NICE Ltd

Greetings and welcome to tonight's conference call discussing second quarter 2022 results and thank you all for holding. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded today, August 18th, 2022. I would now like to turn this call over to Mr. Marty Cohen, VP of Investor Relations at Knight. Please go ahead.

Thank you, operator. With me on the call today are Barack Alam, 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 type of risk factors in item three of the company's 2021 annual report on Form 20-F as filed with the Securities and Exchange Commission on April 5th, 2022. During today's call, we will present a more detailed discussion of second quarter 2022 results and the company's guidance for the third quarter and full year 2022. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles as reflected mainly in accounting for acquisition-related revenue and expenses, amortization of intangible assets, and accounting for stock-based compensation. The difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release, and with that, I'll turn it over to Brock.

Thank you, Marty, and welcome, everyone.

We are pleased to report another outstanding quarterly performance at NICE. Our continued steadfast growth on both the top and bottom lines, which is unquestionably scarce in the tech industry, is further proof of our unique ability to deliver consistent double-digit revenue and profitability growth. For Q2, we reported $531 million in total revenue representing a 16% increase year-over-year and a six consecutive quarter of mid-teens growth. Cloud revenue increased 27% in Q2 with a cloud exit ARR of over $1.3 billion. Our cloud growth at current scale is greater than it was when our cloud revenues were half the size. Furthermore, Our best-in-class cloud profitability, which increased 240 basis points year-over-year to 70.1%, continues to expand and is accretive to both our growth and operating margins. In Q2, we drove further growth in our operating income, which increased 19%, as well as our operating margin, which increased 80 basis points year-over-year to 29%. The strong operating results led to 18% growth in EPS, which rose to $1.86 for Q2. Moreover, our rock-solid balance sheet with a sizable net cash position, which is a capital strength that is unequaled in our industry, gives us the fuel to seize additional growth opportunities that will further extend our leadership. The continued growth in our reported results reflect the strength of our business and the fact that we are winning the market. And we expect to continue to win as the tide has turned in our industry, creating a tailwind for NICE in the current environment. First, organizations are much less eager to adopt point solutions and are stepping away from companies that are financially unstable, preferring to go with large vendors that offer broad cloud platforms. Second, enterprises are further shifting investments into technologies that allow them to tackle increasing labor costs, but even more so, to overcome the shortage of labor. Third, most of the legacy on-prem incumbents in our market carry significant debts, are unable to innovate, and have practically no ability to expand inorganically. And lastly, as access to capital is becoming more limited, niche companies with unsustainable business models are now struggling in the market. These tailwinds, together with the fact that our solutions are mission critical in all the markets in which we operate, puts us in an advanced and a dangerous position. Our forward-looking strategy and tight execution are perfectly aligned with the convergence of platformization, cloudification, and digitalization, creating the strongest transformational force that we've seen in our market. The wave of platformization is the result of enterprises awakening in realization that point solutions are actually preventing them from managing complexity at scale. Knife is a platform company. CX1 is winning the platform play in our market due to its unmatched breadth and depth. It gives us the unique ability to land beachheads faster, provide a long runway for upsell and cross-sell, and attracts the most complete ecosystem. A great example of large enterprise platform deal in Q2 was a seven-digit ACV deal with a very large energy company. An existing Nice Analytics customer, wanting to transform their entire approach to customer journeys, selected CX1 as the platform of choice moving forward. CX1 replaced multiple disjointed point solutions from legacy incumbents. In the process, we upsold digital and other CX1 native solutions, further demonstrating the significant growth and uplift opportunity we continue to have within our large enterprise customer base. Cloudification is entering a new age of clouded scale, as large enterprises are at the cusp of their transformation. This new age will illuminate the few vendors that can deliver clouded scale. NICE's core DNA is at the high end of the market. CX1 has the biggest global cloud deployment, the largest number of enterprise customer, and