Nice Ltd (NICE) 2017 Q1 法說會逐字稿

Welcome to the NICE Conference Call discussing First Quarter 2017 results, and thank you all for holding. (Operator Instructions) As a reminder, this conference is being recorded May 4, 2017. I would now like to turn the call over to Mr. Marty Cohen, VP, Investor Relations, at NICE. Please go ahead.

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

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 fact that that could cause results or performance of the Company to differ materially, is contained in the section titled Risk Factors, in Item 3 of the Company's 2016 Annual Report on form 20-F, as filed with the Securities and Exchange Commission on April 21, 2017.

During today's call, we will present a more detailed discussion of first quarter 2017 results and the Company's guidance for the second quarter and full year 2017. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we'll be commenting on our adjusted results of operations, which differ in certain respects from Generally-Accepted Accounting Principles, as reflected mainly in accounting for acquisition-related revenue and expenses, amortization of intangible assets, and accounting for stock-based compensation. The differences between our non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release.

We'd also like to remind you that we are hosting our Investor Day on May 9 in conjunction with our annual user conference, Interactions, in Las Vegas. The special program for analysts and investors will include meetings with NICE executives, presentations from customers, product and technology sessions, and access to the Solutions Showcase. If you haven't registered and would like to do so, please e-mail us at IR@NICE.com. I will now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. I'm glad to be on the call with you today. We are pleased to report another quarter of strong results, demonstrated by high growth on both top and bottom lines. Revenues came in at $308 million, representing 36% growth compared to the first quarter of last year.

We also saw continued good leverage in our operating model, as profitability has continued to be a key focus for us over the past several years. Operating income for Q1 was $74 million, representing 27% growth compared to Q1 of last year, and earnings per share was $0.89 for Q1 which represented 10% growth compared to the same quarter last year.

Our continued strong financial results reflect the well-defined business strategy we put in place three years ago. At that time, we purposefully steered our business plan in the direction where we believed the market would evolve. This business plan included, among other things, a more rapid innovation, divesting certain businesses, and making sound investments, including the acquisitions of inContact and Nexidia.

Three years later, we are now at a pinnacle of alignment between the four areas of the greatest growth opportunities and our assets, technology, and business strategy. These four areas or what we like to refer as our strategic pillars, are cloud, omni-channel, analytics, and artificial intelligence.

In almost every conversation that we have with customers today, customers of all sizes, the dialogue is centered on these four pillars, underpinning our clear alignment in the current market dynamics. These pillars are not just the foundation of our strategy, but also define our everyday business activities across the Company for all our employees.

Today, I would like to share with you the progress we have made around these pillars in Q1.

Starting with cloud, we continue to make significant progress in the cloudification of the entire NICE portfolio. In fact, we are at the point today where almost all the NICE solutions have also been built for the cloud, so that we can now offer customers a true choice of deployment.

Furthermore, we have greatly expanded our cloud assets as well as our addressable market with the acquisition of inContact. The market reaction to the inContact acquisition continues to be extremely positive from industry analysts, customers, and partners, and we are very pleased with the progress of the integration.

We have already integrated multiple elements of the NICE product portfolio to work tightly with the inContact cloud offering, and dozens of inContact customers have already added multiple NICE cloud solutions. These customer expansion, as well as our ability to bring on new deals, come from the combined effort and collaboration of the inContact and NICE sales teams, as well as strengthening alliances between the NICE and inContact partner community, where partners are now taking on both NICE and inContact solutions.

Moreover, we continue to see an accelerated pace of migration of large enterprises moving away from on-premise legacy vendors on to our cloud offering. Due to recent changes in competitive dynamics, those enterprises are now looking for safer, future-proof solutions, and they're also demanding nothing less than full omni-channel platform, which we are able to deliver.

