Executive Board of SAP. Scott also served as the Chairman of SAP North America and Chairman of multiple business units of the SAP portfolio. I would like to take this opportunity and give a warm welcome to Scott to NICE, and I look forward to working with him.

Now to Q2 results. The momentum we built in Q1 carried through to Q2 evidenced by strong results across the board. The growing adoption of AI along with the unmatched platform power of CXone are thriving. We reported total revenue of $664 million in Q2, representing an increase of 14% compared to the same quarter last year with cloud revenue growing 26% to $482 million. These robust top line results continue to outpace the market and are also resulting in impressive market beating profitability gains.

Topping the list is our industry-leading cloud gross margin of 70.2% aided by our highly profitable AI solutions. Other strong profitability metrics included operating income growth of 19% to $202 million and an increase in operating margin of 120 basis points to 30.4%. We exceeded the high end of our guidance range on EPS coming at in $2.64 for Q2, which was an increase of 24% compared to the same quarter last year. Building on exceptional first quarter cash flow generation, the momentum continued into Q2 as we generated $170 million of operating cash, which represent an increase of 160% compared to Q2 last year. The market leadership gap between NICE and the rest of the industry continues to significantly widen. We are winning, displacing the competition and increasing our market share. In fact, Q2 bookings were extremely strong throughout the period, driven by all-time high bookings for CXone. This booking strength was evident in all market segments and especially with large enterprises, landing multiple seven and eight-figure deals.

Furthermore, NICE stands out, not only by the scale of our business, but also for the ongoing rapid expansion of our profitability. Our superior gross margin continues to further accelerate our free cash flow with a record of $639 million over the last 12 months. This unique financial strength allowed us the flexibility to continue investing in R&D, expanding our go-to-market and seeking potential acquisitions to further enlarge our opportunities for growth.

We are approaching the two-year anniversary of the introduction of GenAI that swiftly changed the semiconductor, infrastructure and software landscape. Companies of all sizes worldwide, along with consumers, investors and analysts are all striving to understand the implications of AI in various aspects of work and life. I believe that like many other technological waves, we're getting closer to the point of shifting from the dramatic to the pragmatic.

Enterprises, in particular, after exploring initial ways to leverage GenAI to boost productivity and reduce costs are now adopting a more mature and systematic approach. They recognize the importance of partnering with leading vendors in each specific business function, one that possesses deep domain expertise relevant proprietary data, end-to-end workflows and above all, a robust platform designed to fully harness the potential of AI for the enterprise.

This recognition is especially evident for the function of customer service, where the expectations for significant cost savings and productivity gains are very high. However, initial efforts to deploy generic GenAI failed to deliver the desired results. This disillusionment is transitioning the customer service market from hype to reality - the ultimate time for NICE, the two leader in functional AI on customer service. We've already experienced this shift, and it continues to accelerate, the depth of conversations, the speed of adoption and the sheer number of use cases are growing rapidly.

CXone is the go-to platform for enterprises looking to standardize on a platform that not only transitions them to the cloud, but also converges all customer service workflows, while infusing AI for end-to-end automation and orchestration. It's the result of our decade-long strategy to build CXone as a comprehensive cloud platform that covers all customer service touch points and workflows combined with unmatched data assets, this approach is the only viable way to truly unlock the benefits of AI in customer service.

In Q2, AI revenues surged 38%. Furthermore, demand for our AI solutions in thriving. It was just one year ago at Interactions, our annual user conference, when we introduced Copilot, Autopilot and Actions. One year later, adoption has been stunning with bookings for Autopilot and Copilot together, soaring 134% in Q2. Moreover, the number of deals greater than $1 million ACV that included AI jumped 100% compared to the same period last year. The AI deals signed in Q2 backed up these strong results. We signed a seven-digit deal with one of the world's largest IT companies replacing the incumbents with CXone. A key driver for the win was our clear advantage in functional AI in head-to-head comparisons against other vendors, leading them to select NICE for its proven AI portfolio.

In another seven-digit AI deal, a large global hotel chain is seeking to enhance its digital transformation and required exceptional accuracy in identifying consumer intents. They valued our extensive data repository and thousands of CX AI models, which provided the precision they needed. Consequently, they purchased CXone Autopilot to help ensure the future digital success. A large regional energy company is advancing its AI strategy and recognized that their existing on-premise non-integrated infrastructure and solutions would not suffice. In this seven-digit deal, they are standardizing on CXone for its seamless AI architecture and comprehensive portfolio of AI solutions, capabilities that AI points providers could not match.

