NICE Ltd

Welcome to the NICE Conference Call discussing fourth 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 Q&A answer session. As a reminder, this conference is being recorded February the 20th, 2025. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Invest Relations at NICE. Please go ahead.

Thank you, Operator. With me on the call today are Scott Russell, Chief Executive Officer, and Beth Gatsbich, Chief Financial Officer. Before I start, I would like to point out that some of the statements made on this call will constitute forward-looking statements. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, please be advised that the company's actual results could differ materially from these forward-looking statements. The different information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors. In item 3 of the company's 2023 Annual Report on Form 20F is filed with the Securities and Exchange Commission on March 27, 2024. During today's call, we will present a more detailed discussion of fourth quarter and full year 2024 results and the company's guidance for the first quarter and full year 2025. You can find our press release as well as PDFs of our financial results on NICE's Investor Relations website. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted 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 loss from extinguishment of debt, and the tax effect of the non-GAAP adjustments. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties and assumptions. I will

now turn the call over to Scott. Thank you Marty and welcome everyone. I'm excited to be talking to you today for the first time as CEO of NICE. Before we dive into today's call, I want to take a moment to acknowledge Barak's strong leadership that brought NICE to where it is today. It is an honour to lead a company renowned for its relentless innovation, customer centricity and operational excellence. I join NICE for its undisputed leadership and for its immense potential for growth. With a strong financial foundation, industry-leading solutions and 9,000 plus dedicated NICES all around the world, we are poised to drive NICE into the next era of growth. On today's call, I want to focus on two key themes. First, NICE is the undisputed AI leader in customer service. We continue to redefine what's possible with the most advanced and comprehensive AI platform in the industry, purpose-built for speed, agility and scale. I've spoken to a number of customers and partners already and their feedback is unanimous. Enterprise has turned to NICE because they trust that our AI platform, CX1 Empower, delivers real, measurable outcomes. We're improving customer experiences for hundreds of millions of people worldwide, managing over 3.5 billion AI interactions annually while driving tangible value for our clients. Simply put, we are leading this market and we are doing so decisively. Second, the opportunity ahead is extraordinary. Agentic AI is reshaping industries at an unprecedented pace and with CX1 Empower, we are already ahead of this tectonic shift. Our AI-powered agentic automation is setting the new standard, combining cutting-edge technology with our deep CX domain expertise, especially in the large enterprise market. Our financial strength, our relentless innovation and international expansion uniquely positions us to capitalise on the opportunity ahead and accelerate into the future. Let me build upon my first point of undisputed leadership, which is exemplified by our outstanding fourth quarter and finish to the year. For the full year 2024, we exceeded the high end of our revenue guidance and came in at the high end of the range for EPS. For Q4, our cloud revenue grew 24% to $534 million, which is the highest cloud growth on the largest cloud revenue base in our industry. Moreover, quarter to quarter cloud growth from Q3 to Q4 accelerated to 6.8%. This excellent cloud revenue growth drove a healthy -over-year increase in total and reflects our strength at the high end of the market as we reached a milestone of over 400 enterprise cloud customers with over $1 million in ARR. Our leadership also flows to the bottom line. Our exceptional profitability continues to set us apart from the rest of the industry. Nice's outstanding profitability metrics speak for themselves. Operating income increased by 22% to $227 million, driving further expansion in our operating margin by 150 basis points to 31.5%. This in turn fueled an impressive 28% surge in EPS compared to the same quarter last year, reaching $3.02 per Q4. We delivered stellar cash flow, generating $250 million in operating cash flow in Q4, bringing our total to $833 million for 2024, a remarkable nearly 50% over the prior year, further extending our strong track record of accelerating cash flow year after year. These exceptional results reinforce our position as the industry leader. I'd like to elaborate further on our AI leadership. CX1 Empower is revolutionizing the way AI powers customer service. It is the only platform in the market that delights the consumer experience with speed and accuracy from intent to fulfillment. It does this through seamless orchestration of all voice, digital and AI interactions. CX1 Empower boosts productivity of both human and AI agents with a smart workforce augmentation. At the heart of CX1 Empower is agentic AI, acting with autonomy by continually learning and making intelligent decisions to enhance customer interactions in real time. CX1 Empower is a game changer in meeting customer needs at scale, encompassing the largest repository of CX label data, knowledge and thousands of AI models in one platform. CX1 Empower is setting a new industry standard. We are undeniably winning in the era of agentic AI. We go beyond the slideware. We are delivering real results. In 2024, our advanced AI solutions were included in 97% of our large enterprise CX1 Empower deals over $1 million ARR. In one such seven-digit ACV deal, one of the largest retailers in the world, who are already relying on NICE to handle 75 million interactions annually, they chose CX1 Empower to differentiate through advanced AI capabilities, supporting their immediate and growing consumer needs. A very large university in a seven-digit ACV deal is going all in on AI with NICE after a diligent competitive process. They chose CX1 Empower, including autopilot and copilot, to significantly improve their student experience and expect in 30% ROI. In another seven-digit ACV deal, a large managed care organization decided to modernize and simplify their multi-vendor tech stack and add advanced CXAI capabilities to enhance their customer service. After being presented with generic AI from their CRM incumbent, they quickly realized that the only path forward was CX1 Empower. With signed a seven-digit ACV deal with one of the nation's leading university medical centers, driven by a strong commitment to maximize ROI from their CX operations and elevate the patient experience, they chose CX1 Empower to consolidate onto a single AI platform. These are just a few examples of enterprises repeatedly choosing NICE because of CX1 Empower's ability to scale at unmatched levels, deliver proven AI innovation, eliminate complexity of fragmented multi-vendor solutions, and provide seamless consumer experience across all channels. Other examples include seven-digit ACV deals with a large furniture retailer, a well-known US regional bank, and a leading healthcare outsourcing. I opened today's call discussing our proven leadership in AI and the immense growth opportunity in front of us. As I look to the future, the opportunity is clear, and let me explain why. Firstly, our market is growing. According to Gartner, by 2028, 33% of enterprise software applications will include agentic AI, up from less than 1% in 2024. This bodes very well for NICE, since one of the most impactful use cases for agentic AI is in customer service, where it's revolutionizing interactions and efficiency. We are at the forefront of this industry-wide transformation, uniquely positioned to drive and benefit from this shift. With our cutting-edge platform and seamless integration of both human and AI collaboration, we are setting the standard for the future of customer experience. Secondly, alongside the tremendous market opportunity, NICE's unique strengths position us for unparalleled success. With our CX-specialized AI, our industry-leading platforms, and unwavering financial strength, we have all the assets needed to drive both organic and inorganic growth. Our proven profitability and rock-solid balance sheet gives us the confidence to be bold, move fast, disrupt the status quo, and think bigger than ever before. Now is the time to seize the moment and lead the future of CX with innovation and ambition. To capitalize on this market opportunity and leverage our strengths, we will unleash our market leadership by putting CX1N power in front of every organization possible to expand our market lead and set the benchmark for excellence. We will lead the CX AI revolution. Agentic AI is our superpower, and we are embedding it in everything that we do, maximizing our innovation edge and reinforcing our position as the undisputed leader in AI-driven solutions. We will scale with a powerful ecosystem by aggressively expanding our strategic partnerships from technology partners to global systems integrators, turning collaboration into a force multiplier that accelerates growth and amplifies our impact worldwide. Finally, speed and precision matters. As you can see, we have the industry leadership, the AI assets, and amazing market opportunity to capitalize on. We will move even faster with laser focus to win and invest for growth in 2025. The energy across NICE is undeniable, and we are all dedicated to driving our vision forward. We are finalizing our updated growth plan, and I'm looking forward to sharing more details with you in the near future. After 50 days as CEO, I'm even more excited about our potential and the journey ahead. I will now turn the call over to Beth.