There were many omni-channel deals this past quarter. One included a deal with a large BPO that was sourced by NICE sales team, and closed by inContact, demonstrating the tight collaboration between the sales teams. Another CCaaS deal was with a money transfer company which is now a customer of NICE, across all of our business segments, and they also signed an omni-channel cloud deal with a growing finance company. Two of these deals were competitive replacements of legacy on-premise providers.

We are also excited by the further cloud adoption in our Financial Crime and Compliance segment, helped by our new solution suite called Essentials that were built for the cloud.

As I mentioned in the past, we are already delivering AML Essentials, our anti-money-laundering suite in the cloud, and later this year Fraud Essentials will be released to the market.

In one of our Q1 Essentials deals, a major bank needed a quick deployment of transaction monitoring to meet compliance requirements using the market-leading brands like NICE Actimize. Cloud was an appealing factor, removing the burden of maintaining an IT infrastructure. In another Essentials deal, a broker-dealer needed a sanction screening application for client on-boarding. They chose Essentials for its short implementation time, and deploying in the cloud allowed them to bring the solution in quickly without dependency on IT.

The other driving force for growth beyond omni-channel and cloud is analytics, where we remain on the cutting edge of bringing high-end technology to our customers, to align with enterprise demand. NICE has always been the clear leader in delivering analytics and real-time technology. Now, with the combination of NICE and Nexidia high performance technology, we have positioned ourselves as the analytics powerhouse in the customer service market.

Let me give you some examples of some very large analytics deals from Q1. We had an 8-digit deal with a major teleco provider that included a portfolio of analytics solutions around customer churn analysis, first-call resolution, and customer sentiment analysis. Moreover, our managed analytics team was crucial in developing predictive analytics to identify at-risk customers and the solutions of leveraging data from existing NICE customer journey implementations. This deal was a competitive replacement, and demonstrates the combination of technology and the main expertise for NICE that we believe is unmatched in our industry.

In another 8-digit deal with a large New York public agency, they extended upon our long-standing relationship, investing in our next-generation analytics-enabled platform.

We signed a large 7-digit cloud analytics deal with a major healthcare provider which is looking to improve efficiency in their back office and provide mobile capabilities to their workforce. Our capabilities around our fully-integrated back office suite, and the fact that we could provide them with higher agent retention as well as the flexibility in offering it as a cloud, helped to win the deal and replace the incumbent provider.

In another 8-digit deal with a major investment bank, they purchased a portfolio of solutions for AML and Fraud analytics, along with Enterprise Risk Case Management. Most of this deal involved replacing internally-developed solutions resulting from regulatory pressure at the organization to implement better control. This further demonstrates the power of our technology and the NICE Actimize brand to help mollify the concerns of the regulators.

In step with analytics, our presence in growing markets for enhanced automation including robotics, is also accelerating, and our investments in this domain are showing good returns. Continuing with the momentum that we saw in robotics in 2016, we signed 10 new logos in Q1 alone.

One such customer included a managed services provider specializing in complex global service supply chain operations. Their goal is to replace 40% of their human-dependent processes this year. We won this deal based on the capabilities of our robotics, to be deployed without intervention from humans. Robotics automation is a growing business for NICE, and the pipeline for this solution is stronger than it has ever been.

We have been integrating our extensive analytics and machine learning competencies with our automation products to help customers achieve intelligent autonomy, also referred as AI. Blending analytics and automation allows our customers to improve performances, whether it is enhancing service or better protecting themselves, while at the same time reducing costs by eliminating manual labor.

For example, we recently launched ActimizeWatch, which allows our fraud prevention customers to use machine learning techniques through our cloud offering to identify early signs of new or evolving fraud patterns. ActimizeWatch allows our customers to better prevent fraud, while at the same time reducing their dependence on internal teams.

We continue to execute well, and much of our success has been our ability to align ourselves with the changes taking place in our market. With sound strategic planning, supported by ongoing rapid innovation and strategic M&A, we have put ourselves in great alignment to capture the opportunities created by these changes. These opportunities are further amplified by our strong competitive position and the growing market in which we operate.