In another deal, where both functional AI and the platform were pivotal, a major UK-based telecom provider is replacing 10 different point solutions, including two large incumbent on-premise providers. They are consolidating on CXone to advance their digital transformation supported by NICE's advanced AI. The platform power of CXone is unrivaled in our industry. Designed as the first and only customer-centric platform it natively integrates all touch points and interactions. From day one, CXone was built on these principles, offering the largest seamlessly integrated portfolio of CX solutions and the most robust CX infrastructure in the market. While the platform value proposition is well recognized, its adoption is now significantly accelerating because it provides the only viable way to implement effective AI.

Every quarter, more enterprises are consolidating on to CXone as evidenced by the rising value of portfolio deals, those involving three or more of our solutions, along with an overall increase in large deals. This typically large portfolio deals tend to be very sticky, driving long-term value for NICE. As enterprises continue to expand the use of our portfolio over time.

In Q2, we witnessed a surge in the booking of portfolio deals, increasing 71% compared to the same quarter last year. Additionally, bookings of portfolio deals from new customers jumped 150%, convincingly demonstrating the demand for CXone to replace both incumbent on-premise and cloud providers that are unable to deliver a true platform at scale.

Also, deals are getting larger. We signed five eight-digit TCV deals in Q2. These deals will power durable value for NICE over a long period due to the platform stickiness and its ability to drive long-term up-sells and cross-sells owed to the breadth and depth of the CXone portfolio.

We signed an eight-digit ACV deal with a very large organization in the APAC region. They were the largest on-premise customer in the region of one of our direct competitors. This is a great example of the power and scale of CXone as a platform. By consolidating multiple legacy on-premise providers, the options for CXone to manage their $1 billion online transactions and 55 million calls annually. CXone stood out as the only platform capable of meeting the extensive CX operational requirements and workflows of such a large organization, while also providing the capabilities to meet all future digital and AI needs.

The power of the platform also secured a seven-digit deal with one of the world's largest cruise lines. We replaced several long-standing incumbents and outperformed other cloud providers, delivering the comprehensive and seamless capabilities of a single platform like CXone. CXone was the only platform to help them eliminate the need for multiple point solutions, while also future proofing their ability to add digital and self-service capabilities down the road. We signed a seven-digit deal with a leading health care company, replacing their on-premise incumbent solutions. Their goal is to consolidate onto a single cloud platform to provide a modern experience for their partners, customers and agents. We secured the deal with CXone, thanks to the flexibility of the platform, which allows for gradual adoption of advanced functionalities, including advanced AI as the foundation for their digital transformation. These consistent quarter-after-quarter mega deals signings highlights our ongoing success in the large enterprise market, where our achievements are unparalleled. Our momentum is further accelerated by our expanding global ecosystem as partners are drawn to our success and by the adoption of our recent innovations including our disruptive UCaaS solution 1CX. Additionally, we recently launched Mpower, which brings together the entirety of CXone with our AI solutions to create the world's first and only CX-aware AI platform. This platform harnesses continuous experience memory and CX awareness, a feat possible only with a comprehensive platform like CXone.

In summary, our market leadership continues to widen as demonstrated by our consistently strong quarterly results. Our record CXone bookings in Q2 highlight our exceptional cloud revenue growth which far outpaces our competitors while our profitability is at the upper echelon of the enterprise software industry. With the most comprehensive platform in CXone rapid innovation in AI that is experiencing significant enterprise adoption and revenue growth and the flexibility afforded by our rock-solid financial position we are positioned for continued market leadership expansion and long-term growth.

I will now turn the call over to Beth.

Thank you, Barak. Q2 highlights the healthy fundamentals demonstrated by our financial results stemming from the impressive execution we continue to deliver each and every quarter. We surpassed our expectations across our key financial metrics, including strong total revenue growth, excellent profitability robust cash flow generation and the acceleration of our share buyback program.

In fact, this quarter saw the largest share repurchases that we have ever executed totaling $146 million evidencing the confidence we have as a continued leader in all the markets where we operate.

Total revenue was a record $664 million, up 14% year over year, outperforming the midpoint of our guidance. Non-GAAP EPS of $2.64 exceeded the high end of our guidance range. We have always been laser-focused on ongoing expansion of our profitability as a general operating guideline at NICE. This quarter was yet another testament to the success with record EPS as well as our outstanding operating cash where we have generated nearly $0.75 billion over the last 12 months.