Thank you, Scott. I'm proud to report a strong finish to the year with full year 2024 revenue exceeding the high end of our guidance range and EPS coming in at the high end. Our industry-leading cloud AI platforms and exceptional financial strength set us apart in the market. We delivered the ultimate trifecta, profitable growth at scale, an ironclad balance sheet, and best in class free cash flow generation. Let me now share the details of our results that demonstrated this impressive performance. In Q4, our total revenue accelerated sequentially to 16% growth year over year on the largest revenue base in our market, and we generated a record $733 million in free cash flow for 2024, easily exceeding our $700 million target that we shared in June of last year. Total revenue in Q4 was a record $722 million, increasing 16% year over year, primarily driven by the strength of our cloud revenue and from strong product revenue performance in the financial firm segment. Our CX1 Empower platform is being rapidly adopted by our customers, and this success is reflected in our strong cloud revenue performance. In the fourth quarter, we achieved a record $534 million in cloud revenue, delivering outstanding 24% year over year growth. Additionally, cloud revenue represented a record 74% of our total revenue. This milestone, combined with strong product revenue growth, showcases the exceptional fourth-core performance of our business across all areas. Our cloud revenue mix is increasingly shifting towards large enterprise customers, who show a strong preference for our comprehensive suite of AI solutions on our cloud platform. We continue to see an increase in average deal size, reflecting the breadth of our portfolio, along with our strength and domain expertise in the large enterprise market. As we highlighted last quarter, it's important to note that large enterprise cloud deals typically take longer to fully ramp up and be recognized in revenue. We may experience some short-term delays in revenue recognition, but this sets us up for stronger long-term growth and profitability from our loyal and sticky customer base. Our services revenue continued to fuel our cloud revenue as our customers increasingly migrate to our cloud AI platforms. As anticipated, our services revenue, which is comprised primarily of maintenance, decreased year over year to $150 million, with this ongoing transition of our large enterprise on-premise customers to the cloud. Across all our business segments, our customers overwhelmingly prefer our cloud platforms, as demonstrated by our strong cloud revenue mix and robust pipelines. In the fourth quarter, in addition to our outstanding cloud growth, we also achieved excellent product revenue growth driven by the success of our on-premise solutions and our financial crime and compliance segments. Product revenue, which represented 5% of total revenue in the quarter, grew 19% year over year as a result of several large FCC term deals. From a geographic breakdown, the Americas region, which represented 85% of total revenue in Q4, grew 17% year over year. The Americas region has continued to excel in both of our business segments, and we are seeing great wins with new enterprise customers as well as expansion from within our large customer base. The EMEA region, which represented 10% of our total revenue, increased 11% year over year, driven by strong cloud revenue growth. The APAC region, which represented 5% of our total revenue, delivered robust cloud revenue growth, which was partially offset by a decrease in the on-premise business, resulting in an increase of 4% year over year. We are extremely pleased with the outstanding performance of our CX International business in 2024, achieving a record year in CX1 and power new bookings and corresponding growth. Our exceptional performance is driving strong growth in our international cloud revenue with increasingly higher recurring revenue. Our international cloud revenue from the combined EMEA and APAC regions now exceeds $230 million in ARR, and these two regions continue to represent excellent growth opportunities with impressive pipelines. Turning to our business segments, we delivered strong results in both customer engagement and financial crime and compliance in the fourth quarter. Customer engagement revenues, which represented 83% of our total revenue in Q4, were a record $596 million, increasing 14% year over year, as a result of a blend of much higher cloud revenue growth combined with the expected decline in our on-premise business. The growth in customer engagement was driven by the growth in our CX1 and power platform. Revenues from financial crime and compliance, which represented 17% of our total revenue in Q4 and totaled a record $125 million, increased 24% year over year, driven primarily by strong in-quarter premise-based sales. Additionally, we continue to see strong cloud revenue growth and increasing demand for and adoption of our optimized cloud platforms. Moving to profitability, our cloud growth margin totaled an expected .6% in Q4, as we continue to strategically invest in international expansion and the scaling of our cloud business in the financial crime and compliance segments. These markets are still in the very early stages of cloud adoption, and while they present significant growth opportunities, the initial investments have led to a short-term impact on our margins. Our top-line outperformance carried through to our bottom line as evidenced by the strength of our operating income. Our operating income in Q4 increased 22% year over year to a record $227 million, and our healthy operating margin expanded 150 basis points year over year to 31.5%, the sixth consecutive quarter over 30%. I'm excited to share that we achieved both our annual operating income target of $850 million for the full year 2024 and our operating margin target of over 31%. Given our strong profitability performance in the quarter, combined with the smart management of our investment portfolio, earnings per share for the fourth quarter were $3.02, an impressive 28% increase compared to Q4 last year. Cash flow from operations in Q4 was $250 million, an increase of 38% year over year. For the full year 2024, we have generated free cash flow of $733 million, surpassing our free cash flow target of $700 million set out in Q2, yielding an exceptional free cash flow margin of 27%, a level unrivaled in our industry. Our financial strength provides us with a powerful tailwind to see the opportunity in front of us. Further, our positive and growing free cash flow enables us to reinvest in our future growth, acquire strategic assets rapidly, and reward our shareholders with our expanded buyback program, all while maintaining our rock solid financial foundation. In Q4, we repurchase shares totaling $95 million and $369 million for the full year 2024, an increase of 28% year over year. We will continue executing our current $500 million share repurchase program throughout this year. Total cash and investments at the end of December totaled $1 billion and $622 million. Our debt stands at $450 million, resulting in net cash and investments of $1.2 billion. Our debt matures in mid-September of this year. At this time, our expectation is to repay the debt on maturity. Therefore, we expect less investment income to be generated in the second half of 2025. Before we turn to guidance, I'd like to connect how our plans to invest our growth translates into financial expectations for this year. As Scott shared, we have a tremendous growth opportunity ahead of us. In 2025, we will continue to invest in expanding our AI innovation and cloud platform capabilities while further broadening our ecosystem. As a result, we expect our strong cloud growth margin to remain flattish in the near term, and we expect a modest 50 basis point expansion in our operating margin in 2025. The underlying financial strength of our business provides us with great flexibility, and these shifts to advance investment into our business are expected to be achieved while delivering leverage in our model, resulting in a double-digit growth expectation and EPS. Now, I'll close with our total revenue and non-GAAP EPS guidance for the first quarter and full year 2025. For the first quarter of 2025, we expect total revenue to be in the range of $693 million to $703 million, representing 6% -over-year growth at the midpoint. We expect the first quarter 2025 fully diluted earnings per share to be in a range of $2.78 to $2.88, representing 10% -over-year growth at the midpoint. Full year 2025 total revenue is expected to be in a range of ,000,000 to ,000,000, which represents an increase of 7% at the midpoint. Our full year 2025 cloud revenue is expected to increase 12% -over-year. We expect our effective tax rate throughout 2025 to be in the range of 19% to 20%. Full year 2025 fully diluted earnings per share is expected to be in a range of $12.13 to $12.33, which represents an increase of 10% at the midpoint. I will now turn the call over to the operator for questions. Operator?

