NICE Ltd

Welcome to the NICE conference call discussing third quarter 2024 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 November 14, 2024. I would now like to turn this call over to Mr. Marty Cohen, VP Investor Relations at NICE. Please go ahead.

Thank you, operator. With me on the call today are Barak 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 Security Litigations 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 three of the company's 2023 annual report on Form 20F, as followed with the Securities and Exchange Commission on March 27, 2024. During today's call, we'll present a more detailed discussion of third quarter 2024 results and the company's guidance for the full year 2024. You can find our press release as well as PDS of our financial results on NYSE'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 and tangible assets, acquisition related and other expenses, amortization of discount on debt, and long-term extinguishment of debt and tax effect of the non-GAAP adjustments. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. 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'll now turn the call over to Barack. Thank you, Marty, and welcome, everyone.

We're thrilled to announce yet another excellent quarter where we exceeded the high end of our expectations, beating the upper limits of our guidance on total revenue and earnings per share. This remarkable performance doesn't just highlight our competitive edge. It redefines it, propelling us leagues ahead of the industry and fortifying NICE as the go-to partner for enterprises across the globe. our success speak loud and clear. When businesses want excellence, they turn to NICE. We reported total revenue of $690 million in Q3, representing an increase of 15% compared to the same quarter last year, with cloud revenue growing 24% to $500 million, exceeding the $2 billion ARR mark, the highest cloud growth on the largest cloud revenue base in our industry. Our scale and superior platform architecture continues to drive outstanding profitability. The number speaks volumes. Operating income surged 20% to reach $221 million, and operating margin climbed by 140 basis points to a record 32%. This resulted in an impressive 27% leap in EPS over the last year's same quarter, hitting $2 and 88 cents for Q3. To top it off, we delivered exceptional cash flow, generating $159 million in operating cash, a 32% increase compared to Q3 last year, and continuing the year-over-year trend of accelerating cash flow. This strong financial performance is a result of our continued excellent execution showcasing just how far we're pulling ahead and reshaping the industry landscape. Year to date, we have displaced legacy on-prem competitors in over 100 large enterprises. Additionally, over 45 leading brands turned to NICE this year, following failed Sika's deployment by other cloud vendors. Our partner ecosystem is flourishing, with over 40 new partners joining our ranks from the beginning of the year, including over 20 international partners, all of which chose to join the success of NICE and our powerhouse CX1 platform. These results are more than numbers. They are a resounding testament to our industry-defining leadership. We are on the precipice of the era of exponential impact, fundamentally reshaping the landscape of enterprise software. artificial intelligence is cutting through the traditional distinction between systems of record, workflow, and intelligence. This paved the way for the creation of hyper-platforms with each market domain, serving as the comprehensive system of everything for the first time. Concurrently, we find ourselves in an epoch where enterprise users and their desktops are rapidly being deformed from their central positions in organizational workflows, replaced by an alternative control points that are essential for delivering AI-driven automation. To navigate this tectonic shift, software leaders must swiftly master new capabilities. Just as the transition to the cloud a decade ago necessitated the software providers evolved from code builders to SaaS operators, this new era will demand that they also excel as data curators. This transformative model will not only reshape monetization strategies, but also unlock unprecedented avenues for value creation. In the realm of customer service, this era of exponential impact is poised to be pivotal, propelling technology to assume a central role in service delivery. Historically, the customer service equation has been heavily skewed, with 90% reliance on human resources and nearly 10% on technological solutions. Today, we possess the tools to invert this equation, bringing us closer than ever to fully automated customer service that meets both precision and scale. Nevertheless, the journey toward authentic automation in customer service is fraught with challenges. With significant barriers to domain expertise, only those vendors fortified with deep resources and robust foundation in customer service, including agents, workflows, and knowledge, will successfully make this leap. At NICE, we possess all of that in an unrivaled advantage. Unlike CRM and generic big tech, we manage billions of customer service interactions every year, providing us exclusive unfettered access to customer intent at any given time, the most important ingredient for customer service automation. These, together with our vision, resources, and technological pause, put us in a unique position to lead this transformation. A few weeks ago, we unveiled our new mission for NICE, to spearhead the wave of customer service automation at scale and without most precision. We're achieving this with the introduction of CX1 Empower, our market-leading hyper-platform, meticulously designed to facilitate end-to-end automation in customer service. CX1 Empower enables enterprises to design, build, and operate their customer service framework, from agents to workflows to knowledge management within a single integrated platform. With customer service-specific functional AI, CX1 Empower equips businesses to deliver orchestrated, intelligent customer service that addresses the needs of every B2C organization. CX1 Empower is the culmination of over a decade of relentless innovation combined with NICE's unique set of assets and substantial investments. Today, I would like to share insights from our Q3 results that showcase how we are advancing these transformative capabilities for customer service workflows, agents, and knowledge. In Q3, we continue to see an acceleration in our portfolio deals that demonstrate the desire of customers to master customer service workflows by consolidating multiple disjointed solutions