Welcome to the NICE conference call discussing Second Quarter 2018 Results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded August 9, 2018. 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 Eilam, Chief Executive Officer; Beth Gaspich, Chief Financial Officer; and Eran Liron, Executive Vice President, Marketing and Corporate Development. Before we 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 the company’s actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in Item 3 of the company’s 2017 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 30, 2018. During today’s call, we will present a more detailed discussion of second quarter 2018 results and the company’s guidance for third quarter and full year 2018. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles as reflected mainly in accounting for acquisition-related revenue and expenses, amortization of intangible assets and accounting for stock-based compensation. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today’s press release. Additionally, NICE adopted a new accounting standard, ASC 606, in the first quarter of 2018 on a modified retrospective basis. This means our results for the reporting periods, beginning on or after January 1, 2018, are presented under the new standard while prior period amounts before January 1, 2018, are not adjusted. All financial data for the second quarter of 2018 as well as guidance for the third quarter and full year 2018 are provided under ASC 605. We chose to do this to provide better transparency and comparability to 2017 financial data, which was reported under ASC 605. I’ll now turn the call over to Barak.

Thank you, Marty and welcome everyone. I’m glad to be on the call with you today and pleased to announce another strong quarter of double digit growth in both revenue and EPS. We reported revenue of $345 million representing a 10% increase from Q2 of last year. Operating income was $85 million, which was an increase of 19%, compared to Q2 last year, and operating margin increased 190 basis points to 24.7% compared to the same period last year. These strong operating results led to an 18% increase in earnings per share to $1.06. Also in Q2, we saw dramatic increases in the number of competitive replacements, 7-digit deals and new customers, all three matrics increased strong double digits in Q2 compared to the same period last year. These strong results are being driven by the continues trend and the growth opportunity in our strategic pillars of cloud, analytics and artificial intelligence. Moreover, we’re still in the very early innings and each of these pillars how a long runway for growth in what we believe to be a total addressable market of $7 billion to-date expanding to $12 billion in the coming years. We are only at the beginning of our journey. And of course, cloud is a major part of this joinery. We reported 28% year-over-year growth in cloud revenue in Q2 and it represented 32% of total revenue compared to 27% in Q2 last year. We are on course to exceed annual recurring with cloud revenue of $500 million by the end of the year. Our exceptional cloud execution is being driven by our market leading CXone platform. Recently ranked first, in the 2018 contact center in the cloud report from Ventana Research, CXone is the only true native open-cloud platform in the industry. CXone encompasses the broadest…

Thank you, Barak. And good day, everyone. I am pleased to provide you with an analysis of our financial results and business performance for the second quarter as well as our outlook for the third quarter and full year 2018. Revenues for the second quarter was $345 million, which represented an increase of 10% from $315 million in the same period of last year. Customer Engagement revenues for the second quarter were $281 million, an increase of 11% compared to $254 million last year, and Financial Crime and Compliance revenues were $64 million compared to $61 million last year, an increase of 4%. Product revenues accounted for 15% of total revenue in the second quarter. Cloud revenue accounted for 32% of total revenue in the second quarter and services accounted for the remaining 53% of total revenue in the second quarter. Recurring revenue for Q2 2018 continued to increase and reached 73% of total revenue compared to 66% in the same quarter of last year. As our cloud and overall recurring revenue have grown to become a much larger portion of our total revenue, this is having an impact on the quarterly revenue distribution. Therefore, as we mentioned last quarter, we expect our revenue to be more evenly distributed among the quarters this year rather than backend loaded as it was in the past. Our regional breakdown, revenues in the Americas were $269 million in the second quarter, an increase of 10% compared to Q2 2017. Revenues in EMEA increased 12% to $48 million for the second quarter compared to Q2 2017, and revenues for the Asia-Pacific region were $28 million for the second quarter, similar to last year. Gross profit in the second quarter increased 10% to $244 million compared to $222 million last year. Gross margin in Q2…

[Operator Instructions] First question we have is from the line of John DiFucci. Your line is now open, please go ahead.

Hi. This is Julian Serafini on for John today. Thanks for taking my questions. I just want to start out with on the product revenue. So we saw that the large decline of product revenue this quarter, which we understand. Should we expect a similar trend going forward through the rest of the year, with something similar, a high negative 20% year-over-year decline? Or how should we be thinking about that going forward?