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Meta Marshall with Morgan Stanley.

Great, thanks. Can you just maybe give a little bit of background into kind of what went into the consideration of kind of the cloud growth rate and just if there's any way to kind of differentiate either kind of what LiveVox becoming organic is as a headwind would just be helpful.

Thanks. Cool. So first of all, thank you for the question. I do want to reiterate as I spoke earlier and as Beth spoke, we are very positive about the market and NYCE is uniquely positioned to be able to seize on that opportunity. We're providing a prudent guidance at this time of year and we'll continue to monitor as the year progresses. As I stepped into the leadership of NYCE, it is also my desire to increase the transparency for our investors. Beth and I are looking at the best ways to enhance our financial disclosures and I look forward to sharing more details as I mentioned earlier. But maybe Beth, if you can share more detail on those expectations. Of

course, yeah. And thank you, Scott. And thanks for the question, Meta. So let me address your question a bit more and try to also help bridge from where our performance has been in the last quarter as well as full year 2024 to what we're guiding for the current year. First, I would start off by saying, you know, we're very pleased we had a tremendous fourth quarter and full year in the cloud last year. So we're quite proud of the accomplishment we just stepped away from. As we step into 2025, you know, Scott highlighted, first of all, that it is still early in the year. And so, of course, we, you know, we are considering a prudence at this point in the year. You know, there are there are several factors that we have taken into consideration as we've set this guidance. I think, first of all, even going into last quarter, we had highlighted that we expected and we were seeing some positive seasonality in the fourth quarter, which played out. But certainly seasonality is not something that you can always be confident around. And so we have taken that into consideration and have not assumed that we will have the same level of seasonality in the back half of this year, given that it's still early in the year. The second thing that I would call out and that Scott also highlighted in his remarks earlier today is that we do know that we are seeing more and more large enterprise deals and these deals are taking us longer to deploy. In the fourth quarter, we actually saw an improvement in the deployment time. But of course, it's something that we're continuing to be focused on and need to be confident that that will will be a recurring event. And then you mentioned LiveAux as well. So I think if we look back to last year, we had given some indication of what our expectations were for LiveAux, which they met and actually outperformed slightly as we looked in the end of the year. But to your point, we've known that the LiveAux growth rate does come with a bit of headwind. And of course, we have that factored into the guidance as well. So I would say all of those are a combination of things that were considered as we thought about the guidance of the 12% on cloud for this year.