is being adopted by NICE's unmatched large enterprise customer base. In fact, we saw a 70% increase in the number of large-scale portfolio deals. The ability to deliver this type of deal is a prerequisite to address the needs of the large enterprise market in the cloud and is a high barrier to entry. Digitalization has exponentially advanced the speed requirement for organizations. This requirement for speed has pushed digital 1.0 solutions into obsolescence, opening a big void that can only be filled by a next-gen digital approach. NICE has evolved into a digital-first company. CX1 is a next-gen digital consumer-led platform that that uniquely leverages AI and massive amount of historical data, allowing enterprises to exceed the speed of the real-time consumer. In Q2, we saw rapid growth in our digital revenue, increasing 88% year-over-year. These winning elements, platformization, cloudification, and digitalization, are manifested in our CXI Framework and opening up opportunities for us to go upmarket in large enterprises, expand internationally, and deliver next-gen digital to our customers. Let me start by sharing some of the wins in the large enterprise market in Q2. We signed a seven-digit deal with one of the largest insurance companies in the US to help facilitate the ongoing transformation to the cloud. They selected NICE for our cloud capabilities and our commitment to innovation, all the while further establishing NICE as a continued strategic partner for the future. We signed a seven-digit ACV deal with a very large healthcare company. Due to the competitive displacement of a CCAS vendor, which failed to deliver scale, had a clear lack of advanced feature, and had issues with integration and implementation, all of which is not uncommon among point solution providers. The customer chose to move to our advanced platform with a full suite of solutions natively integrated in CX1. We signed an eight-digit deal with a major US bank, which is experiencing higher transaction volume, especially around digital, and therefore needed to extend our functionality. And there was a seven-digit deal with one of the largest retailers in the US taking our cloud solutions. Our international expansion is in full force in a market that is still underserved for cloud and digital. Large international deals included a seven-digit cloud deal with a leading UK-based entertainment company. Since 95% of the customer interactions are digital, they needed a platform with strong capabilities and the customer found our digital offering far superior to others. We also signed a seven-digit deal with the leading Dutch-based media company. With two incumbent solutions in place, this customer consolidated on to CX1 as we replaced the incumbents and beat other competitors vying for the deal. In another seven-digit deal, a large German-based financial institution expended with Nice, replacing an incumbent solution and further cementing Nice as a trusted partner. Our next-gen digital and conversational AI solutions are breaking down the silos existing in multi-vendor environments. Only CX One merges all interactions to a single platform, which is the essence of our CXI framework. In Q2, we continue to sign many deals reflecting the success of our industry-leading next-gen digital capabilities. For example, we signed a seven-digit competitive replacement deal with a well-known BPO. In addition to releasing the elasticity and scalability of the CX1 platform to better manage those seasonal shifts in demand, They wanted to add digital capabilities from a single provider and to partner with NICE for our next-gen CXI framework. Similar thinking was behind a seven-digit deal with a large cable company, which is moving off its legacy solutions and standardizing on CX1 to help facilitate its cloud and digital transformation. We signed a seven-digit ACV deal with a large auto dealer's making making a strategic investment to expand more in digital to help facilitate the rapid growth and transformation that are driving from in-person to online. Yesterday, we announced another significant milestone to our fast-growing global distribution ecosystem. This partnership gave us top-tier Microsoft Azure IP call source status, And CX1 is now available natively on Azure. These expanded partnerships provide full flexibility for customers to seamlessly deploy CX1 on their public cloud of choice. Furthermore, it puts the full distribution power of Microsoft behind CX1. In closing, we have come to a pivotal moment in our industry. Software leaders, need to have strong financial profiles, have the ability to grow profitability, and deliver a true cloud-native platform with a full suite of solutions, amid an industry with a shrinking number of viable solution providers. As measured by our rock-solid financial profile, our market-leading cloud platforms, our cutting-edge innovation, and our domain expertise, we have proven time and again that we are that leader in which enterprises want to partner with. I will now turn the call over to Beth.