We believe that the increased level of activity we are seeing in our business across each of our business segments, positions us well to continue to win in 2017.

I'm looking forward to seeing you next week at Interactions, our annual user conference, which is expected to be our largest ever with over 2,000 people in attendance.

I will now turn the call over to Beth, who will review our financial results.

Thank you, Barak, and good day, everyone. I am pleased to provide you with an analysis of our financial results and business performance for the first quarter of 2017, as well as outlook for the second quarter and full year 2017.

The financial results represent continued operations, and exclude the businesses that were divested in 2015. However, the cash flow statement includes the results of both divestitures. And now, I will review the results.

Revenue for the first quarter was $308 million, which represented an increase of 36%, from $226 million in the same period of last year. Customer Engagement revenues, formerly known as Customer Interactions, grew 41% to $243 million, and Financial Crimes and Compliance revenues grew 21% to $65 million.

Due to the significant increase in our cloud business, we adjusted our line item reporting in the profit and loss statement to reflect this change. Product revenues accounted for 22% of total revenues in the first quarter. Cloud revenues accounted for 26% of total revenue, and services accounted for the remaining 52% of total revenue in the first quarter of 2017. Our recurring revenue has grown significantly, and now represents 65% of total revenue.

On a regional breakdown, revenues in the Americas were $239 million in the first quarter, an increase of 54% compared to the same period of last year. Revenues in EMEA were $44 million for the first quarter 2017, compared to $45 million in the first quarter of 2016. Excluding the impact of currency exchange rates, EMEA revenues were $47 million.

Revenues for the Asia-Pacific region were $25 million for the first quarter, similar to last year.

Gross profit in Q1 increased 35% to $215 million compared to $160 million last year.

Gross margin in Q1 was 69.9% compared to 70.6% in Q1 last year. The gross margin was impacted by the consolidation of inContact, which has a lower gross margin compared to NICE, and was offset by a favorable product mix and continuous improvement in the services organization.

Operating income in the first quarter increased 27% to $74 million, compared to $58 million last year. Operating margin reached 23.9% compared to 25.6% last year. The change in the operating margin is the result of the consolidation of inContact.

The effective tax rate for the quarter was 23.2% for the first quarter, compared to 19.5% in the same quarter last year. The tax rate was impacted by a slightly different mix of geographies with different tax rates.

In the first quarter of 2017, we had net financial expense of $1.8 million as a result of the debt we issued in connection with the acquisition of inContact, compared to a net financial income of $3.8 million in Q1 2016.

Earnings per share in Q1 2017 increased to $0.89, compared to $0.81 last year, a growth of 10% despite a much higher tax rate than last year.

First quarter cash flow from operations was $133 million. Total cash and financial investments were $389 million at the end of March 2017, and total debt was $442 million net of issuance costs and the equity component associated with our convertible debt.

As part of our share repurchase plan, we bought back shares totaling $8 million during the first quarter.

And now, I will turn to guidance.

For the second quarter 2017 we expect total revenues to be in a range of $309 million to $319 million, and fully-diluted earnings per share to be in a range of $0.84 to $0.90. For the full year 2017, we are reiterating revenues to be in an expected range of $1,330,000,000 to $1,354,000,000. We are increasing fully-diluted earnings per share to be in an expected range of $3.85 to $4.05.

That concludes my comments. I will now turn the call over to the operator for questions. Operator?

(Operator Instructions) Your first question comes from Shaul Eyal from Oppenheimer & Co.

Barak, I want to start with a question about a comment made on the press release, and one which you have addressed in your prepared remarks. You guys are indicating a higher volume of very large transactions relating to your analytics activities. Indeed, you've provided us with some examples. But, can you provide us with some additional color about the potential scope, the associated verticals, aside from the ones you've touched on, and the potential length of such contracts? I understand that some examples are competitive displacement, but are you also seeing a new investment cycle, or maybe just new and interesting greenfield opportunities out there? Whatever you can share with us, highly appreciate it. And, I have a follow-up.