Great. I'll pass it on.

Thanks. Your next question comes from the line of Samad Samana with Jeffries.

Hi, good morning. Thanks for taking my questions. And Scott, welcome. Congrats on the new role. Maybe we'll start with just a big picture question. I understand more large enterprises adopting DX1, more full platform deals. So I will say you guys have a pretty strong pipeline for most of 2024. It's obvious to understand when the phenomenon that started delaying the rev-rec started. And could that trend reverse? Are you baking that in as the baseline going forward? I guess what I'm trying to understand is, is there a risk to that 12% if enterprises further delay go lives or if they change the size and scope of deals? It's obvious to understand how much of the service is being baked into that.

So first of all, thank you for the welcome and thank you for the question. Let me start by saying I've got a lot of experience in large enterprise, large transformation, large scale deals in my past experience. And the one thing I know is that as you increase the capability that the solutions offer, that often results in, you know, in the short term, longer lead times in being able to deploy, to be able to take advantage, to be able to use the adoption and ultimately for our customers to benefit. We all know the benefits of the AI capability of CX1 Empower. And as you rightly point out, you know, the majority of our large deals are all with the embedded AI capability that CX1 Empower brings. But what it also means is that our customers are figuring out how to best exploit that capability, expand and deploy and use it in the most effective ways with us. So I see a short term opportunity to be able to accelerate that. There's no doubt that in 2024, the team here have already worked on ways to accelerate the ability to time to revenue from when we're we sign these deals to when they're able to utilise the value. That will continue. We will look at further ways to be able to accelerate it. But we also recognise the potential of an AI platform is exciting and it means that you need to be constantly focused on the customer's outcome, delivering the excellence that they need, delivering the customer service efficiency that they are expecting, but also delighting the consumer experience. And I think sometimes that's underappreciated because ultimately, agent AI together with our human agents will make the consumer experience even more effective. And businesses are sharp about this. They want to make sure that when they're deploying this, that it's going to work, it's going to scale, it's going to work in real time. And so they're considered in that with partnership with us. So I see a short term effect on the concern around the deployment. We will get better, we will get faster, we will get more agile as we do that, as we scale this business. And the good news is our customers will then get the benefit from that. And I'm not sure if Beth, is there anything to add? Yeah,

no, I wouldn't add much. I think you've described it quite well, Scott. And the only thing I'm bringing it kind of back more to where we've been with it. I think, you know, Samad, you've heard us announce each and every quarter, probably more and more large seven digit ACV deals. And so it's kind of been a, you know, we're succeeding in that part of the market and therefore we're having more of those deals that need to be deployed at the same time. So as Scott said, you know, we're we're understand the challenges. We're certainly focused on broadening our capacity in terms of our deployment partners and our ecosystem. And so we will tackle that. But it is something that we're not yet over. And so, of course, again, we have taken that into consideration as we look through the full year. And of course, we will continue to provide updates as we show improvement throughout the year.

Understood. And maybe just a follow up on the one key guide. If I think about the midpoint, it implies a modest decline quarter of a quarter. The last time you guys had a quarter of a quarter decline was in March of 20, if I'm looking correctly. So just what's changing there? I know you mentioned some of the seasonality in the prior question as well. But can you just help us think about maybe within the different line items, if there's something in particular that's driving that quarter of a quarter decline that's been atypical in recent years, just help contextualize that first quarter guidance?

Yeah, sure. And it's exactly what you highlighted, which is it's predominantly seasonality. You know, we had some very healthy seasonality that we just came off of in the fourth quarter. When we looked across our verticals, we know our retail customers had strong usage that we saw uptick in the fourth quarter. And some of that is quite seasonal. It's in the retail sector. It's in some of the health care sector, especially with benefits renewals and things like that. So we are again taking that into consideration. We don't want to be overly assertive with an expectation around seasonality. And so that is baked into the expectation in the first quarter.

Your next question comes from the line of Sidi Penigrehi with MiZuo Securities.

Thank you. And Scott, congratulations on your role as CEO and look forward to working with you. I have a big picture question. We certainly agree that AI is a massive opportunity. How do you view in this changing environment right now about investing more to capture this market at this point versus driving profitability?

Thank you, Sidi, and look forward to working with you also. Look, I think there's a few variables to consider. The one is we in the industry, we're living with AI as though it's been for decades and generations, whereas the reality is that we're still in the age of the AI and the capabilities and what the potential it brings. It's still very much in exploration mode. And it's exploration mode from our customers, but also from the providers in the market. And so that gives me immense confidence that when you think about customer service and you think about the needs of customer service, there's two critical things that we're trying to provide for. One is to like the consumer. They want to interact with a single platform, no matter what channel they use, no matter how they interact, no matter. And they want it real time. I really want to highlight this real time matters. Some of the agentic AI and the AI applications out there in the enterprise place are very much on a systems of record basis. We don't live in that world. We live in the real time world. When a consumer interacts with our platform, it's got to work. And so our focus is making sure that that's seamless. It's responsive with speed. They're able to get fulfillment with speed. And we see the AI capability combined with our existing strengths of voice and workforce management, as well as our digital and analytical stack, are being the prerequisites to be able to take advantage of the agentic AI possibility because you then can have a real time experience to fill in the customer's need in a seamless and asynchronous way. So the first is we're looking at it very much for investment of how we can make that consumer experience the most positive, the most benefit and the fulfilled at speed. The second is when you look at then the orchestration and the fulfillment of it, there's a lot of different data points. And so we want to be the centerpiece of how we fulfill the consumer's need and automate that drive efficiency so you can rely more on AI, less on human agent. But it's not going to be a replacement completely. It's the interaction between and then a deeper fulfillment through the back office. And that's where partnerships and when I think about our ability to be able to deliver that, we will deliver at the front ourselves. But we will obviously work with the technology partners, which I highlighted earlier, to be able to ensure that the customer gets the end outcome, which gets our innovation together with our partners to fill the best response. The last but not least is, sorry if I just finish it out, the last thing that I would say is this. AgentiK or the AI platform is not new for NICE. I actually joined and I spent a lot of time researching the capability that we have. We've got a proven platform already and we've been investing in it for many years, credit to Barack and the team. So we're not starting from zero. We're starting from a mature platform already. Now, yes, there's more to do when we want to invest further, but we can invest in profitable growth.