With the ongoing expansion of cloud across both our business segments, our recurring revenue further increased to a record 89% of total revenue in the [second] (corrected by company after the call) quarter compared to 86% last year. Recurring revenue is comprised primarily of a combination of cloud revenue and maintenance revenue, which is a component in our services revenue.

Cloud revenue, which now represents a record 73% of our total revenue compared to 66% last year, increased 26% year over year to a record $482 million. This growth is driven predominantly by CXone, where we see the number of users on our platforms continue to expand as we further penetrate the large enterprise market and continue to upsell and cross-sell our leading digital and AI solutions into our existing customer base.

Services revenue was $148 million, represented 22% of total revenue and decreased 7% year over year mainly due to our transition to the cloud, where we are adding less new maintenance revenue associated with our premise-based solutions. Accordingly, product revenue from on-premise sales, which represented 5% of total revenue in the quarter, decreased 13% year over year as expected, primarily coming from the financial crime and compliance segment.

From a geographic breakdown, the Americas region, which represented 85% of total revenue in Q2 grew 16% year over year. The Americas region has continued to excel as customers transition from multiple legacy third-party solutions onto our CXone offering, the industry's only seamlessly integrated comprehensive CX platform. The EMEA region, which represents 10% of our total revenue, increased 16% year over year.

The APAC region, which represented 5% of total revenue, decreased 9% year over year as a result of a positive ongoing transition to the cloud that is accompanied by a reduction in upfront (technical difficulty) product revenue. We continue to see great adoption across the globe of our cloud platforms and we are extremely excited about some of our recent wins, including our largest ever international CXone deal signed in Q2 in the Asia Pacific region with an estimated TCV of over $100 million.

This large win is another indication of the positive momentum and market share expansion we see globally, thanks to the depth and breadth of our platform, together with our broad network of channel partners. We are only just getting started with a huge runway still ahead of us and highly underpenetrated large enterprise and international segments of our markets.

We delivered fantastic results across both our business segments, customer engagement revenues, which represented 84% of our total revenue in Q2 were a record $556 million, a 15% year over year increase. The growth in customer engagement is driven predominantly by the success of CXone both with new and existing customers of all sizes and our unparalleled ability to deliver CX at scale to the enterprise market to meet their advanced digital and AI needs for a holistic CX experience.

Revenues from financial crime and compliance, which represented 16% of our total revenue in Q2 and totaled a record $109 million increased 9% year over year, driven by the in-cloud revenue.

Moving to profitability. Our cloud gross margin totaled 70.2% in Q2, and similar to last year, as we continue to invest in global expansion of our cloud platform that is driving our strong international cloud revenue growth. We remain steadfast in our expectations to reach our 75% cloud gross margin target in the medium term.

In Q2, operating income increased 19% year-over-year to an all-time high of $202 million, and our healthy operating margin increased 120 basis points to 30.4% compared to 29.2% last year. This is the fourth consecutive quarter of 30%-plus operating margins, and we reiterate our expectation of an operating margin between 30.5% to 31% for the full year of 2024 as I shared at our recent Investor Day.

Earnings per share for the second quarter far exceeded our expectations coming in above our guidance range at $2.64, a 24% increase compared to Q2 last year. Cash flow from operations in Q2 was $170 million, an increase of 160% year over year.

Our industry-leading operating cash flow has yielded an exceptional 28.5% operating cash flow margin over the last 12 months. Due to the strength of our first half cash flow generation, we are increasing our expectation of free cash flow generation for the full year 2024 to be in excess of $700 million, implying 47% year-over-year growth. In Q2, we repurchased shares totaling $146 million. We are executing well on our plan to accelerate and complete our current $300 million share buyback program by the end of Q3.

After completing the current plan, we will begin implementing our even larger share buyback program of $500 million. The acceleration and expansion of the buyback plans are a demonstration of the continued confidence in the growth of our business and our solid financial profile. Total cash and investments at the end of June totaled $1,504 million. Our debt stands at $458 million, resulting in net cash and investments exceed $1,446 million.

In conclusion, we constantly demonstrated clear industry leadership through our best-in-class cloud platforms, the comprehensive breadth and depth of our solutions portfolio and our robust financial profile marked by exceptional profitability, scalability, strong balance sheet and impressive cash generation.

Now I'll close with our total revenue and non-GAAP EPS guidance for the third quarter and full year 2024. For the third quarter of 2024, we expect total revenue to be in the range of $676 million to $686 million, representing 13% year-over-year growth at the midpoint. We expect the third-quarter 2024 fully diluted earnings per share to be in a range of $2.62 and to $2.72, representing 18% year-over-year growth at the midpoint.

