Welcome to the NICE Conference Call Discussing Second Quarter 2021 Results, and thank you for holding. All participants are at present in 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, August 5, 2021. I would now like to turn the conference 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; and Beth Gaspich, Chief Financial Officer. 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 2020 Annual Report on Form 20-F as filed with the Securities and Exchange Commission on March 23, 2021. During today's call, we will present a more detailed discussion of second quarter 2021 results and the company's guidance for the third quarter and full-year 2021. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from Generally Accepted Accounting Principles as reflected mainly in accounting for acquisition-related revenue and expenses, amortization of intangible assets and accounting for stock-based compensation. The difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. We are pleased to announce an excellent quarter marked by an acceleration in all our key financial metrics. Cloud revenue continues to flourish with 32% growth, while total revenue continued to accelerate well into the teens increasing 60% year-over-year. During this acceleration, driving this acceleration is our story in consistent execution in cloud during the past five years. Unlike traditional cloud transitions that are focused on simply switching customers from license to subscription model, our overall revenue growth is accelerating due to a combination of [technical difficulty] to our cloud business. First, net new cloud business in CCaaS, digital and self-service, solutions that we did not previously offer in the on-premise model. And second, cloud conversions of our existing on-premise products resulting in higher annual revenue per customer. As our cloud revenue continues to experience rapid growth and is becoming a larger share of our total revenue, we expect that the acceleration in the growth of our total revenue will continue over the next few years. While the cloudification of our market continues to speed up, we are experiencing another major opportunity in the CX market as it expand to full digital CX. And just like five years ago, in cloud, NICE is well-positioned to take on and grow its leadership position with yet another great market opportunity in digital. Back in 2016, we made a major strategic transformation at NICE by making an aggressive move to the cloud with the acquisition of inContact. It was a strategy to capitalize on a rapidly changing market, a market in which enterprises of all sizes were beginning to shift to the cloud. Customer service organizations were exploring the cloud for its agility, pace of implementation, elasticity, scalability and overall lower total cost of ownership. At the…

Thank you, Barak and good day everyone. I am pleased to provide the analysis of our financial results and business performance for the second quarter of 2021 and provide our outlook for the third quarter and full year. Our second quarter financial results were excellent with 16% year-over-year growth on the top-line, a 32% increase in cloud revenue and further improvement in the cloud gross margin which is a testament to the scalability and efficiency of our cloud business. Total revenue for the second quarter reached a record of $459 million compared to $395 million in the same period of last year. Total revenue growth was again driven by impressive cloud revenue in which its relative share of our overall revenue continues to increase and stood at 54% of total revenue in Q2 Product revenue represented 10% of total revenue and services revenue represented the remaining 36% of total revenue. We exited the quarter with an annual cloud revenue run rate of more than $1 billion. Our cloud business is expected to continue to thrive as we further penetrate the market, continue to add new logos and convert existing on-premise customers to the cloud in which the conversion typically results in a significant uplift in annual contract value. Our recurring revenue increased to 82% of total revenue in the quarter compared to 80% last year. Our cloud revenue is primarily being driven by CXone in all segments of the market with market momentum shifting to digital and self-service. Our new solutions, CXone Expert and CXone SmartReach, were both significant in winning some of the key large enterprise digital deals in the quarter. The Americas region today is still our primary market, which represented 80% of total revenue in Q2 and which grew 15% year-over-year. We are continuing to see more…

[Operator Instructions] Our first question comes from Samad Samana from Jefferies. Please go ahead.

Good morning and thanks for taking my questions. It’s great to see the cloud results. Barak, maybe we'll kick it off the top and it feels like you’ve talked a lot more about digital and your efforts there this quarter. And I'm curious - if you think about the up-market success that you're seeing? How do you feel about digital as far as expanding maybe the average deal size as you attach that more and more frequently? And is that making larger enterprises accelerate their shift to the cloud?

Yes, thanks for the question. So as I said in my earlier remarks, this shift or expansion actually that we see to digital is both what we view from our customers, as well as what we put as our strategy a couple of years ago. And we've been executing in the last few quarters both organically and through acquisition. First, I would say that we believe that the leadership in CCaaS. If you remember, when we stepped into CCaaS, we have converged CCaaS, WEM and analytics and became a leader with CXone with that. And today, we believe that the future is by converging that with digital, that's what we hear from our customers, that's what they want to see. In terms of the potential, it's enormous. If you think of CCaaS and the way we think about it, its technology that is supporting and connecting consumers to contact center agents. The beauty of digital and self-service that if it is done right, it can actually eliminate the need for the agents and a cost of an agent today is about $50,000 a year on average. It can get up to that level. So, in the industry, there are 15 million agents. And by the time – we’ll, when we get to a point that we can start reducing this number by moving into digital and self-service, you can easily calculate the potential of this market. Needless to say that in order to do that, you need a full suite of the offering combining CCaaS and full digital CX and I talked about the notion of organization wanting to see the next generation of digital CX versus the first-gen solutions. So, if you take all of that, what we see is that in those deals that I spoke about, it increases the volunteer for us quite dramatically and definitely at the high end of the market. And we believe that will continue to see the, trend as both the cloudification of our market together with digital CX are starting to accelerate.