onto CX1. This included an impressive number of eight-digit PCV deals 25% growth in the ACV of workflow-driven portfolio deals, and 32% growth in the number of seven-figure ARR customers. A large healthcare company embarked on a sweeping business transformation, uniting 20 separate operations under one roof, which resulted in a seven-digit ACV deal that displaced three legacy ACV providers. They chose CX1 not only for its complete portfolio, but for its ability to automate and streamline customer service workflows within Unix and for the overall group. In yet another remarkable seven-digit ACV win, the power of CX1 as a customer service orchestration platform captured the trust of a major medical technology giant. Frustrated by their cloud ACV provider, which had been in place for a mere two years, and fail to deliver a true customer service transformation, they turn to Knife, showing once again why CX1 is the clear choice for leading businesses. Agents, whether human or AI, are the backbone of customer service workflows. An increasing number of leading enterprises are choosing Knife for agent augmentation and automation, recognizing that success requires specialized domain expertise unique data and rich capabilities. CX-1 AI proficiency at an AI level goes well beyond slides and demos. The results are real intangible proof of our speedy progress in this fast growing area of customer service. In Q3, the ACV of CX-1 copilot soared six fold compared to the same period last year. Since launching, we have welcomed 140 AI agent AutoSummary customers, 50 signing just this past quarter, and a three-fold increase in the ACV of AutoSummary in Q3 compared to the same period last year, all demonstrating rapidly increasing momentum. These numbers speak volumes about the explosive growth of our agent-assist AI solution and the powerful energy behind our AI-driven deals with large enterprises. In one such impressive seven-digit ACV deal, a major global payments technology company was looking to empower, augment, and automate their customer service agents. They selected CX1 with its full AI capabilities to replace their former cloud providers with solutions including AI Auto Summary and CX1 Agent Copiles. In another seven-figure ACV deal, a leading financial advisory giant is also pushing AI to the forefront of the customer service strategy. With a powerful duo of copilot and autopilot on CX1, they are infusing their agents and operations with advanced intelligence. This innovation is set to provide dramatic ROI while enriching the customer journey. Data. is the new oil for enterprise software. But knowledge is what truly powers AI, like high oxygen fuel. In customer service, it is the essential energy source that enables seamless workflow management and powers agent automation. For over a decade, we have amassed an unparalleled mission-critical amount of depth of data and knowledge, positioning us to lead this wave of customer service automation. This foundation makes CX1 the only platform capable of managing and deploying knowledge at scale for AI-powered customer service automation. It's also the first time that enterprises can centrally manage all the customer service AI knowledge assets while applying enterprise-grade guardrails. AQ3 alone, the ACV of our foundational AI knowledge technology, powered by Enlighten, grew by an impressive 163% compared to the same period last year. This wave of interest has also driven a remarkable more than two-fold ACV increase year-over-year in CX1 Autopilot, our fully automated AI agent that seamlessly powered end-to-end workflows on CX1, leveraging knowledge. We signed a large seven-figure ACV deal with one of the top names in cruise lines, showcasing exactly how this organization is putting knowledge at the heart of the CX-1 strategy. Already a valid customer, they are now going all in with CX-1 Autopilot to deliver full customer service automation, thanks to NICE's unique knowledge assets. In yet another large seven digit ACV deal, a major Midwest healthcare provider also selected CX-1 for customer service automation leveraging NICE's knowledge-powered autopilot. This is one example out of many where customers select CX1 not only to replace legacy systems, but also as their AI automation partner instead of their CRM and other digital providers. It demonstrates the criticality of knowledge that uniquely exists in our leading interaction-centric platform, CX1. These large enterprise deals represent just a glimpse into the deals we continue to sign quarter after quarter, showcasing the transformative capabilities of CX1 as a platform that advances powerful foundational intelligence AI for customer service agents, workflows, and knowledge. Additional Q3 customer service automation deals driven by AI included one of the largest financial institutions in Canada, a very large regional healthcare company, a well-known construction service company, a giant online marketplace, one of the largest global telecom companies, and many others. Our success story continues to gain recognition across the industry, with recent accolades from Gartner's prestigious annual report. Not only do we hold our strong leadership position in the magic quadrant, but we are also the only vendor in the leader's quadrant who advance when others move downward. Even more exciting, Gartner highlighted our AI capabilities as a clear strength and acknowledgement of our leadership in shaping the future. Our impressive financial results this past quarter alongside major deal signing, especially at the high end of the market, and our groundbreaking innovation like 6-1 Empower are just the tip of the iceberg. Beneath the surface, we're financially rock solid, backed by strong balance sheets, the industry largest and most elite go-to market team, a rapidly expanding partner network, and the biggest R&D team in the business. With all this momentum and the expected accelerated cloud goals in Q4, we are poised to charge ahead on an exciting path forward. And finally, As this will be my last earnings call, I want to express my gratitude to each of you for the trust and support you have shown me over the years. Building this company has been one of the greatest honors of my life. Together with 9,000 Nicers, we have built Nice into a multi-billion dollar global category leader. I have full confidence in Nice's continued leadership due to the strength of our team the resilience of our vision, and the many opportunities ahead. I will continue to drive the company to the end of the year and ensure a smooth transition to Scott Russell, who will assume the CEO position on January 1st. I will now turn the call over to Beth.

