Welcome to the NICE Conference Call discussing Third Quarter 2020 Results, and thank you all for holding. All participants are 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 12, 2020. 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 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 3 of the company’s 2019 annual report on Form 20-F as filed with the Securities and Exchange Commission on April 6, 2020. During today's call, we will present a more detailed discussion of third quarter 2020 results and the company's guidance. 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 revenues 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. I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. We are pleased to report a very strong Q3, driven by continued rapid acceleration in our cloud business. Cloud group grew a record 35% and now represents 50% of our total revenue, which is a major milestone for NICE. We also reported 10% sequential growth in the cloud, compared to Q2, and we already surpassed the more than $800 million cloud revenue run rate that we had expected by the end of the year. This strong cloud performance underscore the solid quarter overall with total revenue increasing 7% to $412 million. Operating income was $117 million, which was an increase of 10%, compared to Q3 2019, and operating margin increased 95 basis points to 28.3%, compared to Q3 last year. These strong operating results led to an 8% increase in earnings per share to $1.41. Additionally, operating cash flow increased 20% to $99 million in Q3, compared to the same period last year. The acceleration in our cloud growth is being driven by several factors, including substantial growth in new customers, rapid adoption by large enterprises, new verticals that are now more than ever embracing remote service and digital transformation that has become front and center for organizations of all sizes. The strong demand for our cloud solutions from new customers can be seen by the large number of new logos we continue to sign each and every quarter. In Q3 alone, we saw an increase of over 50% in new logos, compared to the same quarter last year. Many of these new customers are coming from the continued rapid adoption of our CXone cloud platform. Enterprises in all segments of the market around the world recognize CXone as the clear market-leading cloud platform to help them deliver on their cloud and digital transformations.…

Thank you, Barak, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the third quarter of 2020, as well as our outlook for the full year 2020. Total revenue for the third quarter reached $412 million, an increase of 7% from $387 million in the same period of last year. Total revenue growth was led once again by our remarkable cloud performance with a record growth of 35%, reaching $204 million and already exceeding the more than $800 million cloud annual revenue run rate that was expected by year-end. The sequential cloud growth between the second and third quarter of 2020 accelerated to 10%, compared to 6% last year. Another milestone for NICE was cloud revenue reaching 50% of total revenue compared to 39% last year. As a result of the strong cloud growth, recurring revenue continued to increase and accounted for 81% of total revenue, compared to 74% last year. Product revenues accounted for 9% of total revenue in the third quarter, and service revenues accounted for the remaining 41% of total revenue in the third quarter. Moving to our business breakdown. Customer Engagement revenues for the third quarter were $337 million, a 7% increase over the same quarter in 2019, and represented 82% of our total revenues. Financial Crime and Compliance revenues for the third quarter were $75 million, an increase of 4% and represented 18% of total revenues. Looking at geographies, Americas revenues grew 10% to $343 million in the third quarter. Revenues in EMEA were $44 million in the third quarter compared to $47 million last year, and APAC revenues in the third quarter were $25 million compared to $27 million in the same period last year. We continue to see strong leverage in our operating model,…

[Operator instructions]. And your first question comes from the line of Shaul Eyal from Oppenheimer.

Thank you. Hi, everybody. Congrats on another solid set of results and on guidance. Barak, I actually want to start with the CXone and the way NICE is capturing significant wins within larger enterprises. I know you’ve mentioned some of the drivers. Can you also elaborate kind of some of the verticals I think that you’ve mentioned in your prepared remarks? And does it require a longer sales cycle from prior quarters or pretty much are you seeing the same acceleration trends that we had been seeing over the course of the past few quarters because the numbers definitely suggest that? And then I have a follow-up.