That's super helpful. And Scott, you bring a lot of experience, enterprise and go to market. How are you thinking about the changes you're going to bring here in the -to-market side and specifically on the partnership side? What changes you can see and especially if you can talk about some of the partners now coming and are turning into competitor? How are you going to address those?

Thank you for the question. And look, I do have a lot of experience. I've got a lot of experience in my background being able to take a strong asset, being able to leverage partnerships together with a really, really strong -to-market capability and being able to turn that into value for customers and growth for the company. And we will do that here to answer your question explicitly. There's no doubt that systems integrators, technology partners and I would also highlight strategic advisors, they're a force multiplier when you partner well. So strategic partnerships is the word that I would like to highlight. It's not partnerships with everyone because we already partner really well today. It's really zeroing in on the strategic partnerships that will be able to expand the -to-end value proposition for our customer to be able to give them the best outcome. And that means the reach of global systems integrators is important because they have the expertise, the industry domain around the world. It means technology partnerships because we know what we're really strong at, but we also know who we need to work with to be able to give -to-end solution for our customers. And the advisory is more about what are the trends, what's coming and how do we then take advantage of that to give more value to our customers. So you can expect a lot of emphasis around strategic partnerships in the short term because I do see it as a real opportunity for us to expand our reach and deliver to a wider customer base than even we do today.

Your next question comes from the line of Rishi Jalluriya with RBC Capital Markets.

All right, wonderful. Thanks so much for taking my questions out. Looking forward to working with you in the new role. Maybe two for me. First, I want to start by thinking about just kind of the X1 bookings. What have you been seeing? I know there's been a little bit of discussion about kind of ramped Revrec, but in prior quarters you've talked about record CX1 bookings. To my knowledge, I didn't hear that comment again on the prepared remarks. Maybe you can just give us a color in terms of what you're seeing in terms of overall CX1 bookings and then I've got to follow up.

So, first of all, Rishi, great to connect and thank you for the question. So as you rightly point out, CX1 and I mentioned in today's call a number of seven digit ACV CX1 Empower deals. The majority of our large deals, as I talked about, the 1 million ARR plus are embedded with CX1 Empower. So the growth and the expansion of the platform that not only includes AI, by the way, it includes your core capabilities to be able to provide the contact center, the customer service at scale for our customers. And that is growing. And that was reflected, I believe, in 2024, where we'd mentioned several times about strong bookings performance and growth in that area. My expectation is we continue on that trend and I see obviously the potential for even further expansion and look forward to sharing those details as the year progresses, how we exploit the opportunity and drive that into not only bookings growth, but ultimately turn into revenue growth as we look to the future. Beth, is there anything to add on the guidance?

No, I think that you've highlighted the strength we saw and we've talked as I highlighted earlier, many quarters about the number of large enterprise deals we're winning as well as tremendous year in international with record growth there and the record largest international deal that we announced in the second quarter of last year. All

right, wonderful. And then Beth, on your preferred remarks, you talked about cloud gross margins being relatively flat in 2025. Maybe what are you contemplating in terms of the impact of GenAI? Because we all know these GenAI workloads can be really compute and resource intensive. So if you are landing all these large deals with AI, what sort of impact is that having on your overall growth, cloud gross margins this year and maybe even in the medium term, as you think about uptake of AI, what should we be thinking about the impact of their on gross margins? Thanks.

Yeah, sure. Let me first explain a bit more about, you know, my comment around flattish gross margins this year. And I would say you've seen a little bit of that playing out in 2024 as well. This was, you know, less related to AI and more about our investments that we've talked about both internationally on the CXM Power Platform as well as in the FCC business where, you know, they're still less mature. We have some fixed costs and we're still scaling and ramping up the customers and the revenue on the other side of that. So that's really the nature of my remarks as it pertains to really the more current year. As we look forward, however, you know, we all are seeing that, you know, that AI is becoming more cost effective as well as compute specifically. And so we expect that to play out in our margins, you know, regardless of the flattish tone for the current year, that is due to investment. And we certainly remain highly confident in our ability to continue to expand our cloud gross margin. And, of course, the cost of compute and AI specifically will help us drive that even at a greater clip.

Your next question comes from the line of Tyler Radke with Citi.

Hi, this is Kylie on for Tyler. Thanks for taking the question. You all saw a good product beat this quarter. Can you talk about why customers may be choosing to stay on premise for longer? And what are your embedded assumptions around conversions and migrations for 2025? And how does that compare with 24? Thanks. And I have one follow up.