Thank you, Barack. I'm proud to report another quarter of excellent financial performance, with results in Q3 exceeding the high end of our guidance range for both total revenue and EPS. Our revenue grew 15% year over year, paired with impressive profitability, as our operating margin reached an all-time high of 32%. We've continued to demonstrate our strong ability to unlock operating leverage while we scale our business, which now exceeds $2 billion in cloud annual recurring revenue. This strength was also demonstrated once again by our robust last 12 months free cash flow margin, which exceeded 25% in the third quarter. Total revenue was a record $690 million. with total revenue growth of 15% in the quarter, comprised of healthy growth both in the cloud and in our product revenue. Recurring revenue increased to nearly 90% of total revenue compared to 87% last year. Cloud revenue, which now represents 72% of our total revenue compared to 67% last year, increased 24% year-over-year to a record $500 million. Our cloud growth rate continues to outpace our industry, even as we operate on a much larger revenue base and scale. Our third quarter cloud growth was driven predominantly by CX1, where we are displacing both on-premise legacy vendors as well as other CCaaS vendors. CX1's complete suite and unique ability to consolidate all CX needs of enterprise customers and our one-of-a-kind unified AI platform is driving our sales pipeline and superb win rates. That growth was evidenced in Q3 by the 33% year-over-year increase in the number of our greater than $1 million ARR CX1 customers. Further, the attach rate for those customers was 100% in the quarter. Our CX1 backlog from signed deals has greatly expanded over the prior year with two main changes in the mix. First, a much larger portion of it is coming from large enterprises. And second, a growing part of this backlog is attributed to our AI solutions. This provides great potential for future revenue, but it does take longer to deploy and recognize. As such, we now expect year-over-year cloud growth for 2024, excluding LiveOps, to be 16% to 17%. The midpoint of this expectation implies an acceleration of growth in Q4, and we are already seeing positive seasonality momentum and healthy customer turnips in the first month of the fourth quarter. Services revenue, which was $150 million, represented 22% of total revenue and decreased 6% year-over-year, as expected, mainly due to our transition to the cloud, where we were adding less new maintenance revenue associated with our premise-based solutions. Product revenue, which represented 6% of total revenue in the quarter, grew nicely year over year, stemming from several large on-premise enterprise deals and increased 6% year over year. From a geographic breakdown, the Americas region, which represented 85% of total revenue in Q3, grew 17% year over year. The Americas region has continued to excel as we are consistently replacing competitors on-premise legacy solutions with CX1, in addition to further expansion of our existing CS1 customer base. The EMEA region, which represented 10% of our total revenue, increased 14% year-over-year, driven by robust growth in cloud revenue. Over 50% of our EMEA total revenue was generated from the cloud in Q3. and we expect our growth in this region to continue to further shift to increasing recurring revenue as a result of cloud wins this year already in our backlog. The APAC region, which represented 5% of total revenue, decreased 12% due to a larger amount of on-premise business with upfront recognition in the prior year versus strong cloud revenue growth this year, which is recognized over time. International cloud revenue from the combined EMEA and APAC regions now represents 10% of our total cloud revenue, and there remains enormous future growth potential in this highly underpenetrated customer experience market. We delivered strong results across both our business segments. customer engagement revenues, which represented 84% of our total revenue in Q3, were a record $578 million, a 16% year-over-year increase. The growth in customer engagement was driven predominantly by the growth in CX1, particularly with our AI offerings that are being adopted by customers across all verticals. Revenues from financial crime and compliance, which represented 16% of our total revenue in Q3, and totaled a record $111 million, increased 8% year-over-year, driven primarily by an increase in cloud revenue, where we are seeing continued positive traction selling our Excite and Exceed platforms across global financial institutions. Moving to profitability, Our cloud growth margin totaled 69.7% in Q3 as we continue to scale and invest in international expansion in a cloud that is already bearing fruit. Additionally, unlike others in our industry, our CX1 platform utilizes our proprietary AI solutions that don't rely on generic LLMs, and therefore our AI is more accretive to our growth margin. We remain steadfast in our expectations to reach our 75% cloud growth margin target in the medium term. In Q3, operating income increased 20% year-over-year to $221 million, and our healthy operating margin expanded 140 basis points to a tremendous record of 32% compared to 30.6% last year. Our strong operating leverage coupled with continued wins in the higher margin large enterprise market positions us well, and we are raising our expectations to finish the year at approximately $850 million of operating income and in excess of the 31% operating margin target we shared at our June investor day and to achieve our 35% operating margin target within the medium term. Earnings per share for the third quarter far exceeded our expectations, coming in well above our guidance range at $2.88, a 27% increase compared to Q3 last year. The ongoing confidence in our business, combined with our commitment of returning value to our shareholders, was evident in our high-performing EPS results this quarter. which benefited from our strong profitability combined with the accelerated buyback we have undertaken this year. Cash flow from operations in Q3 was $159 million, an increase of 32% year over year. Over the last 12 months, we have generated free cash flow of $668 million, yielding a free cash flow margin of 25%, a level unrivaled in our industry. This exceptional financial profile enables us to expand our market leadership by reinvesting in innovative AI growth initiatives, pursue strategic M&A opportunities, and enhance shareholder returns through our share buyback program. In Q3, we repurchased shares totaling $86 million, completing our $300 million share buyback program and started implementing our larger $500 million share repurchase program. Total cash and investments at the end of September totaled $1 billion and $527 million. Our debt stands at $458 million, resulting in net cash and investments exceeding $1 billion and $68 million. In conclusion, our third quarter results stand out in our industry, demonstrating our proven ability to simultaneously drive strong growth in both total revenue and profitability. Our strong execution has resulted in excellent financial results across the board this quarter, and with great AI momentum, it's clear that we are poised for ongoing success. Before I turn to guidance, I'd like to take a moment to express, on behalf of the entire NICE team, our deepest gratitude to Barack. His leadership has been nothing short of extraordinary, and he's fostered a workplace culture that has inspired all of us. Thanks to his vision and direction, we're primed and ready to seize the many exciting opportunities that lie ahead. We are equally excited to start our next chapter with Scott Russell joining us as our new CEO in January, and we look forward to deliver ongoing success for years to come. Now, I'll close with our total revenue and non-GAAP EPS guidance for the full year 2024. For the full year 2024, we are maintaining our previous total 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 $2,715,000,000 to $2,735,000,000, an increase of 15% at the midpoint. We now expect full year 2024 fully diluted earnings per share to increase to a range of $10.95 to $11.15, which represents an increase of 26% at the midpoint. I will now turn the call over to the operator for questions. Operator?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Tyler Radke from Citi. Your line is open.