Thanks. Shaul. Yes, so, indeed we see a great adoption of CXone and acceleration in the adoption. And as I've mentioned, it's got some variety of reasons and one of them is the increase of adoption in both large enterprises as well as some relatively new verticals. They are not new to customer service, they are new to the adoption. And I would say that the two main reasons for that is, first of all that there are large enterprises getting to the point of simple realization that the time has come to accelerate their move to the cloud. COVID accelerated that realization. It's not related directly to COVID, but just the experience they went through. The second thing they realize is that they are really stuck on their innovation, as long as they stay on either their on-premise provider or even is some of those on-premise provider migrated them to a semi-hosted solution, it didn't solve their innovation cycle. We're a native cloud solutions that provide that. CXone has both the scalability and the completeness that is really required by those large enterprises. It's the only platform we believe that has those features and capabilities to cater to this segment of the market. And the other thing that they're experiencing is that, even when they start small, if you’d like, the move is very, very fast, unlike what they've experienced in the past with the migrating from one on-premise solution to another on-premise solution. So, that is accelerating. At the same time, as I said at the end of my opening remarks, we believe that even with the current adoption, we’re just at the beginning, and that is accelerating and there is a long runway over here.

Got it. Got it. Thank you for that elaborated answer. Barak also a question on the Public Safety, pretty much you’ve discussed that, kind of you’re kind of bringing that all those capabilities back to life. You mentioned that in your Analyst Day. So, can you provide us with a little bit of an update? How was recent months, even again, the recent quarter, in that respect, anything you can share with us, shed more light on that activity?

Yes. We're very happy with the progress what we see in the Public Safety. As a reminder for the rest of the forum on the call, it's a market where NICE -- we are operating in this market for -- actually for 30 years and we offer to -- we have a very large customer base, but our solution used to -- or focused on a very niche solution or one product in this market. And what's happening in this market in the past year plus, is that it is going through very similar theme. We've seen other markets, specifically digital transformation, and that opened our eyes with different technologies we brought into this market that, A, we can significantly broaden our footprint for public safety organization but also expand from -- we are mainly in policing and these days we are expanding due to the offering of Investigate to the wider aspects of the overall criminal justice system, all the way from defense, court, prosecution and of course policing as well. So, we're very happy with the progress. We see great traction for this solution, by the way, both in Europe and in the U.S. and even to a certain extent in certain places in Asia. And we think there is something that is relatively mid-sized at the moment, but it can go to become something very significant.

Your next question on the line comes from the line of Daniel Ives from Wedbush.

My question is in terms of acquisitions. Can you just talk about your appetite there specifically on cloud, given the strength you're seeing? Thanks.

Yes. We continue to obviously to be very active on the acquisition front. At this point, we believe that we have all the components that we need in order to execute on our strategy. But at the same time, of course, we will not be shy from augmenting our execution with some relevant acquisition. I believe we have, as a company, a good track record, not just about acquiring but also about integrating, which is the key thing on acquisition, and we have done well in the playbook that we have for acquisition. So, we remain very active. I can't say that the market is different now from where it was a few months ago. But since we have the strategy in front of us and that's what will drive acquisition, we definitely have the capital if we need to go ahead and do something, and we'll continue to monitor on that area.

Great. And then just in terms of conversations with customers, could you maybe compare, in terms of the cloud appetite today versus even at the start of the pandemic when we go back to March and April, maybe compare and contrast in terms of different conversations you're having?

Sure. I think that the conversation has, I would say, similar nature to the beginning of the year before the pandemic. But the sense of urgency changed. So the fact that the organizations already took a decision that they want to move to the cloud is not new, before and after the beginning of the pandemic. What changed, I believe, is the sense of urgency and the timeline they are providing, that’s the same reason I mentioned on the previous -- on my previous answer to question on that front. So just higher sense of urgency to that. It's more about, how do we do it? What -- how fast we can do it? And it's not a question about if we do it.

Our next question comes from the line of Scott Casher from Bank of America.

You've hit it on a little bit, but how sustainable is this cloud revenue growth? And looking at your pipeline and market activity, do you think there is room for more acceleration here?