Sure. I'll be happy to provide a bit more color than the earlier remarks. So, as I said in my earlier remarks, we show in Q1 a continuous progress and growth in both the numbers and the size of the deals driven by analytics, and I will contribute that to I think a multiple factor. First of all, the technology that we have today in terms of scale, the ability to do analytics across the enterprise almost with no limit, as we call it - analytics with no limit, increases the adoption that we see, both from our customers, but also customers that used before different solutions, tried different analytics capabilities from some of our competitors, realized that they are missing the strength of the technology that we can offer with the Nexidia offering and are migrating to NICE. And as they do that, they deliver to us very large purchase orders, as the one that I have mentioned before.

In terms of verticals, we see this across different verticals. I've mentioned some examples from the teleco verticals, similarly to last year. We saw it also in banking and insurance, healthcare. I think all of the above are very, very relevant, because all of them when it comes to customer service are experiencing very similar challenges and opportunities, starting from cost reduction, automation, but also on the opportunity side, the customer experience and driving sales.

And the last thing I would say, that one additional capability to deliver, that increased the adoption -- also increased the confidence -- is our managed analytics capabilities today that allows us not just to go ahead and sell it, but also allow the customer to really use the technology at its best, and we see a lot of follow-on orders as a result of that from customers. And indeed, also, not just for Q1, the pipeline itself is very strong, strongest that it's ever been for our analytics solutions, and we feel very pleased with what we see also moving forward on that front.

Got it, understood. And as a follow-up, relating to your Actimize and Financial Crime activities, what's the current thinking regarding potential relaxation of the regulation associated with a new US administration's view?

So, we all, again, read the same newspaper, but at the same time we also talk to many of our customers, and seeing as Actimize is such a strong brand in the domain of financial crime and compliance, we have this dialogue almost on a daily basis. So, first of all, if you look on both this quarter as well as last quarter, you still have very significant growth in Actimize, above the 20% if I'm not mistaken, both quarters, which is quite significant, showing the high demand and high execution on that front. If I look on the different solutions that we're selling, it's not just coming from regulatory pressure. All financial services have significant expenses that grew dramatically all the way since 2008, and those departments, they're very labor intensive. And many of our solutions are based on the ability to reduce some of those costs. That's one reason why we see this high demand, and I believe this will continue regardless of some changes potentially on the regulatory side, that's number one.

The second thing, many of our solutions are addressing fraud and anti-money-laundering, and there is no dialogue there right now easing any regulations or any directives with respect to anti-money-laundering or fraud, and this is a big chunk of our business.

And the last thing, is that we see us expanding significantly beyond financial services. We spoke in the past, as well as in this quarter, about new customers from the gaming industry, new customers from alternative payments, and the applicability of the Actimize solutions are now going way beyond the classic financial services.

And, maybe one last thing I will say is, the international front, we see the demand also on the different territories and in some countries, actually the dialogue, the nuances that we hear, actually increase the regulation while in others, as we can hear, there are certain dialogues about the other direction.

Your next question comes from Dan Bergstrom from RBC Capital Markets.

A theme that's kind of been more drawn out on several software earnings calls this quarter has been the transition to Office 365, and the move really causing enterprises to rethink infrastructures, and accelerating a move to the cloud. I would assume that's benefiting you, but was just curious if you're seeing customers rethink their contacts and their infrastructures or strategies as they move to 365?

Thank you for the question. So, as you heard from my comments about the cloud, we see a significant acceleration in both the cloud demand as well as the actual business that we see. I would attribute it to some other things. I'm not familiar -- maybe 365 is one more thing that's pushing those organizations to move to the cloud. We haven't seen that particular thing, but what we have seen -- you know, cloud adoption in the customer service market, in our particular market and the adjacent market we stepped into with the acquisition of inContact, has been relatively low at the enterprise level up until I would say a year ago. But, there will be a few things that have accelerated that, and we believe that's really the inflection point. And I think that we have already started to feel it in Q1.