Hi, good morning.

Sorry, I was on mute. Good morning, everyone. Thanks for taking the question. Could we just go back to the commentary around the revenue mechanics that you're seeing on cloud? You talked about some slower ramp-up. Was that more customer-driven, or is it that the revenue recognition dynamics are different in cloud? And then as a follow-up, could you just talk about how that growth should trend in cloud heading into next year? Thank you very much.

Good morning. So with respect to the commentary around clouds, you know, I'll give you a little more color, which is, you know, first, as you know, we delivered our best ever CX1 bookings quarter last quarter, and we now have the greatest backlog that we've had at record highs of CX1 signed deals. As we look in terms of the timeline for the revenue recognition, there is no change in the accounting. AI does not change that. However, we are signing more and more seven-digit and eight-digit ACV deals with large enterprise customers. That combined with the success we're having of our AI solutions, co-pilots, autopilot, autosummary, bring more complexity into those deployments. And that is what we're seeing take hold in some of our revenue and changes in our estimates. So what we do know is that those deployments ultimately result in very sticky customers that continue to increase their customer lifetime value with us. But, again, it is not any kind of change in the accounting. It's really coming from the strength of the backlog we had, but more and more large enterprise customers.

And just to add to that about your second question, as we mentioned on the remarks, we are seeing acceleration in the cloud growth rate in the fourth quarter. We're yet giving guidance for next year. You mentioned that. But we see from October billings and activity, both the turn-ups, as Beth mentioned, as well as the billing overall, a very good sign for the fourth quarter.

Your next question.

Yes, your next question comes from the line of Sidney Penegrahi from Mizuho. Your line is open.