For the full year 2024, we are maintaining our previous revenue guidance and raising our EPS guidance. We reiterate our full year 2024 total revenue guidance, which is expected to be in the range of $2,715 million to $2,735 million, an increase of 15% at the midpoint. We now expect full year 2024 fully diluted earnings per share to increase to a range of $10.60 to $10.80, which represents an increase of 22% at the midpoint.

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

(Operator Instructions) Samad Samana, Jefferies.

Good to see the strong execution in a tough environment. So maybe first question, just as I think about the second quarter, Beth, could you help us understand I know you're not specifically breaking out LiveVox, but just how should we think about the core business versus how LiveVox is performing versus your initial expectations for the year? And is there anything worth calling out, especially as you're now several months into the acquisition being with the company?

Are you starting to see more traction in cross-selling or harvesting the value from a revenue synergy perspective? And then I have a follow-up as well.

Thank you for the question, Samad. And what we're seeing from the LiveVox is performance as expected. I think we've been off to a great start this year. And I may have mentioned at the last earnings call that they actually joined us at our sales kickoff this year. So really right out of the gate, we had a great process, integrating them into the company.

They are performing as we expected, and we're quite pleased with how things are going. We continue to see an increasing pipeline building of cross-selling and upselling opportunities that are happening. And we are seeing already that we are cross-selling into each other's customer base, which was the underlying strategy. So very much aligned and expected with what we had really targeted as part of the strategy of the acquisition.

Great. And then maybe just as I look to the guidance, it implies an acceleration as the year progresses. I know the comps get a little bit easier, but I think just based on what we're seeing maybe in other areas of software and some of your competitors, it would be great if you could help us understand where you're getting comfort around a back half acceleration? And how confident are you? I know there's still a lot of year left to go, but how should we think about the back half acceleration?

Yes. Yes. Thank you for the question. I mean we're looking on the second half. And I think as we look at the quarterly distribution of our revenue and we will see a further execution from that standpoint throughout the year. It looks quite consistent with what we've seen in past years.

And in terms of the confidence, it comes from a combination of, of course, first from the area that Barak highlighted just a few minutes ago, which is we had record bookings, of course, in CXone during Q2. So that was quite exciting.

And combined with that, I think just the general backlog we've seen the stabilization generally in our customer base and healthy metrics across the board gives us the confidence that we're continuing to be excited about the continued execution of our business.

Great. And Barak and Scott, if you're listening, I'd like to congratulate you, but and Barak congrats on navigating the transition and Scott look forward to working with you when you're officially on board.

Meta Marshall, Morgan Stanley.

Great. Barak, you guys have always been very good about kind of starting with a core win and then kind of expanding customers over time through various parts of the platform. Just wanted to get a sense of are you seeing kind of bigger deals upfront, smaller deals upfront, has any of the motion of selling kind of additional parts of the portfolio or the timelines of that changed. And then just maybe as a second question, I know [Isma] just kind of talked about it in the second half. But just for Beth, any changes in seasonality of the customers?

So I'll take the first question, and then Beth will take the second one. So the answer is yes. We are seeing bigger deals, as I mentioned in my opening remarks. We are winning. Our win rate is increasing. We believe we are taking market share from the competition. We see it in our growth. We are growing much faster than the competition and on a much larger scale. And it's a combination of more deals that we are winning.

But also as you hinted, the fact that we have such a wide portfolio and customers either adopt the wider portfolio in day one or actually expand down the road. And AI plays a significant role in this strategy. We see that we are winning those cloud transformation, not just because customers want to move to the cloud or not just because of the desire to integrate digital into that. But AI now plays a very significant part in our win rate and us taking market share from the competition.

And Beth will cover the second question.

Yes. Thank you, Barak. On the seasonality front, we expect it to be quite similar to what we've seen in years past. Generally, Q4 typically has a bit more positive seasonality impact than what we would see in the third quarter, and that's where you typically see the sequential cloud growth is also picking up towards the end of the year.

Of course, we are operating across multiple verticals, but we do have verticals that to bring that seasonality. It includes insurance, some health care, retail. So we expect to see that again in the course of this year. And I mentioned that the kind of the consistent quarterly distribution is on trend with what we've seen in years past.

Tyler Radke, Citi.

And congrats on the CEO hire. It sounded like it was a really strong quarter from an enterprise bookings perspective. But I was wondering if you could talk about the non-enterprise side of the business. It did look like the sequential cloud growth was some of the smallest you've seen just in terms of a dollar or percentage basis for the second quarter in a few years. Was SMB a greater headwind than you thought and maybe offsetting some of that enterprise strength and then if you could just help us understand, are you still targeting 18% organic cloud growth for the year?