Thank you, Barack, and good day, everyone. I am pleased to provide the analysis of our financial results and business performance for the second quarter of 2022 and our outlook for the third quarter and full year 2022. Our second quarter financial results were outstanding, outperforming the high end of our guidance on both the top and bottom lines. Total revenue for the second quarter increased 16% year-over-year to $531 million, and non-GAAP fully diluted EPS increased 18% year-over-year to $1.86. Our total revenue growth is primarily attributed to the growing contribution from cloud revenue, which represented a record 59% of total revenue, up from 54% in Q2 last year, and increased 27% year-over-year to a total of $311 million. Product revenue, which represented 10% of total revenue in Q2, increased 14% to $53 million, and services revenue, which represented 31% of total revenue, was $167 million and was flat year-over-year. Our recurring revenue increased to a record 83% of total revenue in Q2 compared to 82% last year. From a geographic breakdown, the Americas region, which represented 84% of total revenue, grew 21% year-over-year. Our revenue mix is predominantly in the Americas, where most of our business is based on the U.S. dollar. Therefore, we generally have little impact from foreign exchange on our total revenue growth. The EMEA region, which represented 10% of our total revenue, decreased 18% year over year, or 12% on a constant currency basis. The decrease in EMEA is mainly attributed to some large on-premise deals that were signed in Q2 of last year, Making for a tough comparison, while cloud revenue continues to accelerate in the international markets of both EMEA and APAC in Q2 this year. APAC, which represented 6% of total revenue, grew 22% year-over-year, or 25% at constant currency, driven by strong growth in our cloud revenues. Moving to our business unit breakdown, we experienced another strong quarter with both our business segments growing in double digits. Customer engagement revenues, which represented 81% of our total revenue in Q2, was $429 million, a 13% increase compared to last year. CX1 continues to serve as the main engine behind the growth in customer engagement. That includes digital and conversational AI capabilities that can help drive efficiencies for customers of all sizes and in all verticals. Our cloud growth comes from a combination of upselling into our existing install base from our expansive portfolio of solutions on our cloud platforms, as well as continuing to add over 200 new logos each quarter. Revenues from financial crime and compliance, which represented 19% of our total revenue in Q2 and totaled $102 million, increased a record 31% year over year, driven by strong growth in both our cloud and premise business. Our gross profit grew 17% year over year to $389 million. Gross margin increased 110 basis points to 73.3% compared to 72.2% in Q2 last year. The increase in gross margin in the quarter was mainly attributed to an increase of 240 basis points in the cloud gross margin, which crossed the 70% mark for the first time to a record 70.1% in Q2. The continuous growth in our cloud gross margin stands out in our industry, demonstrating our strong ability to drive profitability at scale, while simultaneously driving continued impressive cloud revenue growth. In Q2, operating income increased by 19% year over year to a quarterly record of $154 million, and our industry-leading operating margin increased to 29%. Earnings per share for the first quarter increased totaled a record $1.86, an increase of 18% compared to Q2 last year. We have a great track record of growing both revenue and profitability, which has always been the standard in the way we run our business and which to this day has proven to be very successful as well as contributing to our exceptional competitive advantage. Cash flow generated from operations for the first half of the year total $209 million, a decline from last year, mainly due to some timing differences in the quarter. We continue to use the change in the market environment coupled with access to our strong cash portfolio as an opportunity to expand our share repurchases by $34 million in Q2 to a total of $98 million for the first half of 2022 almost two and a half times the amount of shares purchased in the first half of the prior year. Total cash and investments at the end of June totaled $1 billion and $435 million. Our debt, net of a hedge instrument, was $540 million, resulting in net cash and investments of nearly $900 million. I will conclude my remarks with guidance. For the third quarter of 2022, we expect total revenue to be in the range of $543 million to $553 million. We expect the third quarter 2022 fully diluted earnings per share to be in a range of $1.82 to $1.92. We are raising our revenue and EPS guidance for the full year 2022. We now expect total revenue to be in the range of $2,168,000,000 to $2,188,000,000, representing 13% growth at the midpoint compared to full year 2021. We expect the full year 2022 fully diluted earnings per share to be in a range of $7.33 to $7.53 representing 14% growth at the midpoint compared to full year 2021. I will now turn the call over to the operator for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for your questions. Our first questions come from the line of Samad Samana with Jefferies.