Sure, Julian. Thanks for the question. Very simply, we are a cloud company. We’re leader of cloud and prioritize cloud in our go-to market. I think you can see evidence of this in our cloud growth, not just this quarter also in the past few quarter. And the second half of our year has distributed more evenly over the four quarters rather than being the backend loaded. Moving forward, we expect fluctuation in the product. It can go up and down every quarter vis-a-vis the previous year, and we continue to prioritize, of course, cloud.

Okay. Thank you. And I guess one follow-up question, too. So on the deferred revenue, we typically see a bit of sequential decline in Q2. It just looked like the decline was a little bit larger, I guess, than in prior years, this quarter. So I just want to see if there’s anything specifically else going on or anything you may want to point out with that?

Thank you for the question. Yes, there is nothing that is really significant going off the deferred revenue. We do see variation from quarter-to-quarter and so there’s nothing really relevant there to add.

Okay. Thank you.

Next question we have is from the line of Dan Bergstrom. Your line is now open, please go ahead.

Yes. Hi. Thanks for taking my questions. Maybe to build on the first question in another way, could you help us better think about the services strength this quarter? And how should we think about the line item in the second half here? And then Beth, it looks like services gross margins were up nicely quarter-over-quarter and year-over-year. Could you talk to the strength here? Is this a structural change? Or should we kind of expect segment gross margins more along the lines of historical 67% to 68% levels? Thank you.

Sure. Thanks for the question. So just to answer sort of your two-part question, your first question was around service revenue. And if you recall, our service revenue is a combination of both our maintenance revenue and our professional services revenue. And we have continued to have a strong recurring business in our maintenance. We have high retention with our customers, and we continue to see that as a strength as we look forward in our business. With respect to the services margins, this has been a trend for quite some time, that if you look on a multi-quarter trend, we’ve been very effective at our internal operational efficiencies, that includes both the margins in our services business as well as our cloud business. So in this quarter, compared to the same quarter of last year, we continue to grow those – both of those margins. In the cloud business, specifically, we have increased the margin up until 63%, which is a nice expansion from last year. It will continue to be something that we are leveraging; steps that we’ve taken in other areas of the business to continue to slowly and consistently keep our eye on that and drive it consistently over time.

Thanks. And then maybe one for Barak. Barak, you highlighted a 4,000 seat CXone deployment at a top five financial institution, on the call. Could you drill down into that deal a little more for us? Is this an existing customer? A new customer? Why’d you win? What’s the use case? And then what type of additional opportunities could there be for a deal such as this?

Sure. I think this deal exemplifies what we see, and I talked about in my earlier remarks, about the adoption of cloud in the enterprise side of the market, the large enterprise of the market. It’s something we haven’t seen, I would say, two years ago, and we see it in a very quite significant way as we speak. While we see the adoption happening in a much rapid way, as I said on the call, we are still in the early market penetration. The adoption is happening, but there is a long, long runway over here to take over a big market share in the cloud. And also a few of those customers, even this one in particular, is that we have relationships with these customers, NICE historically before the acquisition, if you’ll remember, has been well positioned in the higher end of the market. So NICE broke in the relationship – great relationship. And now we’re coming from a much broader portfolio, covering the different segments and solutions, including digital and omni-channel routing that we didn’t play in before. And with the cloud, we expand our footprint dramatically with those customers, turning a customer that used to have a relatively light revenue with NICE to a much more significant one. So in this particular customer, as similar to what we see also in other large enterprises, they don’t start small. They start actually in a pretty high footprint, but the opportunity moving forward to extend, as I said before, is both higher coverage, this customer has many more seats to grow. And also additional products in our portfolio, which is a much easier sale and a much easier adoption, when you are coming from a platform, which is CXone, which is so robust and have all the solution you need, fully integrated with workflow between them.

Thank you.

Next question is from the line of Gabriela Borges of Goldman Sachs. Your line is now live, please go ahead.

Great, good morning and good afternoon and thank you for taking the question. Maybe I can start with on the displacement activity that was mentioned in the prepared remarks. Maybe for Barak, can you walk us through, how much heavy lifting has to happen on the customer side to make a displacement happen? In other words how difficult is it to switch out the incumbent solution? And are there things that NICE and its pro services team can do to help with that?