Great. And then - just maybe as a follow-up, I have to ask there's obviously huge news in the industry with Five9 and Zoom announcing that their planned it to merge together. So I'm just curious on maybe what you think the - what the implications are for NICE and what you see as an opportunity coming out of that potentially or how you think about NICE’s positioning in the market as a consequence?

Yes, so first, I'll say one thing we can - one insight from this particular transaction is that we say what we said all the time that the potential in the customer engagement market is huge. Usually, large players don't step and don't acquire into markets that do not have a big TAM. I think that particular transaction - as well, as others represent the potential of the future TAM, the current and the future TAM of this market. So that's one more proof point to that. The second, if you’d like, lesson learned from that is that anyone that have the desire to organically build and develop into this market, it’s too late. It's a highly complicated, feature-rich market that requires a lot of domain expertise. And in order to build and be competitive in this market, the only way for someone to get into this market is to buy into this market. And there aren't too many players in this market and actually, Five9 were not a leader and the Gartner MQ and them being taken out by a video collaboration or video collaboration player is actually good news for us. The last one, going back to what I said on the call, we believe that in order to win the customer engagement market, the direction and the need from customers is to offer full digital CX offering that includes CCaaS, workforce engagement, analytics and AI digital and self-service. That’s what we were building in the last 18 months and this is where we see the success today. In this particular transaction I don't think Zoom is giving a size in any of those assets. I don't see how it solved their problem. So quite frankly we're happy with the upcoming disruption to them and we believe we have a very solid position both with our offering as well as many other partners that we have. And we do great business together.

Great, and then maybe just one for you Beth and then I'll turn it over. Just the cloud revenue was really impressive, staying well above 30% even as the comps got tougher. Can you maybe just - I know get total revenue guidance, can you maybe just help us understand in shorter term how we should think about the linearity of cloud revenue growth. I know the company is given longer term guidance, but just I sure thing about the short-term cloud revenue growth trends?

Yes, thanks for the question Samad. So, as you've seen we've been consistently delivering a really healthy growth in our cloud business. Looking on the first half of the year gave us confidence obviously on the visibility in line of sight looking forward. We remain really optimistic in a good place so with respect to cloud revenue looking forward. And as you know we don't give specific guidance with respect to our cloud. But I can reiterate what we've shared already in the past which is that if you look over the next few years we're confident that you know we'll see a 25% growth or higher. And in the current year we're comfortable that we’ll be in excessive of the 25% growth.

Our next question comes from Pat Walravens from JMP Securities. Please go ahead.

Thank you, and congratulations. Hey, Barak, back to this sort of the - how the industry is changing question. I think I have sort of a two-part question. Part one is how important is it to have the call center software riding directly on top of the global communications infrastructure, so that would be the idea I guess, with Five9 and Zoom? And then people say that's also part of the appeal of Talkdesk riding on top of Twilio. So, I’d love to hear your thoughts on that theme and whether that's really important or not and then also your thoughts on Talkdesk competitively?

So, thanks for the question. Most of our deals are not driven or combined with a unified communication, and for sure not with video collaboration. We haven't seen any traction with that. It’s a different buyer between video collaboration and CCaaS. The other thing that we're seeing and I've talked about it a lot in past quarters is that while there is some of that behavior in the lower end of the market. If you go up market, these are usually decisions that are taken separately. And also, the fact that in the higher-end markets, the needs from customers is much more about the expanding from CCaaS to a full digital CX offering with everything that I've mentioned before. It's a very feature-rich offering, very complicated, if you would like, sales cycle in that regard not because the sales cycle is complicated, because the type of transformation customers are looking for is significant. So, we don't seek too much of that and especially not to the higher end of the market. Specifically about I think, you asked about Talkdesk, right?

Right.

We don’t see them a lot. I think they are competing more at the lower end of the market. They are a much more smaller player as far as we know. They are a private company so we don't know for sure. But they are - we don't - they are not a leader in our market and it's one more competitor in the market that we see. The electing of course of all of the things we have done both organically into a position and completeness, if you'd like, of the suite.

Our next question comes from Tavy Rosner from Barclays. Please go ahead.

Thanks for taking my questions. I just want to speak a little bit about the transition to the cloud. So, I guess the first part of the question would be, if you can get a sense of, you know, what proportion of new revenues coming up from existing customer transitioning to the cloud as opposed to new logos? And I guess as a full on - I'm assuming that Nice sells a proportion kind of your entire customer base and try to convert them from on-prem to CXOne and I guess, do you ever get push-back from customers saying, you know listen, we are happy with our on-prem solution, it's working. No need for CXOne, at least no need in the near future. I'm just curious - sorry, just curious to get your perspective.