Please proceed with your questions.

Hi, good morning, Barack and Beth. Maybe, Barack, first one for you. On the Microsoft partnership, the expansion, can you maybe double-click on that and just help us understand how much of a difference it makes from a distribution standpoint? What was Microsoft doing before from a go-to-market perspective for Nice and what's changed? And when should we think about starting to impact demand for CX1?

Yeah, thanks so much, thanks for the question. So we announced it yesterday. It's been in the making for quite some time. The relationship with Microsoft are not new. We had a relationship with Microsoft for years, but this is a big change in two parts to it. First of all, 6.1 is now available in Azure, as I said, which allows the customer even more flexibility than before. as they consider CX1 and some of them prefer one public cloud versus the other. That's one thing, it adds to the flexibility and it allows us to address 100% of the market. The second thing I think which is even more powerful is this change in distribution. So there is, Microsoft just announced the Digital Contact Center, which is a framework of what happens when you take teams together with Dynamics and few other components and the recent acquisition of Nuance, but the core element of the contact center come from a partner like us and CX1. And we already saw it in the last few months as our team started to work in the field together that it's a great match and customers like it. So there was an appetite on both sides, both us and Microsoft to kind of officialize it. And they wanted to take it to the highest tier of the cost-sell relationship that they have, it means that the sellers of Microsoft are now getting fully compensated on that at the highest rates from partner solutions, and our teams in the field will have the full motivation to cooperate together.

Great, that's great to hear. And then, Beth, maybe just a follow-up on guidance. I know the company's given full-year cloud revenue Can you maybe help us understand just what you're thinking in terms of back half seasonality for cloud revenue, just as we think about modeling the rest of the year and kind of similar questions around the product side as well?

Yeah, thanks for the question. You know, we're finishing up another strong quarter with great growth that we're seeing in our cloud growth overall at 27%. And so as we look forward, you know, I mentioned on the call today, we have recurring revenue of 83%. It's really being driven by the strength of our cloud business. We see great momentum taking on more new logos and large enterprise, great footprint expansion internationally. And so that's reflected and looking forward in terms of our guidance for the second half. In terms of seasonality, specifically as it relates to cloud, we mentioned earlier this year that as we looked at the full year, our cloud growth is expected to be around 27% for the year. And so as you look at the full year guidance, that is clearly still taken into consideration and that you can use to kind of back into expected seasonality. When we look on the product side, On the product front, if you look back at last year and the second half of last year, we had some extremely strong growth in our product revenue. We had 73% growth in Q3 of the product and 54% in Q4. There was a lot of pent-up demand on the on-prem side of our business that came out in the latter half of last year. So we don't expect to see those kind of growth rates. And the pent-up demand, of course, has subsided on the on-prem side of the business. So both of those factors are taken into consideration with ongoing double-digit revenue growth applied in both Q3 and Q4 in the guidance we've provided today.

Great, thank you again for taking my questions. Thank you. Thank you. Our next questions come from the line of Tyler Ratke with Citi.

Please proceed with your questions.

Good morning. A couple questions to start off on the macro front. I guess, number one, Barack, you talked about just seeing some customers consolidate on larger platforms, moving away from point solutions. I guess, I'm curious how much of a new impact is this in the quarter, and do you see this kind of translating into larger deal sizes? Just give us a sense on kind of what's changed in the last 90 days. And then secondly, just in terms of what you're seeing on deals requiring extra levels of approvals or sign-offs, do you see any of that? in the second quarter, perhaps over in the MIA region? And how are you thinking about, you know, just de-risking the guide for the second half, just should the macro environment get tougher? Thank you.