Yeah, thanks, Kylie. I'll start with that. I think with respect to product, if you looked on our performance in 2024 and notably in the fourth quarter as well, what we're seeing is that there are certain segments in our business which tend to be financial crime and compliance and sometimes our international regions where cloud is in its more early stages of adoption by customers. And either as a result of the newness of the cloud into those segments as well as sometimes customers simply prefer to deploy our premise software in their own environment. Sometimes it's a cultural thing. I think with FCC in particularly, we see that more so certainly than the CX1 and power business where we have very few premise deployments at this stage and again, occasionally internationally, but we see that more so in the FCC business. And again, it tends to be a cultural approach to financial institutions where they have a history of managing the software within their own data centers and their own environments. In general, it still tends to be not the norm. If we look at the pipelines across all of our businesses, including financial crime and compliance, they are still cloud centric. That is still the way that we are predominantly going to market and incenting ourselves and our customers. But we do see those from time to time. And again, that is what we experienced in the fourth quarter. I will add that as it relates to guidance and our expectation around that, you know, in general, we are a cloud first company. And so as we have considered what that means into our guidance for next year, we have assumed that our business continues to increase on the cloud. And that in relation to that, the premise business continues to decline in terms of the pace of that transition. And again, as you've asked, we expect the pace in 2025 to be more or less the same and assumed in the guidance. However, Scott and I both see that as a wonderful opportunity for us to actually accelerate that. And Scott, I'll let you talk about that more.

Yeah, thanks, Beth. I think just to reiterate, so our guidance has assumed a consistency from what we've had in the past. But I do want to highlight and I guess again, I have a lot of real experience of this at scale. Not only do we want to accelerate time to revenue from our point of view, but it's time to value for our customers. And so there is going to be a great emphasis on that transition path. They're a loyal, long term existing customer of ours, whether it be on the CX side or on the FCC side. But either way, they do actually want to exploit the benefits of the cloud and AI. It's more the how to get there that is the critical point. And so we're going to be putting more emphasis on the how to transition. Do so cost effectively in a risk managed way, in a way that they can get the benefits but not introduced concerns or risk. And that will then give us the potential upside that we all see. And Beth and I are obviously very excited about it.

Thank you. That was super clear. And then if I could squeeze in one more on the 12 percent cloud growth guide, could you just talk about the macro assumptions that you're embedding and maybe the customer ramps as it compares to 24? Thank you.

So maybe I'll start and then Beth, I'll hand to you on the ramp side. But on the macro assumptions, look, we're positive and we're positive because the buying sentiments in the market, particularly in SAS, you know, you look at what's happened with the the .A.I. market. A lot of it initially went to the LLMs, at the infrastructure layer, at the compute layer. But it's very quickly moving to the SAS layer. Companies are looking for exploiting the benefits in the way they run their processes, their workflow, their tasks, their customer service. And so at a macro level, we are actually optimistic about the landscape, about the potential for us. So I don't see any concerns from a headwind from that point of view. And the real opportunity for a system initially put that into bookings. And then ultimately that will then convert into revenue as time goes, as we deliver the value for them. And that's where our emphasis is, Beth.

Yeah, I don't know that there's much more to add. I think you've explained the opportunity ahead of us. And, you know, we've already said that essentially we expect to this 12 percent growth is that, you know, going to be equally distributed across each quarter in terms of that 12 percent. So we believe we have an opportunity to revisit that. And we'll obviously update throughout the course of the year because there is a great opportunity. And with those customers that are deploying, what we see in practice is that they do not turn everything on day one. There is a gradual ramp. And then the consumption and usage benefits us. So, again, we will continue to monitor all of those. And that is what we've seen in practice from our customers as they drive ROI in their organization. And it enhances and increases our AR as a result.

At this time, I would like to ask everyone to limit your questions to one due to time restraints. And your next question will come from the line of James Fish with Piper Sandler.

Hey, guys, this is Quinton for Jim Fish. Thanks for taking our question. Beth, maybe my one for you. In the analyst date early in the year, I think we highlighted a 113 percent net retention rate for CX1 customers. Obviously, you talked about some slower revenue recognition that probably declined that a little bit. But any color you can give us to where we're at exiting the year for net retention rate, how you think about expansion for customers in 25. You know, is this the main weakness as we think about the forward guide or the kind of the balance of net new any color that would be helpful. Thank you.

Yeah, thank you for the question, Quinton. And as you highlighted, you know, NRR is something that we shared at our investor day. It continues to remain healthy and is not a factor that we've considered of any expectation that will have any deterioration and add. In fact, you know, as we talked about, we see that more as an opportunity ahead of us as customers really fully ramp some of the the portfolio on CX1 and power that we have been deploying and will continue to deploy. So, you know, I would just highlight one of the other things that, you know, Scott and I spent a lot of time talking about is the opportunity for us to kind of provide some additional disclosures from time to time around some of these metrics. So while that hasn't been our practice in the past, I think certainly, you know, it's something that Scott, I'll let you speak to. I know you desire and but, you know, in short, I do want to ensure that it's understood that, you know, we see continue to see a healthy NRR and don't expect deterioration as being a part of the guide.

Yeah. So just on the NRR, there's no doubt that we we see upside on that. And that would be our expectation going forward. And I don't see any any concern there. But to the best point, there's no doubt that in our business, there are a lot of different factors that lead ultimately to the revenue growth, retention of customers, expansion of customers, being able to improve, reduce and compression and more importantly, expand the usage, speed up deployments. There's a lot of different factors. So I definitely got the desire and the intent to increase the transparency for our investors. So as we move forward, your understanding and and and the the explanation of how we're driving the business, how we're driving the growth opportunity that we've talked about can be can be understood and then in shared to the investor base.

Your next question comes to the line of Arjun Behatia with William Blair and Company.

Thank you so much. Maybe one for you. Can you just talk about agentic AI? And I certainly see that as an important trend going forward here. But when you think about how customers reviewing agentic AI versus co-pilots versus human agents, how do you see this kind of balance of those three playing out? Is agentic really making it that much easier for you to maybe sell into the customer base as the much more evident? Just talk a little bit about what you're seeing in sales cycles and demand on the agentic side.