Thank you. Thanks for taking my question. Just a follow-up to the earlier question. If you recall, one of the key driver for CCaaS is that 70% sale on-prem and will move to cloud. But when you look at your growth and your competitive as well compared to last year, What sort of change are you seeing from customer moving to cloud, you know, on-prem to cloud? Do you see some kind of delay from their side in terms of evaluating AI or anything macro? Are you seeing anything of that nature? Any trend would be great.

I wouldn't say there is a change in all of that, but I'll go back to what we said already. We are winning the higher end of the markets. As we mentioned earlier, year-to-date, we won and displaced more than 100 accounts. So the legacy on-prem provider was the incumbents, and we're also starting to see a nice trend of displacing places where the customer already selected a cloud provider but failed to deliver. We signed more than 45 of those from the beginning of the year. So that's the positive momentum. Yes, it is about moving from legacy to the cloud, but these days, more so than not, it is about the notion of automating customer service, and we're very happy to see that in almost 100% of those deals, we're not just selling like for like, if you would like, just from on-prem to cloud, but further, and many of our AI solutions that provide the significant acceleration in the footprint and the usage of solutions by those customers in the future.

Your next question comes from the line of Mita Marshall from Morgan Stanley. Your line is open.

Great. Thanks. Appreciate the commentary just about some of these deals taking kind of longer to get ramped. I guess, you know, I would think some of these large deals that would be coming revenue in the second half would have been kind of signed, you know, a year ago or so. And so is it – you know, that they're kind of going back and making sure that they have all of the AI toolkits, you know, and kind of revisiting and adding to what those implementations are going to be and that some of the elongation. I guess I just want to get a sense of, you know, are these older deals that are kind of impacting the second half of this year or, you know, how we should be thinking about that. And then second, just any commentary on and is it kind of performing as expected for now? Thanks.

Thank you for the questions, Meeta. You know, I'll start by talking about the deployments that we highlighted. First, you know, we launched our AI solutions, a co-pilot, an autopilot, back in Investor Day of 2023. And generally, right out of the gate, we saw great success, and Barack just highlighted, you know, that we've seen that great success continue on into this year. So while customers are quite familiar with our traditional CX1 platform, When it comes to our AI solutions, they are newer solutions for them, and they are more thoughtful as they consider how AI will be deployed within their organizations. So, you know, to your point about the timing of these deals, it really is kind of coming back to both the complexity that we see with large enterprise deals, and, of course, we've had more and more of those from last year coming into 2024 as well, inclusive of, as I said, the thoughtful deployment around the newer AI solutions that we offer. If I also comment on the question about Livox, so we continue to perform as we expected for the Livox portion of the business. We are seeing that Livox business being more and more integrated into our CX1 platform, our go-to-market across the board.

Your next question comes from a line of Rishi Jaluria from RBC Capital Markets. Your line is open.

Wonderful. Thanks so much for taking my questions. And, Brock, it's been a pleasure working with you, and we look forward to seeing the next chapter in your career. Maybe just two quick ones from me. I want to continue thinking about kind of the ramps on the cloud side. Maybe can you be explicit in terms of how has that ramp, over time changed in terms of the lag from booking to when deals go live. And is that purely just a function of closing larger deals and maybe they're more complex and that's why they're taking longer to ramp into live production or is there something else? And maybe related to that, if we take a step back and we think about the analyst day where you kind of laid out the long-term model and talking about getting to 80% cloud penetration over the next several years, Maybe can you walk us through from your perspective as these deals start to ramp up, what's the kind of right organic cloud growth rate that you'd be happy with, you know, in terms of kind of going towards those long-term targets? Thanks.

Sure. Thanks, Rishi. Let me start by saying that, you know, I don't want to repeat on what we've said already, but generally we have numerous motions in our business. Obviously, there is the more mid-sized customers that we've always been signing. That doesn't change. We have great opportunity, and we're seeing it already where those customers and new ones easily adding a variety of capabilities because of the flexibility of CX1. AutoSummary was a great example of that. But as we go into the more interesting part of the market and we meet more and more large customers, On our end, from the technology side, the platform is ready to onboard those customers in day one. But the market of customer service automation is not just about the move from on-prem to cloud. That's the easy part, if you would like. It is about, as I said before, reengineering workflows, taking out agents from the workflows and embedding AI instead. So that, for customers, takes a bit longer. But when it happens, it happens in a massive scale, and it's going to be there forever. because it's going to replace people with our technology that had tremendous value. So it's a revenue that have a much higher profitability and much higher customer, lifetime customer value. We see, as Beth said before, a significant backlog that we have for CX1 with that change of mix. It gives us optimism about the future. And as we mentioned before in Q4, given what we've seen in October already, we are estimating acceleration in the cloud goals.