Sure. So as I said, the market is shifting. There is a very large customer base out there of legacy on-premise providers that they are experiencing two things: first of all, their technology is getting outdated; and the second, they haven’t invested in real cloud solutions like we have with CXone. So customers are proactively seeking to move into the cloud. Cloud in our market provide a lot of benefits, starting from a very fast turn out for the time versus the on-premise solution; very fast cycle of innovation, elasticity, which is very important in the customer service business. Hence, the real – we’re starting to see in the last 18 months, a shift in the market from early adopters to those that are seeking proactively customers – large customers seeking proactively to shift to the cloud. And we get into those deals, helping our customers are helping customers to cross the – bridging between how do they move from the on-premise to the cloud. So I’m not going to say that the displacement efforts are not that difficult. It’s less about arguing, like in the past, whether what’s better, on-premise or cloud. It’s much more about making sure they understand the value in CXone and our win rate our increasing quite dramatically. And we are enjoying from the market transitioning into cloud, and there is still a very, very large legacy on-premise base, whether there’s competitors – legacy competitors, which we are already converting to the cloud.

That’s helpful. Thank you. And a follow-up with Beth, if I may. So you mentioned earlier, a little bit of the changes that are happening on the P&L as you move towards more of a subscription mix. I also wanted to ask – perhaps little bit similar to the previous question – on the deferred revenue and billings piece of this. So I understand the probability and I can also appreciate that for your contracts a lot of them are billed monthly as opposed to annually or multiyear. So would just love to get your perspective, how much should we paying attention to the deferred revenue to the billings line? Or is it more helpful to just look at the P&L?

Thanks, Gabriela. Yes. I think you really kind of nailed it when you said earlier that as we’ve highlighted in the past, the cloud growth that you’re seeing of the 28% year-over-year is predominantly being driven by the CXone platform and the business there. And as we’ve mentioned it is a monthly pay-as-you-go, actually billed in arrears, and that’s one of the real added attractions for our customer base given the elastic model that they can use, what they need from month to month in that model. So that’s the – that’s a little bit different than most cloud companies that you would expect that could maybe have annually paying in advance. So we have a different model and therefore, we’re not looking at deferred revenue in the same way given the elastic model of our business.

Okay. Thank you.

Thank you.

Next question we have is from Sanjit Singh of Morgan Stanley. Your line is live. Please go ahead.

Thank you and good morning and congrats on the strong operational improvements year-over-year. Barak, maybe I wanted to dive into sort of the composition of your new bookings. In your script, you mentioned some momentum with AI and robotic process automation. Can you give us a sense of how your new booking compositions books today versus this time last year? And what are the main drivers – what are the main contributors to your new bookings? And how that might be different year-over-year?

So we continue to see – this is a journey we went to in the last, I would say, five years or even more than that, wherein the past analytics was the smaller part of our new booking. And today as I said, it represents a big portion of the majority of our booking. This has been our journey for the last several years. It started with even more basic analytics many years back with early adopters in the five or six years ago. And these customers extended 12 years. And today customers are growing robust to the next generation of analytics, which is, I would say is twofold. First of all, in more advanced analytics, which they take to additional use cases. And then recently, the last couple of years, the injection of AI, which is a classic evolution from our basic analytics solution many years in the back, much more of the machine learning algorithm and other artificial intelligence related activities that play on top of our analytics capability as we have a lot of data, a lot of services for customers. And as I said, both to new customers as well as to the installed base or the customer base, we think expanding very nicely.

Got it. Understood. In terms of the customer evaluation cycles in terms of the large enterprise, I think for us, we’re seeing a lot more of new vendors coming to the space, the contact side of the market, trying to offer large enterprise customers these new capabilities. When you guys are looking at some of these displacement opportunities and these request for proposals, is there more people competing for these deals? And how does that potentially impact the length of these customer evaluation cycle?