Great question, Arjun. And I need to be I need to highlight I'm only 50 days in. So be aware, although I have obviously interact with a lot of customers and partners already. So I feel like I've got a good understanding not only of the market, but but also the needs. There's a few factors that that we see. The first is agentic AI and the capability and the possibility. It's clear. And I think all of our customers see that they see the potential of a of a continuous learning platform being able to interact and being able to to drive productivity, to drive efficiency. But in customer service, there's a few variables that are really loud and clear for our customers. First, when they interact, it's got to work. Why do human agents? Because the human agent can interact with complex or simple tasks, and they need to make sure that that that intent, that consumer request gets fulfilled. And so when they're deploying agentic AI in a consumer context, they have the same expectation. Real time, real time capability, high quality response, speed of resolution. Now, we see that as an advantage for us because we obviously understand with our knowledge, with our platform, with our models already about how we use that to help the agents be able to serve those consumers and our self service platform. So for us, it's an extension on a single platform to be able to fulfill that. And a lot of our customers are not looking for generic platforms when it comes to consumers experience. So I think what you'll see as we look forward is the context, sensitivity, the domain knowledge on the data and the interaction, who the actual user is, is it an employer, a supplier? In our case, a consumer, it does matter. The second is I was intrigued when I spoke to a number of customers that they're filing agentic AI in the back, but they're leveraging a single platform at the front. So they don't want to be able to trial in front of their customers. They're not going to take that risk. They're looking at a single platform. That's why for us, the platform, that unified platform of voice digital AI becomes really important because they're not looking for breakpoints on the interaction that will deliver to poor customer service, poor efficiency. They don't want that fractured, you know, lots of breakpoints between tech. So, you know, it's interesting how it will play out. I am very optimistic about customer service being a really I think it's going to be one of the use cases that will be proven agentic AI to be able to deliver on the ROI. I do believe firmly that we will see over time a reduction in human agents and increase of AI agents. But the combination and the interactability is going to be the key rather than you go to one channel or the other. You need to have a unified platform to be able to fulfill a consumer who frankly doesn't really care about how who they're interact. They just want their service request fulfilled. And that's what we're zeroed in on.

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

Great. Thanks for the question. This is Matt on for Mike. Maybe can you help us frame the expectations for contribution from the RingCentral partnership to revenue heading into 2025 relative to the 2024 run rate? Is that a headwind we should be considering in the context of the 12 percent organic cloud revenue growth cut?

Yeah, thank you for the question. You know, Ring is one of many, many partners that that is part of our ecosystem. We have many different partners that are actually working with us, attending via the SMB and lower end of the market. So we don't expect to have any kind of negative impact to our revenue. And that is not a consideration. And Scott, maybe you can.

Yeah, I'll say something interactive on on pretty regular basis with Vlad and the team. I mean, we see the potential of the partnership being able to drive value, particularly for our SMB customers. It's one of our one of our many partners that are able to deliver an end to end proposition to serve our customers. So certainly no negative impact when it comes to our our full year outlook. Yeah,

at the end of the day, we still have the best in class CX one empower platform. And that's what customers are looking to to get.

Your next question comes to the line of Patrick Walravens with Citizens JMP.

Oh, great. Thank you. And Scott, welcome. It's great to have you here. I was wondering if you could share your thoughts in terms of. M&A for nice now that you're here and two sides of that question, the first side is. What you might consider acquiring and the other side is how you feel about. Like the financial crime and compliance business and the public safety and justice business and whether it might make more sense to divest those over time and focus on the the core opportunity around customer experience and customer engagement.

Thank you, Pat, for the question. And and thank you for the warm welcome. Look, there's no doubt I mentioned in the opening comments that I provided nice has a. It's a remarkable financial position that we're in. We've got obviously a very strong balance sheet. We we generate cash and we're able to from our operations exceptionally well. And that gives us optionality. There is no doubt that when I look forward and our ability to be able to fulfill what we believe our customers need. Not only on the AI side, but that's that platform to be able to deliver the outcome that they need. We're looking at organic growth for sure, because we've got a great platform already, but it does give us optionality on on the inorganic side. But it's got to be driving value that will deliver long term growth for our business and for our customers. And that is where my my head space is at. But also what I think the needs of this business is. And that's true not only on the CX one side, that's all parts of the business as it relates to FCC. All I can say is it is a vital part of our business. It's a well performed business. And and I think what what I can say is when we get together, as I shared earlier, I'm looking forward to sharing more details about our strategy, how that will be put into a growth plan and the details behind it. I'll be more than happy to share more on what those expectations are for both organic and inorganic moves.

Your next question comes from the line of Catherine Trevnik with Rosenblatt.

Oh, thank you for taking my question and welcome, Scott. So just you've talked a lot about your point up market, large deals, bookings, et cetera. What's the strategy for the mid market? Because it seems to me that the mid market customers that you deploy have a fast return to revenue. So could you explain to us your thoughts on the mid market? Thank you.

Yeah, so you're right. We've talked a lot about the the upper end and there's no doubt that we've got a platform that caters to the scale and the real time needs at the upper end. But that's also true for the mid market. The mid market also needs scale in real time. I firmly believe that our platform and our capability can serve the mid market really well. A simpler deployment time frame that comes back to partnerships, by the way, because our our our deployment partners to be able to in an agile, sharp way of being able to quick deployment, being able to serve that for the mid market because they're looking to grow their business. They're looking for high MPS of their customers. They want to fulfill it in a more efficient way. And I do think that capability goes to the mid market and then clearly at the small end, that's obviously through partnerships, through distribution means to be able to to bring out our platform, our capability, which is the best in the market and then do that into the small end as well. So I know I've highlighted a lot on the enterprise side because clearly we know that's a strength of ours. But I also see a tremendous growth opportunity to mid market. I will highlight that I mentioned international expansion. I've got a lot of experience in growing businesses and scaling them around the world. Quite often that starts in the mid market and goes up because the US is clearly a large enterprise market. But around the world, you've got a much bigger mid market space. And I think we were well set up to be able to capitalize on that opportunity, given that we've already got presence in most of those markets globally.