Yes. Thank you for the question, Tyler. So I'll start off with the latter question first, which is, yes, we still continue to expect to see the 18% growth in the cloud, excluding the LiveVox revenue contribution from the cloud this year, in terms of kind of the sequential change in cloud between quarters, we did see some lightness in the second quarter. And I would say it was less attributed to the SMB, where we've seen really stabilization and it really is attributed more to what we're seeing with wins in the large enterprise.

We've talked about the significant number of large deals that we continue to sign and Investor Day actually shared that more than half of our cloud revenue is now coming from organizations that have ARR of $1 million or more. And likewise, that's what we're seeing from the new logos and new bookings generally that we're signing this year as well.

So as a result of that, there is more of an elongated ramp into the revenue. These organizations tend to be multinational, highly complex. We know that they generally are buying portfolio deals. For us, that means they're buying three or more solutions off the platform. So it takes some time for the delivery to ramp to the full recurring revenue base that we'll have.

So we saw that play out a little bit in Q2 and of course, we're keeping that in consideration as we look at the full year as well. That being said, I think, again, we feel confident based on all of the indications of the strength of our business to deliver on the 18% that we've previously given a guidance for on the cloud.

Maybe just to add one more thing on the SMB. It's less for the immediate revenue this quarter, but more so about the potential down the road we announced about 1.5 quarters ago, 1CX, the $5 pricing in UCaaS, which is very disruptive, it is fully functional, very rich offering and is fully integrated to CX and we see that we are disrupting this market and more and more deals in the SMB, we are winning with this offering.

So it's still early days, but from the many, many deals you already won and the pipeline that we see, there is great potential over there.

Great. And maybe a follow-up for you, Beth, just as you think about the timing and the ramp of those large enterprise deals that you referenced. How far away are we from cloud revenue growth reaccelerating? I think you would have to see growth step up to hit 18% for the full year. So is that going to be more of a Q4 event? Just help us understand kind of the timing of the large enterprise ramps in terms of reaccelerating the total cloud growth.

Yes, sure. As kind of alluded to, I think that the distribution of our revenue looks very similar to what we have seen in years past. And that does mean that we'll see the greatest kind of sequential input expected in the fourth quarter that from the seasonality. So we'll see it again picking up in the back half, generally, but more so in the fourth quarter, which is generally on trend with what we've seen and experienced in the years past as well.

James Fish, Piper Sandler.

I actually want to turn over to the FCC side of the business. Every three years, we see a cyclical uplift. It was kind of the stronger part of the quarter really why wouldn't this quarter be kind of that start of a trend of the cyclical uplift given what happened if I look back three years ago?

And if so, how should we expect the balance between -- for that perpetual product adoption versus term adoption versus the migrations to the cloud is to kind of Tyler's point, cloud revenue and aggregate came a little bit weaker than we were all expecting in terms of net new. And so we're just wondering if you're seeing a little bit more of a say in product adoption on the FCC side as opposed to that migration of the cloud.

Thanks for the question. You're right to see observation that historically, this business had some element of seasonality or cyclical element to it. And obviously, it's somewhat aligned with upcoming regulations and things like that. Having said that, it's going through a very interesting transformation, a solid one. It is shifting to the cloud and the team is doing a phenomenal and in a great way.

Beth mentioned that and one of the reasons why we see some fluctuation in product revenues is predominantly coming from that business. So we'll continue to see some of those fluctuations on the product revenues. But by and large, we think that if you look in the next few years, it will be a great contributor to our cloud revenue, but it's a process we're managing.

And one of the important thing about this business the loyalty and the stickiness of customers over there. This is an area of the business where customers stay with us for a decade or two decades. So that's what we really like about this business and obviously, it's profitability.

Got it. And just as a follow-up, Barak. On the customer engagement side, what are you hearing or seeing from customers with the desire to migrate within the base or even net new kind of customers given conversations around return on investments in this space can be a year or more.

Are you seeing any sort of pause just as customers kind of hold their budgets a little bit tighter? Or are you starting to see those migrations to cloud really pick up, and we're now at an inflection point?

I don't see customer debating or questioning whether they need to move to the cloud. That's no longer happening. That belongs to several years ago. Today, it's all about, yes, they want to move to the cloud. As you go to the larger enterprises, that shift is not a one-day thing. It takes time. It's pretty complicated. They need to select a vendor, a partner that can actually manage this transformation.