So first of all, we're, of course, very pleased with the 35% growth we provided for the quarter. And generally, this year, we saw an acceleration in our cloud growth. We have -- we'll provide our next year guidance only in February when we report our Q4 earnings, and then we'll provide some insight as to next year. But in general, we feel confident both for next year, as Beth said in her remarks and also for Q4, for sure. But also moving forward, we believe this is area of growth for us. And that's exactly where we will we see a change in the size of the market, the addressable market. When we talk about the market that is $6.5 billion today and going to $17 billion, this entire growth is cloud. This is a market that is going through a cloudification. So the opportunity is there. Of course, it's for us to continue and execute, and I believe that it will execute as good as we have executed in the past two years. There is an opportunity to further go with that. We need to remember, in our industry, in the CCaaS business, we are the largest player by far, twice the size of our next competitor and reporting a higher growth rate. So the runway is there, and it's all about execution right now.

That's very helpful. And then just one more, if I could. It looks like you saw some declines abroad. What are the market dynamics in EMEA and APAC right now? Is this more macro weakness? Or do you need to educate the market about CCaaS and invest in your channels?

Hi, Scott, this is Beth, and thanks for the question. As we look on the markets outside of the Americas, today, they are still more on-premise and license-based regions. So we're quite excited about the growth and the expansion we have of our cloud business. In fact, we've seen really a very strong year-over-year growth in cloud revenues coming from those regions. But to-date, you are seeing more a reflection of the variability, which we see from time to time in those regions, given the impact of the license-based business. We're excited about all of the partnerships we've created in the last 12 to 18 months in those regions, and we're driving additional business. But of course, cloud revenue takes longer to really be demonstrated in the revenue. So the markets remain healthy for us, and we're excited about the cloud opportunities ahead for us in those markets.

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

This is Chris Zimmer on for Tavy. Actually, what I wanted to ask has already been asked, but I will follow-up with -- you mentioned in your opening statement about partnerships. And I was wondering if you could expand on the evolution of the partner channel for the CXone and X-Sight platforms?

Okay. Thanks for that. Yes, a key pillar of our strategy is forming more and more partnerships, and that's not new. It's something we have started several years back. And today, the size of the partnership that we have, both in terms of the number of partners as well as the volume of business with those partners is very substantial part of our business. And it's also a key success factor as we go and expand into international markets, as Beth mentioned before, and we reported in the past few quarters on some key partnerships that we have signed and we're very happy on the performances of those partnerships. It is true for both CXone and X-Sight. CXone has more mileage, so it has more partners. But X-Sight is starting to gain also a lot of momentum with partnership as well as Xceed, which aim into the mid-market of the Financial Crime and Compliance. And lastly, I will say that we are very happy also with the technological partnership on the different marketplaces that we have on all the different platforms that we have. It creates a very strong momentum, both technologically, for customers, but there is also a lot of go-to-market opportunities with these many dozens of technological partners.

Your next question on the line comes from Samad Samana from Jefferies.

Beth, I want to follow-up on the really strong cloud performance. It was very impressive, and maybe just want to peel it back just a little bit. So can you maybe breakdown how much of the strength was pure CXone versus increasing contribution from X-Sight and some of the other cloud offerings on the Financial Crime and Compliance side of the business? And I have a follow-up to that as well.

Sure. Thanks for the question. And as you look at our strong cloud performance, we've been highlighting every quarter that more and more of our growth in the cloud is coming from multiple arenas. If you look back a year ago, really, our growth was being driven predominantly by CXone in the Americas. And while that's still a significant driving force today, of course, as I've mentioned, we're seeing growth rates in double and triple-digits across our other business units for Actimize for Public Safety for the regions. Of course, in terms of absolute dollars, they are not as large as a contribution. So CXone today is still predominantly driving that growth. But again, as I highlighted, we're seeing very good signs as we start to build out that cloud expansion and our other business units as well as other regions.