Your next question comes from a line of Jim Fish from Piper Sandler. Your line is open.

Hey, guys. I do want to hit on that last point, Barack, that you just made. I mean, you guys acquired Playbox earlier in the quarter. I think it looks like $45 million of cash outflow here for it. our math kind of points to about 20 million of contribution. So, you know, first, can you talk about what PlayVox gives you strategically when it closed and what we're supposed to be expecting in terms of contribution kind of moving forward?

Yeah, I'll take that and then allow Brock to add any further commentary. I think first of all, it's important to highlight that the PlayVox was a technology token acquisition with a purchase price, you know, around $40 million. You know, we also saw some published articles that, you know, considerably exaggerated the revenue related to those deals. And, again, highlighted it's immaterial in terms of revenue contribution in our Q3 results.

Your next question comes from a line of Samad Samana from Jefferies. Your line is open.

Hey, everyone. Good morning. This is Billy Fitzsimmons on for Samad. Barak, we wish you best of luck in your future endeavors. And in terms of the question, Barak, since NICE last reported, several larger software vendors have introduced agentic or autonomous AI solutions. How do you see NICE's market position evolving as these companies that you partner with seemingly offer competing solutions?

Appreciate the comment, Billy, and thanks for the question. You know, as I mentioned before, I think we are, although it's been two years since the launch, if you would like, of generative AI, the adoption cycle of enterprises, like many other technological cycles, is much slower than, you know, our own adoption as individuals. So I think we're over the hype into reality, and there is understanding that taking something generic doesn't work for enterprises. It might add, you know, the ability to get further access to knowledge base and others, but to make it functional takes something else. We're talking about something called functional AI, and that's what happens when you take the right knowledge with the agents and workflow and connect it to all the backend processes and backend system of customer service. We have something, as I said before, that is critical and unparalleled when it comes to customer service automation. We have at any given time, in real time, access to the customer intent. And without a real-time access to the customer intent, you can't really automate customer service. We have it in real time, and we have the historical tens of billions of interactions of customer intents. That allows us to provide not just a functional AI, but also one that works at scale and precision. So we're seeing a lot of those enterprises after two years of trying something generic or small point solutions coming to us as they understand that, in order to broaden it and to really think of customer service automation at scale and not just for a specific small use case, to take a much more strategic approach. And this is exactly what we see in our booking. And the examples I gave in my earlier remarks were just a few of the many that we're seeing.

Your next question comes from the line of Arjun Bhatia from William Blair. Your line is open.

Perfect. Thank you. Going back to some of the longer implementation times, I was hoping you could just maybe touch a little bit on how much longer we should expect some of these deals to take. Are we talking months? Are we talking quarters, given the increased complexity? And then, Barack, would love to hear a little bit about the CCAS displacements that you're seeing. What is the main driver of those? I fully understand, I think, the on-prem wins, but... What's driving nice to win over other CCaaS vendors that have already kind of gotten a foot in the door with some of your customers? Thank you.

Cool. Thanks for the question. So as we mentioned before, it's the largest backlog, but it has a change of mix. It really depends in many cases on the customer. We are also working very closely with our partners. to be able to drive this adoption by customers. I can't really quantify it right now, but the beauty that as soon as it's up and running, we see an increase in both adoption, billing, and eventually, as I said before, the lifetime value, the length of this customer, the time that they're going to stay with us is as long as it's extremely sticky solutions. About the wins, as I've mentioned before, we see an acceleration in the win over legacy provider, you know, the on-prem providers like the FISCO, Avaya, Genesis, all of those legacy providers. But we're seeing, and maybe that's something you can easily see from the Gulf and Magic Quadrant, we see that customers who signed up, especially customers came, signed up with a cloud provider and already moved kind of to the cloud, coming a year or two after to us and moved from their cloud providers to CX1. I gave you an example. We have many more of those in the backlog. And our ecosystem of partners actually help us with that. Many of those partners that work with those cloud providers tend to us because eventually it's their reputation, their brand, when it comes to the customer success.

Your next question comes from a line of Timothy Horn from Oppenheimer. Your line is open.

Thanks, guys. So do you think the cloud acceleration can continue into next year? And the cloud gross margin took down a bit. Can you just talk about the trends there? And then just on this point on the workflow kind of reengineering by enterprises, do you think you have a good handle on that now? Or are you at a stage where you can implement it relatively quickly? Thank you.