Eventually, CX is a highly complicated environment with a lot of integration a lot of legacy processes. And when you go to the large enterprises, when we land them, we like very much to land them because, as Beth mentioned before, when those enterprises sign up with us, they stay for many, many years, sometimes decades, and they expand with us.

The ramp takes time. It takes time not on us, but most like -- in most cases, it takes time on the enterprise side. But when it happens, it happens for the long run. So we don't see a delay in desire to move to the cloud. It's more of delay on how fast they can start the project and ramp up the deployment.

And the second reason why there is a desire to do that, they understand they need to move to the cloud in order to really benefit from AI and as they choose their AI, they choose the right platform and they choose the right platform, they want to have the right cloud providers, it's all tied together. And I think that our increase in green rate and market share expansion sticks to that.

Tim Horan, Oppenheimer & Co.

Can you give us maybe a little bit more color on how the bookings look this quarter maybe versus last year? Or are we 10% above, 20% above. And same thing for implementations. Can you -- is it taking like 10%, 20% longer to implement these large contracts? Or any type of color there? And then lastly, well, and then I had a follow-up.

So I'll start with these two. First of all, as we've mentioned, Q2 bookings were extremely strong and specifically CXone booking at all-time high compared to every quarter that we have seen before in a significant way. I can also share with you that this was not just a one-off phenomenon as we stand here in the middle of Q3, and although Q2 was so strong, even the booking for the first six months -- six weeks, I'm sorry, or the first 1.5 months of Q3 are also very strong across the board and also for CXone.

So that's what we see right now in the bookings, and those bookings eventually will convert into revenues either later this year or most likely next year. With respect to the conversion from bookings to revenue, as we've mentioned before, sometimes it takes longer as we win those very large deals, they will guarantee revenue for the long run, but the ramp takes a bit longer than winning a smaller customer.

But the beauty is, as we said, the opportunity for cross-sell and larger customers also tend to be much more sticky due to the notion of integration and how embedded the platform is with larger customers.

Maybe just on AI. Can you talk about how rapidly the product is improving, how much innovation you're seeing? And what's changing in the payback period for the customers or any kind of productivity improvements that the customers are experiencing quality improvements would be great.

Yes. Thanks for that. I will say, I've been in the tech sector for 25 years or more, and I've seen past technological waves all the way from proprietary hardware, software, Internet, mobile, cloud, et cetera. And I haven't experienced in my career any technology that shift from ideation to production and adoption so fast as AI. This is -- the cycle is so fast. And I will separate between two things that I see right now.

The -- for the early days of AI, I talked about a year ago, we've seen very specific use cases converting from ideation to adoption extremely fast. I'll give you one example. We launched, if I'm not mistaken, it was October of last year, AutoSummary. AutoSummary done by AI specialized in CX. It was launched in October of last year.

Today, we have more than 80 customers and growing that have adopted either purchased or adopted AutoSummary as you see the immediate value. So this is a very specific use case, great use case, great ROI, immediate ROI in that.

But what I see right now, which I believe will be the trend moving forward is a broader adoption of what I call functional AI for the purpose of customer service. This comes out of the early trials of customers trying to just take generic GenAI and disappointment with that.

And then, of course, they come to us to understand how the value, the relevant proprietary data the integration to workflow, the ability to work at scale. And functional AI with deep domain expertise and over there, the speed of innovation and how much we are investing, by the way, is just staggering.

Patrick Walravens, Citizens JMP.

Great. And congratulate you on the results this quarter. So Barak, Scott seems like an amazing hire. Could you walk us through how the search process unfolded? And then what is it exactly about Scott that made him rise to the top for you, the Board and the search committee?

Sure, happy to do that. So as soon as I announced my desire to step down in mid-May, the Board immediately hired an executive search firm, a very good one, Spencer Stuart, and immediately started the search.

They have defined what are the critical criteria for the next leader of NICE, and they've done a very -- an extensive and a very thorough search interviewing and looking for multiple candidates and Scott definitely came up on top with his vast experience in enterprise software coming from a company that operates at scale as NICE would like to scale further and can and should and will scale further.

He has global experience. He's based in New Jersey, but in his vast career, he’s seen different markets and the fact that he also spearheaded a transformation of the company to the cloud. All of those plus the personality, the cultural fit were part of the decision criteria for the Board of Directors and eventually they have decided to go with Scott, and we're very happy to give him a warm welcome into NICE starting January 1 as he'll start and take over the role from me.

Congratulations. And if I could ask a follow-up, Beth, you mentioned that APAC was down, [Scott], I see is Australia. What's going on in APAC? And is it something that he can help with?