Actually, we enjoyed it very much. With the recent higher interest that we see in the market, the more vendors making statements about the contact center and the customer service that the main as a whole. This market has been not quiet, but has – wasn’t been in the spotlight for many years. And I’m personally a veteran of this market for 20 years. In the last two years, it’s getting more significant attention. We enjoy it very much because we have, for several years, all of the relevant analytics, artificial intelligence and other capabilities. And these further attention in the market gets, help us actually to educate the market solutions that in the past domains and solutions in the analytics space of artificial intelligence that’s considered to be a more of a early adopter domain or even science fiction becoming more and more into the mainstream, and we actually benefit from that. One of the biggest advances that we have for many years and even more so today with CXone is the fact that we’re not just – we’re not a point solution company but those are provides a very wide platform. The demand of customer service in complex coming with just a niche of single solution is not enough. Customers are tired from doing the system integration themselves. They want to see an end-to-end solution that cover all the different channels, all the different scenarios. And the barrier of entry to that, to solution that is enterprise grade that can cover all aspects of customer service across all channels, there aren’t too many of those solutions out there. So on one hand, we enjoy the help on the educating the market. On the other hand, we see many customers selecting eventually to go with a robust portfolio like what we have at NICE.

Perfect. Thank you very much.

Next question is from the line of Rishi Jaluria of D.A. Davidson. Your line is now live. Please go ahead.

Thanks. Hi, guys. Thanks for taking my questions. Barak, let me start with you. You mentioned in the prepared remarks that you’re seeing cloud traction on the financial climate compliance side as well. I was wondering if you can expand on that. Maybe give us a sense for what types of customers you’re succeeding with there? And then is it a conversion of existing customers with Actimize to Actimize cloud? Is it new customers? Is it expansion? Maybe a little bit more color, and then I have a follow-up for Beth.

Sure. Up until a year ago, you heard us mentioning in the call a lot of focus that we gave in the market as well as obviously in our operating to the cloud in our customer services domain that we have prepared ourselves to the adoption of cloud also in the financial climate compliance business. Obviously, some of the different dynamics in this market, but we’re starting in the last few quarters to see them happening. Still in the early stage but the dynamic are very, very good, and we see the adoption is increasing. I’ll try to give you a bit more color as to where we see the adoption. Historically, financial climate compliance, we have been playing mainly at the very, very high end of the market. And this is a market we’ve catered for many years. We didn’t go further down in the market. And when I say down in the market, these are still, very large financial institutions because the model itself was quite expensive and quite complex for these customers to adopt. So that mid-market – and to qualify those markets said, these are still financial services with assets between, I would say, $10 billion and up to $80 billion, that’s my definition here of mid-market. We see the adoption and the desire of these customers to have solutions that are rich. The one that we have with NICE Actimize and cloud actually enable those customers to move and to enjoy the set of offerings that we have in a much better way. So that’s one and to that, we’re satisfying this need and seeing the demand with our Essentials solution, which we’ve launched about 1.5 years ago or so. In parallel to that, in order to accelerate those go-to markets, because we didn’t have…

Okay, great. Thanks, that’s super helpful. And then, Beth, you touched on cloud gross margins, and obviously, some solid expansion relative to last year. Just how should we be thinking about cloud gross margins from here? And what sort of steps are remaining to optimize the margins other than scale? Thanks.

Sure. Thanks, Rishi. You know, as you highlighted already, we have seen a nice trend in the year-over-year growth in our cloud gross margin. We expect to see more of the same as we look forward into the future. Clearly, we – it’s being driven by the strong top line growth in our revenue, the 28% that we had this year, year-over-year. We have very strong leverage in our model, and so we’ve taken a lot of steps around cloud that we have taken in our services business as well that we’ve highlighted previously. So some of those things include higher [Audio Dip] talent in other low-cost areas. We’ve also really focused KPIs internally around driving certain operational effectiveness. And specific to the CXone platform, it’s often very associated with telephony, and so we also have a looked at smarter routing associated with a lot of our calls. So those are some of the steps, and we’ll continue to do that and more as we continue to grow the margins over time.

All right. Perfect, thank you.

Next question is from the line of Gregory McDowell with JMP Securities. Your line is open. Please go ahead.

Great, thank you very much. Just one for you, Barak. There’s a lot of excitement around of the RPA space, and one thing I noticed is the competitive dynamics around RPA are a little different than other markets you attack that maybe have more legacy incumbents. And here in the valley, there’s recently been a lot of venture capital excitement and funding in this category and Blue Prism out of the UK, it seems to be doing really, really well. So I wanted to ask, I guess, number one, how you expect this category to evolve over time? And maybe number two, and I think you touched on it, but when you win with RPA, why do win? And what are the key NICE differentiators in the RPA space?