And the reason for that is, the first effect, as you suggested, that enterprises feel more comfortable adopting cloud solutions. They've experienced the cloud with other enterprise software segments that they have adopted, so as they think about, or re-think about, customer service infrastructure, the level of confidence increases. And we see this across all verticals, even very traditional, and not necessarily early-adopter vertical. That's number one.

The second thing that is unique to our industry, the cloud has certain capabilities that are more significant in the customer service market versus other, and among that is the elasticity. Customer service has strong dynamics for certain verticals, and today up until now, with on-premise solutions, customers had to build to the max. The cloud offers them the ability to have full elasticity and basically pay to what they are using, and this is a very appealing, valuable position for them.

And lastly, which we believe is accelerating the move to the cloud in our segment, is changes in the dynamics of the legacy players. The majority of the routing business of the customer service market, a majority of the install base, is with legacy providers. Most of those legacy providers have some financial stress. You know, they went through certain Chapter 11, or they carry very large financial debt, which either didn't or will not allow them to invest in building cloud solutions, full cloud solutions with omni-channel capabilities, and this is something that we have.

And over there, because of the recent changes and announcements, we see a very, very significant shift of customers approaching us, checking the possibilities, some of them more than checking, to migrate really fast from their legacy solutions into our cloud solutions.

Great, thank you, and then maybe one for Beth. Beth, cash flow was really strong in the quarter. Is that largely a function of collections here in the first quarter, or maybe we're seeing the benefits of more scale in subscriptions? And then, any thoughts on seasonality, linearity, for the rest of the year?

Sure. We were pleased with the cash flows, and the positive incoming cash flows for the quarter. It is typical that after seasonality that we have in the fourth quarter, that we will tend to see a strong positive cash flow in the first quarter, so that certainly contributed to that.

With respect to the subscription basis, the inContact business tends to be more on a monthly cycle. The collection activity is really more applicable just to strong execution and some of the mix of the seasonality. With respect to the overall cash contribution, we do expect it to continue to be moving in a positive direction throughout the rest of the year.

Your next question comes from the line of Gabriela Borges from Goldman Sachs.

Maybe one for Barak, on the four pillars of growth, the artificial intelligence or the AI being added as a pillar of growth. Maybe you could just help us understand how you're thinking about that, as an independent add for growth, as opposed to something that maybe historically has been embedded in the other three pillars -- analytics, cloud, omni-channel? Thank you.

That's correct, you're spot-on. In terms of our investment in artificial intelligence -- and artificial intelligence is the headline and beneath that there are multiple technologies that we've been either working on, evolving on selling on the other pillars. But, we see such a strong demand for that, so we decided to start addressing it as a standalone pillar, if you would like, as a branching out just from the other two, because we've been applying a lot of machine learning capabilities on both our analytics business as well as our omni-channel. If you think about the way that we do analytics, for many years it has a lot of machine learning capabilities, and in our omni-channel there are a lot of self-service capabilities that required us in the past to inject again, artificial intelligence and machine learning capabilities.

The other reason why we have decided to have a standalone pillar for that, as I mentioned in my earlier remarks, is also the strong demand we've seen in our robotics. So, robotics started for us more of the need to automate, take human intensive processes and automate them. That was the beginning, if you would like. But, the demand today is actually taking those robots -- and we have many of them deployed with our customers, and not just to teach the robot if you would like, how to get from point A to point B but equip those robots with cognitive capabilities allowing them to find the best way from point A to point B, and allowing them to find further opportunities for automation.