Yeah, thanks for the question. You know, obviously we're monitoring that very closely and asking the same question that you're asking. You know, the beauty of our business, and I think we, you know, we've seen it time and again in the past, I'm with Snice for 23 years, I've been the CEO for the last eight and a half years and I, you know, have seen different, you know, different environment, different macro environment. What really characterized MICE, I think, is that in all the markets where we operate, our solutions are really mission critical. So that's kind of one thing to note and this is why we are, you know, we feel relatively okay with even with kind of the general concern of the macro environment. Specifically in Q2 and what we see right now, I can't say that we see a big difference versus before. We do see, as I said, actually certain benefits that we can potentially enjoy from. I think enterprises are much less eager to partner these days, either with very small niche players, that there is a question about them staying as a standalone or even staying as a viable business. Um, and the second thing, uh, there are, there is more concern from, from big enterprises to partner with some of the, the large incumbents in our industry that are carrying a lot of debt. And I'll kind of now with this interest level moving to focus on serving the debt versus, uh, you know, investing more in R and D and it will be more challenging for them. So all of those tailwinds, I believe, you know, uh, can help us moving forward. The other thing, and best mentioned, our great, uh, net cash and overall cash position, which is very unique in our industry if you think about it. Most of our competitors carry a lot of debt or convertible debt that will have to be repaid at some point with very light, if at all, EBITDA. And I think the year to come potentially will give us opportunities on the inorganic side of the business and further expand our leadership and the leadership opening a gap to others.

Thanks. And follow up for Beth on the expense side in cash flow. So obviously you're raising your full year EPS guide. Any changes you're contemplating on the hiring side? And then secondly, you talked about some timing impacts on the quarter for operating cash flow, but just how should we think about the full year expectations? Any changes to your assumption for cash flow? perhaps from lower collections, just given the macro environment. Just help us understand how you're thinking about cash flow for the year. Thank you.

Yeah, sure. I'll break them up into sort of two pieces that address both the expenses and then this cash a little bit separately. On the expense front, you know, I think for us it's generally business as usual and We're continuing to hire as we typically do. We have lots of new positions we're adding in the second half of this year. They continue to be focused in the areas that we generally are looking at on the R&D front to continue to drive innovation and the organization and our cloud platforms. And, of course, on the sales side to continue to – feed the sales engine. So, you know, that is continuing, and we are hiring as usual. You know, in terms of other expenses, I think if you think of kind of the op expense generally, you know, the E to R ratios for us are generally pretty consistent, and I would say you can kind of expect that in the back half of this year as well. When you look at the cash flow, on the cash side, certainly there are timing differences that happen from quarter to quarter. In Q1, we actually recorded a record in terms of our collection activity with a significant amount of collections coming in. This quarter, some of that got pulled into last quarter, of course, and so there's timing differences. For us, we look really on the longer-term trends We know that we have healthy cash generation from our business, just really reflecting the overall health of our business. What we don't see is any impact from macro. So the timing differences that we did have this quarter weren't related to any kind of customer change and behavior. And in fact, I would say even during COVID, we actually had very little of that, and predominantly because In the contact center and with CX1, we generally are operating at the higher end of the larger size contact centers as well. So we haven't seen any change in behavior, and we expect to continue to see strong cash this year.

Thanks for taking the questions. Thank you.

Thank you. Our next question has come from the line of Michael Funk with Bank of America. Please proceed with your questions.

Yeah, thank you for the questions this morning. You've already addressed it in part, but I just wanted to go back to the sales cycle and demand. I understand the sales cycle can be relatively long for contact center. So are you seeing any change in behavior earlier in the funnel from customers?