Great. And then, Barak, maybe a question for you. It's exciting to hear about the 80% plus conversion for CXone@home. I'm curious if you could share any characteristics about those customers. Are they generally larger than your existing installed base? Are they on the smaller side? Are they -- or is it getting you into new geographies or new verticals? Just curious how much that's widening the aperture for NICE and who they can look at?

Thanks for that. I'm trying to think because it's -- I must say it's across the board. I can't characterize it on a specific territory or a specific vertical. It's across, actually, multiple verticals. We have this success, both internationally and domestically and also different sizes. I think what is common to all of them is that they've experienced the need to move to work from home, and they hit a wall on the limitation they had with their on-premises or hosting solutions from other providers. And that came exactly on the right time for them. So they tried it. And just in a matter of days, they realized this is the right solution. So the common thing is just a matter of the how outdated their legacy solution is. Other than that, it's across -- it's all over the place from a vertical segments and size.

Helpful. And Beth, I'm going to break the rules, I'm going to squeeze a third question. And just given NICE has such a broad view across so many verticals, I'm curious if you think about some of the challenged verticals that you serve, maybe more in the hospitality, travel, retail, are you starting to see improvements there? Are you starting to see customers bring back service agents? Just anything you could give us qualitatively or quantitatively that shows what's happened there trend-wise inside of the installed base, that would be helpful?

Sure. I think we've highlighted in past quarters that -- and Barak highlighted today in his discussion around -- we are fortunate to really be driving a lot of growth and acceleration from certain verticals, which are in the government sector and really kind of new breed technology companies. So this is really fueling and further accelerating the growth we're seeing in the cloud. In terms of challenged verticals, I'd say we did see some initial slowdown, as expected, from the result of COVID. We've seen kind of a flattening in terms of those verticals. And certainly, we're optimistic as we hear positive signs in the market and optimism that those are opportunities for fueling further growth as we go into 2021.

Maybe just to add to that, Samad, and those verticals that you referred to, hospitality, travel, were not a very strong verticals for us before, it’s just a matter of size for us. But surprisingly, one of the deals -- I think the first deal I mentioned in my opening remarks was one of the largest hospitality operators in the world. That was obviously impacted by COVID, but decided to take the opportunity at this time and replace their in -- their on-premise providers with CXone. And generally, customer service, it's front and center for every organization. So even if there are some more challenges with their business, it's an area that they want to continue to excel in.

Your next question on the line comes from the line of Ryan Koontz from Rosenblatt Securities.

Congrats on the strong cloud growth there. You've clearly seen success in moving inContact up markets, and as you do that, I wonder if you're seeing any changes in the low end of the enterprise and the mid-market space. I'm wondering if new entrants there from some of the UCaaS players are starting to impact the competitive market or pricing in that segment?

Thanks for the question. So obviously, as I said, we see success across the board, but we are very excited about the adoption, the increased adoption of large enterprises. This is where we believe the opportunity lies ahead. But at the same time, we're not neglecting the mid-market and the SMB. We have a very strong offering, a very good go-to-market capabilities, and of course, a very wide network of channels to be successful in this market. So we are highly segmented in the way we run our go-to-market and with the way we run our services post the deal. And of course, we know how to continue to do that. And we don't see any different dynamics in those segments.

Our next question on the line comes from Sanjit Singh from Morgan Stanley.

Congrats to the team on hitting 50% of cloud mix, it's really great to see. Barak, maybe talk a little bit about the conversion on CXone. It's been 80% for the past couple of quarters. Can you give us a sense of how strong a funnel that is in terms of driving either new logo acquisition or even potentially driving some of these larger ACV deals that you're signing?