So APAC had, from a bookings perspective, probably the best quarter ever in terms of bookings. We had this as I mentioned, $100 million TCV deal that we originated out of our APAC region. So very strong quarter performance. With respect to what you see in the revenue, it's really an apples-to-oranges comparison

The cloud growth in APAC is continuing to pick up. It's in the double digits, and it looks very nice. The comparison to the prior year was that they had some large premise-based deals last year where they took the revenue immediately into their revenue stream.

So really across both our business segments and all our regions, we're moving more and more towards recurring revenue, more linearity. Of course, you will see some continued variability in FCC in some of the regions as they make that transition as they still are early days in terms of penetration to the cloud. But good things happening. So a little bit masked by the apples to oranges comparison in APAC, but really a strong quarter there under the covers.

Rishi Jaluria, RBC Capital Markets.

Maybe I want to start diving a little bit deeper on to the AI front. When we think about your customers who are live and using especially generative AI today. Can you maybe talk about how much of that is internal, which would include use cases like call logging and summarization versus anything external or actually customer facing. And then I have a follow-up.

Yes. Great question. I'm not sure I have the exact mix of the top of my head. But if I look on both Q2 booking and Q1, I would say that it's half-half. I would say that most of our customers going back to the offering of Copilot and Autopilot, if you think about CoPilot, it's the augmentation of the user.

So you can argue that it's more so internal use, right, to make the user 10x better and very effective with the interactive consumer and Autopilot is what happens when you take AI, you take the agent out of the equation, and it is the entity that communicate with the customer. I would say that it's about half-half. And most of our customers that adopt Copilot eventually add Autopilot because they gain confidence and some of them actually right out of the gate go with both.

Got it. That's really helpful, Barak. And then maybe just a question on margins. So it looks like you're bringing up your cash flow expectations from the Analyst Day, which is great to see, maybe just wanted to understand kind of how you're thinking about the balance of bringing up margins when you're investing for this GenAI opportunity?

And maybe alongside that, as GenAI starts to become a bigger piece of the business and maybe more directly monetizable, how should we be thinking about the potential drag on gross margins?

Yes. Thanks. It's an excellent question. I'll take the AI piece first, which is to say that over the last several years, we've really pivoted our business and in particular, our development teams to be focused on AI solutions, and you can see that to success playing out and the selling that we're doing to our customers. we've already made significant investments. We'll continue to do so in terms of where we prioritize our internal focus and how we spend in the company.

And in terms of how that will play out in the margins, I think, first of all, you're seeing that a little bit from the cloud gross margin. It's been a bit on the flattish side. And while we are highly confident, you'll see that continue to accelerate over the medium term. I think in the near term, we've made a lot of investments. In terms of the cloud margin, a lot of that is focused on some of the growth factors that I talked about earlier as well.

So growth in sovereign cloud as we're building out and penetrating more internationally as an example. That all being said, when you put it together, I mean, we have great operating leverage in our business, and you can see that play out consistently quarter after quarter. We're very proud of the fact that if you put us up to some of the nearest competitors across all our financial metrics, our cloud growth, our our gross margins, our operating margins, our cash flow generations, we're leaps and bounds ahead of the other players in the market.

And it's just an area that we continue to focus on. I think you see that playing out in the cash flows. And if you look at the operating expenses as well, I think we are -- we show a very healthy, pretty overall investment that we're making in those areas around R&D and while at the same time, continuing to add and grow our sales organization.

So again, it really comes down to, I think, a very laser-focused approach that we have here in the company in terms of prioritization of spend, while in parallel, really looking to that operation or operational leverage to continue to expand profitability.

Daniel Wang, Mizuho Securities.

This is Siti Panigrahi. It's really impressive to see the bookings strength in this macro environment. So the question I have, and Barak, you mentioned about AI is one of the factors driving this cloud migration. So the question is, are customers looking at your AI solution that's better than others that's driving this CX platform adoption or they're looking at for CX platform and then AI is an add-on at this point? And also in the same context, are you seeing the cloud migration trend differently between SMB and enterprises?

Yes. So for the first question, it's obviously the combination of the 2 and the 2 are very tied together. We have superiority, we believe, both with the best platform, the most comprehensive and complete in our industry, and it's a true natively built platform in the cloud with all the different solutions, also touch points and, of course, the data repository that we have.