Hi, Tim. I'll take the first half and then hand it over to Barack. And as we highlighted earlier today, with respect to cloud growth, we're not commenting yet on 2025. Of course, we will provide an update on expectations as we provide our fourth quarter results. But, you know, again, we'll just say, again, we are expecting acceleration of our cloud revenue growth in the fourth quarter. And we've already, you know, completed the month of October, so we can see statistics of our customers. We can see that the seasonality kicking in, particularly in some of our retail customers. Now, it looks like it's going to be a nice season there, and that will, you know, help drive the seasonality and growth along with the healthy tramps, which happened in the first month as well. You also had asked about our cloud gross margins. And one of the things I highlighted earlier today was that we had really great growth in EMEA this quarter, 14% that was underscored by our cloud growth. And it's really evidencing some initial very early positive signs that we're seeing great cloud traction. internationally. But we have made some significant investments outside of the Americas, both in the EMEA and APAC region. And that's what you're seeing is a bit of pressure on fixed costs in those regions associated with the cloud. But of course, as you know, cloud revenue is recognized over time. So we're going to continue to see great economies of scale as we continue to deliver on the backlog and the pipeline that we're seeing in those regions. And then I'll hand it over to Barack for the rest of the questions.

Yeah, I appreciate the question on the workflows, and I think that's key for the future of customer service automation. That's the reason we are spending so much time on that, and I've tried to give a bit more color on that. The desire to automate customer service is not new. It exists for the last 30 years with very full results if you think about it. And there have been a few waves in the last few years of hopes to different technologies. If you remember the days of RPA that was supposed to bring automation, we can make parallels between RPA and almost like prescriptive or predictive analytics, but it's basically delivered automation at the task level, which is definitely not enough to drive full automation. And then the early days of GenAI augmented roles, specific roles in customer service, but didn't touch the full workflow and deliver the right gains or a full automation. We believe from what we're seeing that only functional AI with a system, a platform that oversees all customer service workflows, including all different roles, all different functions, is what will eventually deliver full customer service automation. And that's why we have launched CX1 Empower. It's the evolution of CX1. We have all the knowledge. We have all the agents. And now we have all workflows in order to design, build, and, of course, automate and operate all of those workflows moving forward. tactical efforts to automate customer service, we believe will result in what we've seen in the past 20, 30 years, which is very small local automation versus what enterprises really want and need.

Your next question comes from a line of Patrick Walravens from Citizens JMP. Your line is open.

Oh, great. Thank you. And Barack, we're going to miss you. I think one place where there's some investor confusion, and I'd love to hear your perspective on it, is who has the right to win when it comes to AI SKUs like, you know, auto summary knowledge management? So if a big bank, for example, is using the Salesforce Service Cloud and they're not using ICX1, who has the right to win those AI SKUs and why?

It's a great question. And we, as I mentioned before, find ourselves in many conversations with customers who are asking themselves the exact same question. Who should automate my customer service? Should it come from NICE or should it come from, you know, a generic big tech or should it come from a CRM? And after they try a variety of angles, they understand what I mentioned before. A, you need the domain expertise. We understand customer service inside out. Actually, through our partnership with one of those big techs, we realized that they'll go to marketing, cannot talk, or even they don't understand what customer service is all about. When it comes to us versus the CRM, obviously there is a room for CRM and customer service as a system of record. But when it comes to full automation, as I mentioned before, you can't automate something unless you have the customer intent. The analogy I like to give to that, you know, Google is the best advertising platform in the world because they know what is the consumer desire and intent at any given time, given what they are writing in their search. The customer intent, only really exist in real time in the interaction itself. We are an interaction-centric platform. Hence, we are the only one that really have the ability to automate workflows end-to-end. And more and more customers understand that. We coexist with the CRM in those environments, but we see more and more of those assets from digital engagement and AI coming to the CX1 direction instead of other either point solutions or the system of transactional records, which is the CRM.

Your next question comes from the line of Michael Funk from Bank of America. Your line is open.

Great. Thank you all. Thank you for the questions this morning. You know, I guess the first one is actually more of a request than a question, part question, part request. I get the comments on the backlog, you know, record levels of backlog. I also understand longer deployment. times for the large enterprise and AI solutions. I think that what the bears are picking at, though, is the appearance that the organic cloud revenue growth is lower and no certainty around acceleration of that. What would be helpful, I think, is if you could provide some commentary, maybe today or in the future, about the go-live timing expectations for that backlog. so we can actually bake that into our estimates in the future, that'd be very helpful. You know, more details around that. The question for me is what competitive environment and, you know, are you seeing any changes in win rates, execution, pricing pressure in the competitive environment? And, you know, if so, you know, where regionally or is that up market or down market?