Your next question comes from the line of Thomas Blakely with Cantor.

Hi, good morning, everyone. Good afternoon, Israel. And thank you for squeezing me in here. I just want to double click on agentic AI and kind of understand better understand in terms of the 12 percent guide, how much you know, how much uptake is kind of embedded in that guide. You know, from our checks and you talked about increased complexity and elongated sales cycles, this is certainly a cutting edge technology. And I just wanted to maybe just circle back there. And if for best is related to that question, a longer one part question, what kind of pricing uplift could you assume from a subscription basis, even if it is consumption based? You know, overall, it's a pricing commentary as agentic AI is consumed, what that would what that would manifest itself from a like to like customer. That'd be a

great question. And I'll start and then I'll hand over to you on the second part. So I want to reiterate again, and I know we've mentioned it a couple of times, we've taken a prudent guidance. We've taken a prudent guidance because whilst we're super optimistic about the potential when you win these large or these enterprise deals and agentic AI with its capabilities and also the deployment timeframes, we want to be really clear that we're trying to accelerate it. But also that takes time for that to ultimately convert into revenue when you you understand the operating model that we run. So I believe agentic AI will be a cornerstone of that growth. As you look forward into the midterm, the growth will come from our AI platform to be able to deliver that. But, you know, it's the current run rate of our business is obviously factored in to the 12 percent revenue. And maybe, Beth, you can comment a little bit.

Yeah, sure. In terms of the, you know, the pricing uptick. First, I would highlight that, you know, AI is embedded across really everything that we do when you consider our platform. So our AI is advancing both agents as well as, of course, its agentless as well. So, you know, we are still continuing to have AI that is embedded on the pricing side as part of the agent based pricing. But even we're turning more and more towards a consumption based model on the agentless side because that is the way of the future. So when we look at that, you know, we have multiple examples where we see customers with, you know, receiving great ROI from the adoption. They're able to cost. They're able to increase their spend in technology and our and our AI platform. And on the other side of that, for us, again, the uptick that we receive is a broad range, depending on what level of, you know, AI that the customer is adopting. But as we've described, 97 percent of our large enterprise deals last year included our AI offerings. And so they are we're consistently seeing that that is driving and a nice average, you know, increase in our deal size. And so, as I said, it's a broad range, but we see that playing out. And of course, as the customers continue to further adopt and continue to ramp up usage on those platforms, that will play out over time. And it's part of the growth acceleration we expect to see in the future.

Your final question comes from the line of Timothy Horan with Oppenheimer.

Thanks a lot, guys. The seven percent revenue growth you're guiding to. What do you think the industry is growing at overall? And can you talk about maybe the competitive impact or any changes that you're seeing, I guess, you know, particularly from from Salesforce and their partnerships out there and the other other cloud providers? Any change out there? And I guess, you know, ultimately, is AI going to be accretive to your overall industry revenue growth or, you know, will it hurt overall industry revenue growth? Thank you.

Thanks for the questions, Tim. And I think you asked a few, so let us try to address them and we can circle back and make sure we've covered everything. First, with respect to the total revenue growth, you know, I think it's important to highlight that you can't always put us side by side with some of the other players because we are still a hybrid of both the cloud company and a premise based business. Of course, the cloud mix is changing and continuing to expand further and further. In fact, we reached 74 percent of our overall revenue in last quarter was coming from the cloud. And of course, that's the trend we continue to expect. But certainly the the total revenue is taking into consideration that transition of the premise customers. And that's a declining part of the business. When you think about the premise that offsets the real potential and growth that we see in the cloud. That's specifically why we call out our expectation in the cloud, which is really where, you know, we're focused. We are continuing to drive that acceleration. And again, it's more about us driving the cloud growth faster. You know, even though it may and sometimes come at the expense in a near term quarter, because that is consistent with our overall strategy and direction as a company. And Sam, was there again, I don't know if you had other questions we didn't get to.

Just the competitive intensity has changed much out there. It seems like, you know, Salesforce and some of the cloud providers have ramped up their offerings.

Yeah, let me let me cover that. So, so first of all, there is it's a it's a dynamic market. I will say that, Tim, there is no doubt that there is. And there's a lot of hype. There's a lot of slideware. There's a lot of noise that you can easily see. What we see in customer service is that to deliver the efficiency and the automation that our customers need in customer service and the real time that I mentioned before. Needs to be and the agent, I opportunity. It's got to be on a single platform. They're not interested in our consumers using different platforms, different interactions without it being unified under and the orchestration being so lost. Yes, we see others that have got a capability that I would argue that is really good for interactions that are static or more, you know, systems of record where you're it makes for good marketing or other things that CRMs can provide as it relates to customer service. That real time interaction between digital human and agent becomes the critical factor. And I am I'm convinced that the market will continue to go that way. There will be generic players out there that will have, you know, that will have standard platforms. But the value will come from the ones that really understand the data, be able to apply that data and deliver it. And that is nice.

I will now turn the call back over to Scott Russell for closing remarks.

So first of all, thank you everyone for the kind words of welcome in my first earnings call. I look forward to working with you as we go forward and have a wonderful day ahead. Thank you so much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.