So first of all, this quarter regardless of -- separate from CXone@home, this was one contributor. We're very happy with the number of new logos overall. CXone, of course, is one of them, but we grew 50% on new logos acquisition versus Q3 of last year. And CXone@home is one of those contributors. The way I look at CXone@home is one of the vehicles that we have as kind of a lead generation. It's very effective lead generation. Customer comes over, they can try it very, very fast. In a matter of day or two, it's up and running and at their disposal, live in production. And it saves a ton amount of time and effort in the sales process. So call it a very effective piloting program or a trial program or however you want to call it, it's just very, very effective vehicle. And by the way, in the course of doing that, we're very proud also to help some organization at the time, back in May and April, where they really, really needed that support. So we just continued the program and it created great momentum in our pipeline. But as I said, it's one of the elements out of many.

Yes. And if I could just follow-up, Barak, on that point, and we think -- I mean, 50% is a pretty outstanding number. And it seems there's multiple elements at play. I think what's particularly impressive is that large enterprise customers, your traction on that side of the market is doing great there as well. So are you guys getting better at sort of online customer acquisition? Is the sort of pace of decision-making, in terms of converting the pipeline, increasing? What are the things that are changing today versus last year that's driving that increased velocity in the new customer acquisition side?

So it -- I will give it a few factors. Firstly, in general, as I said, race into the cloud by a lot of enterprises that they would like to move and move much faster versus a year ago. Second is the expansion of our go-to-market. We have more go-to-market resources, more go-to-market capabilities. And as I said, both domestically and internationally, while the revenue internationally, you yet see that. We actually have strength in those areas as well which will eventually also become more pronounced in the revenue as well. So all of those are key contributors. The beauty about all of those new logos is, even if we land such a customer and they are starting relatively small, even if they are a big enterprise and decide to start small in one department or one area, once you've landed in this customer, and of course, if we're successful and customer satisfaction is high, and that's our intent, of course, the opportunity for expansion and growth with that customer is very substantial. And I mentioned, in my opening remarks, a lot of some large -- a lot of large deals that will have follow-on expansion deals from new logos that got acquired a year and two years ago.

Your next question on the line comes from Rishi Jaluria from D.A. Davison.

And nice to see continued acceleration on the cloud side. I first wanted to go back to the CXone side of the business and ask about sustainability. But not sustainability of growth rates, but thinking just about maybe the sustainability of the tailwinds that you've seen as a result of COVID. As we think about post-pandemic, especially with visibility into a potential vaccine, how are you thinking about those tailwinds going forward? Is there maybe even a replacement opportunity as those reopenings of offices, to replace the legacy on-premise and increase of velocity of those replacements? And maybe expanding that question a little bit more, as you're talking to your customers, especially the larger upmarket ones where you have some nice traction, what is your sense for their post-pandemic playbook? Is it a kind of back to business as usual when it's safe to do so? Is it going to be a hybrid environment and contact centers not running at 100% capacity with some remote work options? Maybe walk us through that, and then I've got a follow-up.

So it's kind of, I would say, several questions. I'll try to answer. The first one is, as I've mentioned and we mentioned in the past few quarters, quarter-on-quarter, we benefited from the reaction to COVID because it accelerated decisions with many of our customers and prospect. On the flip side, we don't see the negativity or a negative impact on our business, when hopefully, there will be a vaccine and we will all be out of this COVID situation. On the contrary, we believe that those insights and realization and experience the organization had during the pandemic will further accelerate the cloud even post the pandemic. So we don't see, if I can call it, a negative reaction to our business as the pandemic clear out. With respect to what we hear from customers about their thoughts moving forward. It's an interesting question, and we have this dialogue with a lot of customers. Customers come to us to consult and ask if we know what others are doing and et cetera. What they really want to know from us these days is they would like to get our analytical tools, two things. First of all, to understand the real productivity of their people who are now working from home for the past 7 to 8 months. They're all working from home. There is a sense everything is okay. But different things like the customer experience, engagement, effectiveness, et cetera, is something that now increased the consumption of analytical tools. And you heard again many of the analytical deals -- analytics deal we had in the quarter, that's one thing we have from customers. And the other side of it is implementing those tools as they understand that that's work from home, either in a hybrid mode or just working from home is here to stay potentially, and they want to make sure that those environments, the working-from-home environment is as effective or even more effective than they have versus working from the office.