We are, first of all, about the first one, we took a note and will, of course, consider it moving forward. So, appreciate the advice. On the second one, on the win rate, we feel that our win rate has been accelerating and growing in the last 18 months. We feel that when it comes to the large enterprises, some of the, Other players that wanted to go into this market aren't able to scale. We feel that some of our competitors are strategizing or taking short-term decisions because of certain financial structure or certain desire exit of the company. And we feel that some of the things, some of the big tech that wanted to get into this market and made a big noise just six months ago, We haven't seen anything in the field. So we feel that our win rate is going well and accelerating, and we are optimistic to continue in this market. And we are very happy to see that Gartner thinks the same with the recent NQ.

And, Michael, I do want to just quickly kind of address the comments you made about the request because, you know, first of all, I just want to, you know, state again that one of the things we highlighted in the quarter is we saw a 33% year-over-year in the increase of the number of 1 million-plus ARR CX1 customers. And, again, it just highlights the large number of enterprise customers that we're winning and that we're seeing in the backlog. When we think about the timing, it's important to say that technically with CX1 and our platform, we have the ability to deploy our solution in a matter of days. And, you know, we have plenty of instances where we've shown that we have the capability to do that. But as Barack highlighted earlier, especially if you're starting to consider about, you know, large organizations rethinking about how AI and how our co-pilot and autopilot will actually re-envision kind of a seamless process workflow, it's a much more thoughtful deployment. And so, you know, that's why we don't give specifics on the deployment time because we have customers. We continue to operate in all segments of the market that are deploying very, very quickly. But as we go into the large enterprise with customers that are buying a great amount of capabilities, it can take, you know, upwards, you know, six, nine, even 12 months as they're deploying some of the AI-based solutions. So that's just to give you a bit more color. It is something we've kind of shared a bit in the past, and just to give you a sense of what to expect in terms of timing.

Your next question comes from a line of Catherine Trebnick from Rosenblatt. Your line is open.

Hi. Thank you for taking my question. And one of my questions is, Of the new logos, what would be the attachment rate for 1CX? Because you launched that product, I believe, last March, April, May timeframe. It was announced but came in on the market before the investor day. And what types of trends are you seeing with the UC and CC attachment is really the question in the large enterprise. Thank you.

So thanks for the question. We launched 1CX, which is a UCAS solution, full-fledged UCAS solution for $5 per channel earlier in the year. We see tremendous traction, and many deals are signing. Obviously, it's more applicable for the lower end of the market. I think that UCAS at the higher end of the market is boring and obsolete because it's being displaced basically by teams and completely separate from the Circus and the Contact Center solution. There is no real need for future UCAS in the higher ends of the market, but for our customers at any size, we make it available, but we see the demand mainly on the lower end of the market, and we're very happy with the traction that we get.

Your next question comes from the line of Chris Reimer from Barclays. Your line is open.

Hi, thanks for taking my question. I was wondering if you could comment on the traction, well, the small uptick this quarter in the product. And what do you think is driving the stickiness there? What kind of customers are on the product segment of the solutions?

Yeah, thanks for the question, Chris. I think that if you look on our growth, you'll see that quarter after quarter, you know, our overall revenue growth is being driven by the cloud. This quarter we had a nice year-over-year growth in product as well. And what you see is from time to time there are, you know, generally a select and lesser and lesser number of large enterprise customers. that just haven't yet figured out exactly their roadmap to the cloud. It often occurs with organizations where cloud has not yet penetrated much of the market. They're in very early stages. So generally, you'll see that tend to be more outside of the Americas. Also, we tend to see that from time to time in our FCC or Actimize business. where cloud is still more in the early days. And so you will have those customers, as you saw this quarter, elect to purchase our premise-based solutions.

And your final question comes from the line of Michael Latimer from Northland Securities. Your line is open.

All right. Great. Thanks very much. Yeah, when you talked about cloud accelerating in the fourth quarter – Are you referring to a sequential change there or an improvement in the year-over-year growth rate? And if the year-over-year growth rate, do you expect it to be above or below the guidance you give in fourth of year?

So, with respect to the fourth quarter, we do expect the year-over-year growth rate in Q4 to exceed the year-over-year growth rate in Q3. In addition, we expect the sequential contribution in cloud to exceed going from quarter to quarter this year relative to what we experienced one year ago. So what it means for the fourth quarter or for the full year, again, you can do the math, but it is showing that the expectation for Q4 is an acceleration increase. And as we've highlighted a few times on the call, we have our usage coming out of October, which gives us some nice confidence as we head into the end of the year.

And that concludes our question and answer session. I will now turn the call back over to Barak Ilan, CEO, for closing remarks.

Thank you all for joining us today. And once again, thank you for the many years of partnership, and we will continue to drive the business to the end of the year and handing over the company to Scott. It's a great team over here, and NICE will continue to thrive. Thank you very much.

This concludes today's conference call thank you for your participation you may now disconnect.