I would say that from potential, it's very significant. I think that both the market, as well as the understanding of customers, is still in its infancy but the demand is very strong, and our investment is also very significant in this domain. And as I mentioned, the dialogue with customers about it becomes something of almost on a daily basis. So, that's why we've decided to put it as a standalone pillar.

Obviously, if you think about the four pillars of our company, while we present them as standalone, there are very strong interdependencies and value of those interdependencies between them.

That's really interesting color, thank you -- and a follow-up for Beth, if I could. Great to hear the commentary on the integration on inContact going better than expected. Maybe just a little more detail there on the OpEx synergies and the gross margin of the COGS synergies? What are some of the areas that have already been executed on, if you could just remind us, what are some of the other places where you think you can realize synergies over the course of the year? Thank you.

Sure, thank you for the question. If you look at our operating profit, which I'll highlight as a starting point -- our operating profit grew by 27% year-over-year, and if you were to actually look at inContact as it was Q1 of '16 on a standalone basis, it was basically at a break-even, more or less. So, we are starting to see the realization of some synergies in the first quarter. As a reminder of some of the synergies that we had shared, the first one that I will highlight is that inContact had partnered with one of our competitors for selling a WFO offering. And, as a result of the acquisition, we have now moved those customers of inContact over to our own WFO offering. So, that comes with a certain savings in terms of the cost of the cloud, and we'll continue to realize that.

In addition, there are other synergies that we've started to realize, some simply from the combination of both companies, which were public companies and had typical public company costs, such as audit fees, insurance fees. We also had some shared vendors, so we've gone back to look at where we could do some consolidation around the renewal of vendor relationships, and gain some synergies there as well.

And then finally, as we look kind of on a longer-term basis, we do have plans to further scale in terms of some of the cloud, where we will be looking to shift away longer term from private cloud to public cloud that could offer some efficiencies, as well as looking at taking advantage of some of the efficiencies that NICE has benefited from in the last several years, one of which is doing more services in lower-cost regions. So, that is also an opportunity for us to see further expansion in the margins over time.

Just to clarify, the benefit of inContact customers now using NICE as their WFO provider, is that already reflected in the growth margin profile of the combined company, or is that something that will play out over the course of the year?

So, that has started to come into the gross margin in the first quarter, and will continue to play out in the upcoming quarters, as well.

Your next question comes from Greg McDowell from JMP Securities.

I appreciate the adjusted line item reporting. I think that'll be helpful for investors to understand the cloud business and the margin profile of that business. So, a couple questions in that area. First, I know you don't want to get in the practice of guiding revenue by line item, but as we tighten up our models, and factoring in this idea that all NICE solutions have now been built for the cloud, how should we think for the rest of the year and into next year about the potential for product growth beginning to moderate, and with cloud growth beginning or continuing to stay in the double digits? And then, to that end, how should we think about the services business, and professional services growth versus maintenance growth and those sort of items? That's question number one.

Thank you for the question, Greg. So, indeed, we're not going to guide to the line items. So, what I'll give, I'll give kind of the general theme, and I think that's what we've seen in Q1 is what we'd like also to see moving forward, and this is that on the one hand we have stepped aggressively into the cloud business. Some of it is our own solution being cloudified, but a lot of it is us stepping in to adjacent markets. So, it's not necessarily cannibalizing an existing maintenance stream or business that we have, and that will -- we'd like to see moving forward, to represent high growth on our cloud business. And, at the same time, as you've seen in Q1 and we expect it also moving forward, we continue to experience high volume of very large deals, 7- and 8-figure deals. It's been many quarters that we see those kind of deals, and they're impacting positively the products and the services lines as you've seen in our results. So again, I'm not going to guide specifically, but the theme for us is that cloud will grow. We would like to see it growing fast. Some of it is migration or addition to the existing install base of NICE, but a lot of that is us taking the opportunity of that cloud, stepping into the customer service market. And we take advantage of that, to go to addressable markets where we didn't operate in before.