Got it. That's really helpful. And then just a quick follow-up. As we think about the traction that you've had with the ecosystem and Marketplace, right, with CXone, and then now you're building out this X-Sight marketplace. Can you speak a little bit about kind of the longer-term vision for the Marketplace? And maybe the potential monetization vectors there?

So I think there are 3 layers to the value we see in the marketplaces. And as I said, we use the same playbook in CXone, in X-Sight and in Evidencentral, which is the platform for the Public Safety. And for CXone for sure and X-Sight, we are already at the point where there is a scale to that network, and it's part of our go to market, and it's part of the cadence of customers to navigate through this ecosystem as they are looking to further expand and onboard additional capabilities on top of either CXone, X-Sight or Evidencentral. So we are very happy with that. So the first one is value to customers. The second thing is we do see -- we're already starting to execute on some monetization opportunities. And the monetization has, I would say, a variety of options in there enriching the data in our systems and then monetizing on this, and I mentioned a bit on that on the X-Sight part. But also certain charge that we can have on advanced integration. And also resell opportunities and referral opportunities that we might get from this network that are very eager to leverage our go-to-market. These are the opportunities that we see on this. And I would say the third layer is actually a great way for us to explore M&A opportunities. We can, in real time, see who are those players that are very successful, who gets traction beyond [slideware], but actually in real life, and that allows us to have a better -- a more better qualification for future acquisitions.

And your next question on the line comes from the line of Walter Pritchard from Citi.

Two questions. Just one, first, on the license side. There was, I think, a notion last quarter that you might -- you've seen some license deals maybe deferred and you might see that come back. I'm wondering how you're thinking about license, especially as you move into next year? And then I had a follow-up.

Thanks for the question, Walter. As we look at the license side of the business, I think what we've seen in both Q2 and Q3 was generally as expected. We have had some headwinds coming on the license side of the business. And as we look forward to the fourth quarter, I think we expect a bit more of the same in terms of some of that compression on the license side. And of course, the -- on the flip side of that, the momentum we have seen on the cloud is continuing to be strong, and we have ongoing momentum there. As we look a little bit further into 2021 on the license side of the house, I think that it's a year with new budgets coming into play and obviously, some optimism around a potential vaccine and what that means on a broader scale. So we believe we'll likely see some stabilization on the license side next year. And certainly, as I mentioned, on the cloud front, we expect that to continue to be really the strong growth in the fourth quarter as well as looking into next year.

Great. And then just on a margin question. You've made good progress on gross margins generally in the cloud. I'm wondering how is the larger enterprise mix within cloud impacts gross margins? I know sometimes those customers don't bring their own telephony and they're just larger deals, so they may have higher gross margin. But how should we think about it as you see continued migration of that cloud mix towards larger customers, what the margin impact is at the gross level?

Yes. I think you hit the nail on the head, really, which is that, that's very true that as we go into the larger enterprise, they do often have their own telephony. And of course, we see them buying more of the suite across our cloud platforms, whether it be CXone, Public Safety or Financial Crime and Compliance and the X-Sight platform. So it's really a common theme that, as you're going into the large enterprise, they're buying more of the software and the analytics which is really coming at the higher-margin profile relative to the telephony piece of the overall deal. So we are seeing that it has a positive impact, and that's one of the factors that has contributed to the NICE growth you've seen in the cloud gross margin year-over-year. I mean we've had almost a 400 basis increase year-over-year. So we expect to see more of that over time and that ongoing trend to be in place.

There are no more questions in the queue at this time. And now I'd like to hand the call back over to Barak. Please go ahead.

Thank you all very much for joining us, and have a nice day.

Thank you to all our speakers. That concludes your conference call for today. You may disconnect. Thank you for joining, and enjoy the rest of your day.