No, I can't say that we see, you know, there is always anecdotes here and there, and maybe, you know, that customer, but those situations appear in every quarter, and I can't say that, you know, we see any dramatic change in that. Also, don't forget that one of the characteristics of the CX business, or the contact center business, and we saw it very nicely during COVID, is that it's not a one vertical industry. Contact center are across about 12 different verticals. Each one has its own ups and downs. I'll remind you that COVID, you know, travel and tourism was somewhat muted, and all of a sudden now travel and tourism is a very, very hot vertical where they actually have, you know, spike in demand, just as one example out of many. So that gives the contact center industry, I believe, good balance. And we keep monitoring the sales cycles, and I think by different segments, they're somewhat similar to what we've seen before.

Sure. Thank you for that. And then just on margin, you know, nice increase in profitability this quarter. What do you expect, though, the next few quarters for cost of cloud revenue? Just thinking about the inflationary environment, any kind of potential pressure points there?

It's a good question. We've had some tremendous expansion in our cloud margin, and we're very pleased with crossing the 70% cloud margin this quarter. Of course, as a CFO, we're always keeping a close eye on the impact of inflation. We don't expect it to have any kind of significant impact or drag on our cloud gross margin. You know, I will say that we are continuing to expand our footprint internationally, and so, of course, we make investments outside of the Americas to continue to drive that business. So I think in terms of margin expansion, we've taken a lot of expansion and shown that in the improvement in our cloud gross margin over time, meaning that I don't think you should expect to see that same level of continued expansion, but certainly we believe that we can continue to as we add scale, grow the margin higher over an extended period. So there's really no expectation that inflation would negatively impact us in the near term as it relates to our cloud margins.

And just to your comment about geographic expansion, should I take that to mean we could maybe see some short-term pressure on margin as you expand geographically and add capacity?

I think that generally what you see from us is pretty consistent growth. Occasionally you may get a slight variability from quarter to quarter, but generally, yes, our expectation is that a significant amount of business is coming from the Americas, and we're scaling, always driving the ARPU higher in terms of our existing install base, and that will continue to be reflected in the growth of our cloud margins.

Thank you for the time this morning. Thank you.

Thank you. Our next question has come from the line of Chris Reimer with Barclays. Please proceed with your question.

Hi. Thanks for taking my questions and congratulations on the strong results. I was wondering if you could talk about the financial crime and compliance solution and just give some color on the opportunities for that product and where do you see what kind of growth do you see and in what regions and in what industries maybe just for this product?

Yeah, sure. So we had a real record quarter in terms of the growth of financial common compliance going 31% year over year, which is, you know, far back as I remember, it's a record growth for financial common compliance crossing the $100 million in revenue, which is just phenomenal. And I think it speaks a lot to a variety of things. First of all, it's the leadership we have in the industry, which is unmatched to any other competitor in that space. But it also speaks about the change we see in that industry in a few areas. And one of the biggest disruptions to banking, obviously, is digital. You know, banks in the last few years, we are all consumers. We are consuming banking in a much more digital format through mobile apps than others. And that has advanced very nicely. But the back end itself, all of the back end processes are still kind of left behind. And as I mentioned in my earlier remarks, digital means speed. And all of those back end processes around the compliance and fraud and money laundering, they are obviously kind of counterintuitive to speed. So there is a very significant wave of refresh and adopting of new approach and technologies from us. that allow banks to also solve, you know, keep the trust with their customers, but at the same time, you know, adapt the back end and compliance processes to digital. So I believe we're just at the beginning of this rejuvenation. And at the same time, we are going after bigger opportunities in the mid-market, now that we are leading in the cloud in that business, and we see expansion also internationally. And the really last thing is that we're seeing a lot of new, I would say, fintech and fintech-like companies that would like to make sure that they are fully up to date on different regulations, money laundering schemes, and fraud. And you add all of it together, and this is kind of the reason for the acceleration we see in that business.

And just in terms of competition for this type of product, how do you feel you're positioned versus competitors?