Lastly, I will say that historically, both in our existing solutions as well as into our adjacent markets, we didn't operate in the mid-markets, neither in the SMB market. And for us, cloud allows us to take our existing solutions, as we cloudify them, and sell them to places that we haven't sold before. So, it's not replacing existing revenue, but rather, bringing cloud as incremental business from the existing solution, but for new market segments for us.

Thank you, Barak, that's helpful, and maybe one for you, Beth. You took up EPS guidance for the full year, but your revenue guidance is unchanged. I guess, what's changed in the last 90 days to sort of lead you to take up EPS guidance, and is it more of a change on maybe the gross margin dynamics of the business? Or, is there something happening on the OpEx line that's leading to the increased EPS guidance for the full year? Thanks.

Yes, thanks for the question, Greg. As you highlighted, we've left the revenue guidance unchanged for the year. For the EPS guidance, the primary reason was that if you looked at the results we had for the first quarter, we actually exceeded the range that we had given as guidance for the first quarter, and it was by approximately the same amount that we're adding on to the fiscal year guidance. So, we've already had that achievement, and that's in the bag.

With respect to the upcoming quarters, we will still continue to manage the expenses as we've done in the first quarter. However, we are comfortable with the range that has been set as we look towards the remainder of the year.

Your next question comes from Jonathan Ho from William Blair.

I just wanted to understand, as more and more of your customers elect SaaS as maybe the preferred model over the traditional on-premises model, how should we think about the potential for revenue recognition headwinds, just given we've seen this before with other companies that have transitioned from on-premises to SaaS? The deferred revenue recognition typically pushes that out a little bit.

I'll start, and Beth, I think will complement more of the deferred revenue line. Similar to what I said before, again, just to highlight -- not all, but a lot, of our cloud business, is not replacing an existing business, but rather us stepping into adjacent markets, again, either a market we didn't operate in before, or segments. So, that's just one thing. And with respect to recognition, and what you should see on the deferred revenue line, especially with the inContact model, maybe I'll let Beth refer to that.

Thanks, Barak. I was going to make the same comments, that like the transition you see obviously in some software-to-cloud-based companies there's more of an erosion of the revenues, which we don't expect to see in our business given that the majority is going to be incremental. With respect to the revenue recognition, the one additional highlight I would make is that inContact has a very nice, elastic model that Barak spoke of earlier, and the way that they are invoicing their customers is actually monthly billing in arrears. So, the balance sheet looks a little bit different than what you would typically see from a lot of cloud-based companies, where they have more deferred revenue as a long-term liability. For us, you'll continue to see that more of that is included as a short-term liability, again, due to the nature of their billing. There is other billing outside of inContact, clearly, which is also applicable to the rest of NICE, and that does tend to have more of a flavor of a traditional cloud business on a longer duration.

Got it, and then how should we think about Amazon Connect? Should we think about them as a potential competitor, or is this really more of an opportunity for you to work with them over time?

So, we see it as an opportunity, going back to the fact that the customer service market is, let's call it, waking up, after many years of legacy on-premise vendors basically doing the same thing time and again. And it's an interesting market. We believe we have not just the right, but the best, assets to win the market.

This market is of an interest to other players that see the opportunity, hence, they see this opportunity and the very fast-growing addressable market, and we'll probably see more vendors making an effort or trying to introduce something into this market. Particularly with Amazon, we see it obviously, we have partnership and we will work closely also with Amazon Connect. At the same time, they're not addressing the exact same market segment that we are addressing. Our solution is much more holistic, omni-channel, many capabilities as required for the enterprise level in this market, which is more of an interest to us, versus the very micro and small businesses in this market. So, we actually see it as competition if you would like, or this introduction is something very positive that will increase the viability of the cloud solution, and the confidence that customers are willing to put enterprises in the hand of cloud solutions like we are offering.

Great, and then just one quick follow-up, in terms of the tax rate, how should we think about that for the balance of the year?