Sure. You’re absolutely right. There is a lot of activity excitement and market momentum around the RPA. It’s a big, big headline and yes, a lot of investments are getting into these markets, which help a lot in creating also market dynamics from customer’s perspective. I would say that a year ago, or two years ago there was a lot of initial drive with customers and what we’re starting to see right now is moving from sampling to a more large adoption. As large enterprises started to adopt the robotics and it also do it in a more large production environments, one of the most important thing that they’re looking for is scalability. One of the best things that we have as a company is knowing how to cater and provide enterprise-grade solutions. So one of our differentiator is robot that can function, hundreds and thousands of them in highly scalable environment with all the different checks and balances and control. That’s one thing. The second thing, we come as a company with the main expertise from the customer service arena, which is the most complex arena in terms of processes and much more complex on the back office. And it’s also heavy on employees and employee engagement. So the second differentiator that we have, and I referred to that before, is the fact that we actually have not just unattended robots, which are relatively simple, but also attended robots that walk side to side and actually with the employees. And these are expertise will bring about from the contact center how do you guide employees to operate in real-time and you will bring it into the back office. And that’s quite a unique differentiator that we have and although together, it’s a – the barrier of entry to develop…

Thanks, Barak. I appreciate it.

Next question is from the line of Walter Pritchard of Citi. Your line is live. Please go ahead.

Hi, thanks. Two questions. I guess there’s been a lot of asking about this issue, but I just wanted to hit it directly. So on the license piece, I think we’ve seen a lot of companies go through these transitions where cloud and license kind of interplay with each other. It looks like what I’m seeing your numbers is more services versus license. And I’m trying to understand qualitatively, what factors would drive a swing in the mix between the services and the license line?

Sure. I wouldn’t connect between [indiscernible] between the different line. On the license plan, as I mentioned before, we are leading with cloud, and we can expect fluctuation in the product line, both as we sold our growth given the cloud as a service line is very, very healthy, and we believe that will continue to be the trend moving forward. On the service line, as Beth explained before, it comprises of both professional services and maintenance. We have a very healthy recurring base over there, and we believe that it would continue to grow and be stable. And on the service itself, cloud or not cloud, we continue to offer new type of services, value add services to our customer that come also at a higher margin as you can see from the margin line of this service line. So all in all, we can expect, in this base to be much more of a stable one and growing line.

And then just on Actimize, I know that business bounces around to some degree seasonally and with larger deals and so forth. It sounds like you’re also seeing a pickup in cloud success around Actimize? Can you talk about if that – if you expect that to impact the seasonality that you’re seeing in that business as we look forward?

Sure. So financial climate compliance are under our brand of NICE Actimize. The market itself is very strong and healthy. We see a great demand. As I mentioned before, we see also higher demand in the cloud, which for us, is an incremental market because we didn’t play before very effectively or even at all in the mid-market. So this is where we see the pickup of cloud. And we have a lot of new offerings, as I mentioned before, ActimizeWatch and the overall autonomous financial crime management set of solutions that we have. I think as we’ve seen before in the past couple of years, there are fluctuation between quarter in Actimize. We still believe that this is a double-digit growth business, and that’s what you can expect moving forward. As we build also the cloud business in this, I can say that the pipeline moving forward for Actimize is the strongest that we have seen for many years. Operator?

I’ll go to the next question from the line of Paul Coster of JPM. Your line is now live. Please go ahead.

Yes. Thanks for taking my question. Quick one for Beth. You, obviously, are pointing out that revenue’s going to be more linear during the year owing to the makeshift here. EPS, though, still seems pretty backend loaded. The growth rate from 3Q to 4Q based on guidance is maybe a little lower than last year, but it’s still very significant Q-on-Q jump, so can you just talk us through why the 4Q is still backend loaded from an EPS perspective?

Thank you for your question. I think as we’ve talked about, again, the revenues are evenly distributed. And that’s what we expect to see more going forward given the recurring revenue. And with respect to the EPS, I think, again, it’s linear and not unexpected.

I’m sorry, I didn’t quite get it. So there’s no – should we expect EPS to be more linear than as well?

Yes. I think it’s fair to expect it’ll be a bit more, yes.

Okay. Thanks.

And now, I’d like to hand the call back over to Barak for closing remarks.

Thank you all for joining us, and we look forward to talk to you again. Thank you.

Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.