At least with all the analysts we are working with, we are positioned at the highest end of the fourth quarter as the clear leaders in this industry. And what's unique about us is that we are probably the only vendor, the only player in this market that offers a full suite, a platform that offers both anti-money laundering solutions, fraud and transaction monitoring, covering a very broad lifecycle of consumers' risk, on the risk profile of consumers. And that allows us to really differentiate versus others And we see more and more banks and others stepping away from adopting point solutions and serving as kind of system integrators between vendors and looking to partner with someone like us that can offer a platform that have both the understanding of how to deliver complexity at scale, but also have a very deep domain expertise in financial services.

Got it. Yeah. Okay. Thanks. That's it for me.

Thank you.

Thank you. Our next question has come from the line of Rishi Jaloria with RBC Capital Markets. Please proceed with your questions.

Oh, wonderful. Thanks so much for taking my questions and nice to see continued resilience in the business. Two for me. First, I wanted to start by what you're seeing specifically on contact center agent side. Are you seeing any levels of churn, right, where the customers themselves are, you know, reducing the number of agents they have or even slowing them down for that matter. You had mentioned kind of a continued focus on leveraging digital solutions. You know, is that happening hand-in-hand with lower agent count?

Maybe how should we be thinking about that? And then I have a follow-up.

Yeah, thanks. Great question. So we don't see a drop in contact center agents. At the same time, the number, the absolute number of contact center agents is not growing dramatically. It moves and shifts between different seasons and maybe some different industries that have some changes in demand. But it's not a number we expect to grow in a meaningful way in the future and potentially even be flattened. But at the same time, a few things that we are seeing A, in order to, you know, service become more complicated experiences or mastering customer experience becoming more complicated. So companies are investing more in the ecosystem of those agents in order to make them much more effective and coach them better and lead them better as they work with consumers. So the span on technology around the same agents is actually increasing significantly. In completely parallel, there is a significant spike as organizations try to leap ahead and catch up to the digital consumer. We are all consumers, and I'm sure you understand what I'm referring to. And to that end, in order not to add a ton of agents in order to serve in the digital space, the investment in both digital and conversational AI is spiking. I mentioned that year over year we saw a growth of 88% in our revenue in digital, and it keeps growing rapidly. But one of the greatest advantages that we have is that most enterprises are starting to realize that looking at attended service versus unattended service separately doesn't work. And we're among the only few that can deliver at scale with one platform, a full orchestration from an attended and unattended service with the full suite of solutions, whether it's digital or other channels. And that's very unique for NICE. All right, wonderful.

That's really helpful. And I just wanted to get a sense for, has there been any change in what you're seeing from customers in terms of the pace of on-premise migrations to the cloud? Has that accelerated? Has it slowed down? Has it kind of maintained?

And how should we be thinking about the cadence of that for the rest of the year? Thanks.

I think the pace is the same as it was before. Obviously, it's different in different segments of the market. Smaller customers, where it is relatively kind of an easy task for them to move to the cloud, are already well into their journeys. And large enterprises, are now at the cost of their transformation and moving to that. So the pace is, I believe, similarly to what it was before. I think there are potentially more tailwinds that can develop in the market. One of the largest incumbents in the industry is under significant financial stress once again. which we already hear concerns from customers and thought about expediting. But more importantly, there is a realization of large enterprises that their on-prem environment is very, very complicated. And when they want to move it to the cloud, it's an investment for the future, and they have to have it with a partner that can operate at that scale versus buying a variety of point solutions. And I gave an example, at least one out of many examples, of such a customer who already moved to a CCAS provider that was a point solution that provided many of the solutions for kind of third-party integration and didn't deliver on scale. And they came to us, and we won the deal and become the provider there.

All right, wonderful. Thank you so much. Thank you. Thank you.

Our next question has come from the line of Meadow Marshall with Morgan Stanley. Please proceed with your questions.

Great. Thanks. Maybe jumping on that last question, on the displacement of the CCAS vendor that you were talking about, you know, just at what point in the process did they kind of realize that, you know, they weren't going to get an adequate solution and just kind of the timeline for you guys to get in there and displace them would be helpful. Just kind of more context on that deal. And then the second question for Beth, just kind of what is leading to the gross margin leverage in the cloud business? Is it more digital only deals, just efficiencies found, just any more context there for where you're finding the leverage? Thanks.