Can you repeat that question? You were breaking up.

How should we think about the tax rate for the balance of the year?

Thank you for the question. So, if you look on the tax rate, and going back to 2016, you'll see that there was a gradual shift and increase over 2016, to end with the higher tax rate, and you'll see that continuing on into the first quarter of this year. So, currently, as I'm sure everyone is aware, there are a lot of discussions that are happening with both the Israeli regulation administration as well as the United States administration. So, clearly, if that comes to fruition, that would have a positive impact on our tax rate. However, at this time, we're not banking on that, so we're assuming that for the foreseeable future it should be around the range that we were at in the first quarter.

Your next question comes from the line of Tavy Rosner from Barclays.

Hi, thanks for taking my questions. Most of them have been answered. Just looking into the additional color you gave on cloud into the income statement, so it seems that the gross margin implied in the first quarter was slightly below the mix of the rest of the Company. Is that just because of the legacy of inContact? And, what's the right way to think about this figure in the coming quarters?

Thank you for the question. First of all, coming into the first quarter, we expected to see a decline in our overall gross margin. That's because of the profile of inContact, which historically had a lower gross margin, around 50%. The gross margin decline compared to the same quarter of last year was expected. The good news for us is that if you look at the other breakdown of our gross margin, we had improvement in both our product gross margin as well as our services gross margin. So, we've seen the increased margins there, and the cloud margin really is the difference in the profile, and as a result of the aggregation of the inContact results. And, as I highlighted earlier, we will continue to realize additional synergies throughout the fiscal year and beyond, in the cloud margin.

Okay, that's helpful. The last one is, last quarter you guys touched on the NICE2B plan. I was wondering if there's any additional color you can give us, perhaps around the timeline, roughly speaking, if you have anything to add on that?

Thanks for the question. We're not providing a specific timeline. The NICE 2B is the framework of our updated strategic plan, around the four pillars I've talked about, and we see that in those four pillars, and we saw it very nicely in Q1, cloud, omni-channel, analytics and artificial intelligence, I think that among the four of them we have enough addressable markets and we have enough assets in order to get a line-of-sight to that particular goal. And in all of those markets, again, we have a very strong alignment between the growth in those markets. We felt very significant the fact that they are on the top of the agenda of many enterprises, and all of our customers, and as well as the assets that we have. So again, we're not providing a specific timeline, but in our model we see a line-of-sight for that.

Your last question comes from the line of Paul Coster from JPMorgan.

Good morning. This is Mark Strouse on for Paul, thanks for taking our questions. I believe you said that you're seeing acceleration in both the organic and the cloud business. Is it possible to even say what the organic growth might have been, in 1Q '17?

We are not breaking that part. As you know from our strategy around acquisitions, with the great assets that NICE has, we're leveraging immediately some of the acquisit map and a lot of the synergies both on the top line, the go to market, product integration, other things which allows us to grow those businesses together. What we have said on the earlier remarks, is that we see a very nice growth across the strategic pillars as I had mentioned, both the cloud and analytics. I mean, both parts we've done some acquisitions that we believe that our positioning is even better for this year and future years' growth.

Okay, understood. And then, just over the next 6 to 12 months, how should we think about M&A? Should we expect it to be quiet as you integrate inContact, or are there other opportunities that you might be looking at?

We are indeed very busy, very happy and busy with the acquisitions that we have done, and we are in the process of realizing many of the opportunities we have with the recent acquisitions. At the same time, we remain acquisitive, we have a strong balance sheet, and if we see opportunities which allow us to further accelerate, opportunities that are completely in alignment with the four strategic pillars of the Company, if they can contribute and they can be accretive both operationally and also to our strategic pillars, we won't be shy of making the right acquisitions.

Okay, operator, any further questions?

There are no further questions at this time.

Okay. Thank you all very much for joining us today. We look forward to see you next week at the Interactions event. Thank you, have a great day.