And this is an environment, this is if you would like the right place where AI can actually flourish. Without the right platform, AI just doesn't work. So I think that after 2 years or a year and a half, a lot of enterprises testing and understanding what AI can do, there is a much more mature understanding of enterprises generally that it doesn't -- just to take a point solution of AI, won't do the job, and you actually need to -- for a specific function, adopt a platform for that share domain and leverage it in order to do AI.

So it's the combination of the two, both -- they choose us both because of the AI solutions we have as well as because of the platform. And I'm sorry, the second question was?

Any trends between SMB versus enterprise in terms of cloud migration?

Not a trend, but obviously, cloud is -- the cloud penetration is still a, I would say, relatively early stages in the large enterprises, and it's more advanced in the SMB. So there is still room to grow in the SMB, and it's not saturated yet. But the biggest opportunity, obviously, is at the enterprise.

Great. And a quick follow-up, a Beth great job on cash flow. Was there anything like onetime can drive in Q2? Or is that the trend we should expect going forward?

So and overall, I think you can expect a continued very healthy year cash flow, and I updated on the call that we now are expecting more than $700 million to be generated in free cash flow this year, which is up a significant amount even from just a few months ago.

So you will see that our business from a cash flow generation is not equally distributed. We still have some remnants of our maintenance customers and our on-premise based, term-based customers that still pay annually in advance.

So you still typically see that, that's coming in kind of the first half and particularly, usually Q1. So you won't see the same level of quarterly distribution that you see on the P&L. But again, continued very healthy and a really strong performance for the full year expected with that $700 million, which is nearly close to a 50% year-over-year increase.

Arjun Bhatia, William Blair.

Barak, for you. I think I heard 100% plus bookings growth in autopilot and copilot which is obviously very strong. Can you talk a little bit about where you're seeing the early adoption? Are there specific verticals that are leading the way and then I think Beth mentioned there's more upsell and cross-sell. So we'd love to hear what adoption of Copilot looks like between existing customers and new deals as well.

So I'll start with the second part. I think it's about half-half between existing customers and new customers. A lot of our new deals are coming with AI, different parts of the AI. As I've mentioned before, Copilot is the big thing where customers are usually starting with because they feel a bit more confident to put AI next to their employees and see it working before they actually put it in the hands of their consumers. But very fast after that, they move into taking very specific tasks and automate them with the, hence, using the autopilot.

Okay. And then the win rates seem to be strong and improving. What are you seeing in the competitive landscape? Where are others falling short. And we had Microsoft announce an offering in the space. I'm curious if that's coming up at all with customers. Is it something they're considering at this point or if it's only to tell right now.

So generally, in the competitive -- the real competitive landscape, we feel that we are winning more. I think from what we see from other competitors versus our performance. It seems that we are taking market share. We also see it in the field and the different deals.

I think that the main reason for that is our long-term investment in doing the right things in terms of the architecture and the solution as we go to those larger enterprises, I think the competition just doesn't have what it takes in terms of both scalability as well as richness and the overall offering that they have in their platform.

With respect to Microsoft, I know it got a lot of headlines. I must say we see zero activity in the field. We had a partnership with Microsoft. We don't see the go-to-market effective, they do not have the domain expertise to speak about CX. A great example is they have a CRM offering, Dynamics with barely 5% or less than that market share. So if they were not successful in Dynamics, I'm not sure that they can be successful with what we do, which is way more complicated that requires way more domain expertise.

Catharine Trebnick, Rosenblatt Securities.

Nice quarter. I have a question on the macro. You reaffirmed your revenue guide for the year, but could you piece in or give more details, are you seeing any of the deal cycles ignited because people are looking at AI and trying to understand where they're not pace in AI? And then is there any impact from more eyeballs looking at these deals. So are you seeing any things that make you want to be a little bit more pragmatic in your guide?

No, I don't see a change in the macro to what we've seen, let's say, a year ago. I think that the adoption of tech by enterprises is still a necessity for them to run the business. And across all our businesses, we are mission-critical and the drivers behind our business are not really changing whether the macro is doing better or worse. Completely irrelated and I don't think it relates directly to the macro, when you sell to large enterprises, in what we do. Those are lengthy processes.

But when the enterprises adopt us, whether they adopt us on day one to do or to be the standard throughout the entire enterprise or just part of it -- that's a lengthy process to begin with regardless of the macro. So we are always -- if you think about our guidance in the past, we are not that type of company that come with very low guide and then that is completely ridiculous, and then we did it and we said that we did it.

We know what we are seeing at the beginning of the year, we're very responsible with our guidance. And then we come and execute according to that.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Eilam for any final comments.

Thank you all for joining us and have a great day. Thank you.

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