Cool. Thanks for the question. So I'll start and then I'll hand it over to Beth on the gross margin. So I'll refer to that customer, but I'll say even more on kind of a typical example. In this particular, you know, this customer, a relatively large enterprise who has submitted an RSP, that vendor that is a SICAS vendor that's specialized in, I would say, the core of SICAS, but provides the breadth of the other solutions like WEM, like Digitat and others, through third parties with a lot of integrations, they started to implement. It took a long time. It failed on the scale. It failed on delivering all the promises of what can be delivered only with a natively integrated solution like ours. And the customer approached us and we said, we can do it immediately and this is exactly what we did. there is a clear realization of the customer that there is a very big difference between piloting something not at scale or just looking at the slide or not doing proper diligence versus coming to us, adopting CX1 as a whole. Everything is developed natively. All the solutions, the advanced one and the core solutions are fully in. It's not first-party integration. And the ability to migrate was extremely fast. So I think that as a result of that, needless to say, we are winning a lot of markets, but there will also be a wave, I believe, of customers, large customers, that will try on from time to time point solution and will come back to or will go back to us or talk to us in order to adopt eventually CX1, which we see it as a great opportunity. About the growth margin, I'll hand it over to Beth.

Yeah, thanks for the question, Mita. I think when we talk about our cloud gross margin, I think generally at NICE, you know, we have a long history of really driving margin expansion and all the types of business that we do. And it pertains specifically to the cloud. You know, first of all, it's the way that we actually have built our platforms and our cloud business. We've built them native to the cloud and We do it in a way that it's intentional that we can really scale up into very large customers that we're adding each and every quarter. So it starts with how we actually build the solution native to the cloud. The second I would say is that we have and are succeeding on selling multiple solutions that have all been natively integrated into the platform. So we continue to go back into our existing install base We're selling more, not only digital, but multiple solutions that we're constantly adding. And we have really the best depth and breadth of a platform offering in the industry. And so that's also showing in our current margins and gives us a great opportunity to continue to thrive that expansion, especially as we go into the large enterprise where they have very complex needs. Another factor I would highlight is just the stickiness of our solution. We have excellent retention rates with our customer base and our existing install base that drives that stickiness and keeps that high recurring revenue. And then I think the last thing I would just add is, of course, the expense side of that, the expense management that we've always been very attentive to how we spend as an organization and how we consume in the cloud, et cetera. And so it's really a combination of all of those different factors, the attention to really being able to scale and drive strong operating coverage.

Got it. Thank you. Thank you. Our next question has come from the line of Pat Walravens with JMP Securities.

Please proceed with your questions.

Oh, great. Thank you. I'd like to talk about the federal business a little bit. Big picture, how's it going? Secondly, there is that $10 million deal with the Department of Transportation that the federal government publicly disclosed. I just love to hear what you're doing for the FAA there. And then thirdly, we're heading into the seasonally strongest quarter for federal, right? How does the pipeline look?

Yeah, I appreciate the question. You know, we're not commenting on a specific customer deal, but I'll give you some color about the business, both at the federal level as well as the SLED, state and local business. First of all, we have a great presence in those industries and a great reputation and strong customer base, and it's going very well, you know, A couple of years ago, you know, COVID obviously was a great tailwind in that business, and we saw great business with SCX1 over there. We also have, as you probably know, and I didn't mention it on this call, but we have our public safety business, which is advancing very nicely into the full supply chain, if you like, of criminal justice, and we're advancing in this business extremely well. It's a market that is going through its own digital transformation at a fast pace and requires a similar solution on the digital side. So we are very bullish on this business and continue to perform well there.

Okay, great. Thank you. Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Barak Elam for any closing comments.

Thank you all very much for joining us, and she'll speak to you very shortly. Have a great week. Thank you.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.