Sure. If you remember at my opening remarks, I talked about what I believe is the quite unique in our cloudification story for the company and we're not just a company that takes it's customer base and converting it to the cloud and basically reclassing the - doing the reclassification of its revenue. Our cloud transformation and you've seen it in the last few years and you continue to see it in a more pronounced way in the last few quarters is derived by two separate dynamics. First of all is us stepping into a market, the CCaaS market and now the full Digital CX market with new cloud solutions with the CXone platform that we did not previously offer in the on-premise. So for us it's a complete upside just new business not converting any existing revenue that we have. And that tap in to your question, that is the predominant the larger parts and the larger share of both of the revenue as well as the new business. It means that there is still a pretty long runway for us to continue to do that and at the same time to start and accelerating the conversion of the existing customer base that we have that are still on-prem. And by the way, when we do that in most cases we see a major uplift because A, even for like-for-like the annual revenue run rate from such customers will at least double, but if we managed to sell the full CXone suite, which is the case in many situation, the multiple is much more than just doubling. And to the last part of your question, whether we get a push back from customers. So I will say that today for most customers the question of, you know if they're…

Our next question comes from Rishi Jaluria at DA Davidson. Please go ahead.

This is actually Rishi Jaluria from RBC. Thanks for taking my questions. First I wanted to go back to the question on CCaaS and UCaaS that Tavy had brought up. I know you partner with some of the UCaaS vendors out there that white label CXone. So are there, I guess, some evidence of having the same buying center for UCaaS and CCaas, but maybe can you talk a little bit philosophically, do you not see any convergence of this over time as the partnership, the right strategy or what would need to happen in the market for you to consider having your own UCaaS solution? And then I've got a follow-up.

First of all, we have registered a lot of partnerships in variety parts of our ecosystem. UCaaS is one of them and we have one with RingCentral and few others than we are very, very happy with these partnerships. It gives us great expansion to our go-to-market and it's also allowing us to focusing on being leaders in CCaaS and someone like Ring to be a leader in UCaaS and video collaboration and both companies are doing extremely well and will continue of course to do that. At the same time, we think that the right investments for us is not to go in that direction and definitely not into video collaboration, but rather to do what the customers wants from us and this is to expand CCaaS to the full offering and expanding into Digital. I spoke about the opportunity before, that's what we've been doing in the last 18 months. I think that players that could not execute in that strategy, had to sell themselves and being taking out from the market and this is the right investments for the long run. That's what our customers need. This is what consumer preferences are in the customer service and customer engagement market. And this is probably the right use for our time both organically and also to the right acquisition strategy for us.

Okay. Great that's helpful. And then I just wanted to maybe drill down on the FCC side of the cloud business, can you talk a little bit about what sort of momentum or traction you're seeing on the cloud side there both with migration's as well as new customers? Thanks.

Sure. So as you've heard both from myself and Beth earlier, we’re very happy with what we are seeing with the Financial Crime and Compliance business. I spoke specifically by the way about the three very large eight-digit deals for this business. One of them is the largest in the history of the Financial Crime and Compliance division or business, so we're very happy with the momentum that we see there. And what we're starting to see in this business that is historically a very on-premise business, we are starting to see a shift to the cloud. We have yet to see it in the revenue, but we definitely see it in the booking. And it's divided into two parts of the market. One part of the market is the mid-market following the acquisition of Guardian Analytics, we now have the platform called Xceed is 100% cloud. For us, it's a pure upside because we did not have the right product nor the go-to-market to go after the mid-market, and that's exactly what we are doing these days with Xceed. So that's one area of cloud growth for Financial Crime and Compliance. And the rest of the business is just now starting its cloudification process, and we are starting to see that dynamic moving there. It is behind if you would like, versus the customer engagement business, behind meaning in its evolution to the cloud. But I would say it's where customer engagement was four years ago in terms of its cloudification cycle. But we are starting to see the acceleration and we are ready for that. And more and more customers are asking about it. And it's a great opportunity. And we also see them there in this business it's a great opportunity and we also see them there in this business, the ability to accelerate the business with the similar multiple I talked about in terms of the conversion from on-prem to cloud.

Our next question comes from Meta Marshall from Morgan Stanley. Please go ahead.

This is Dave Nwokonko on for Meta Marshall. So two questions from our end and thank you for the questions. First, as larger customers start down the cloud transformation path, what are you seeing as far as what will be the biggest hurdles to getting them to transition, whether that be security, complexity, scope of how to think about digital transformation? And second, as you - do you think you can maintain 25% cloud growth rate targets without larger customers really making a more meaningful move towards cloud? So in other words, can current channel support that growth? Thank you.

Sure. So let me - I’ll start with the first question the two obviously are connected. So you ask about what is the hurdle of cloud customers to move to shift to the cloud and you also ask about in the context of digital transformation. So my answer to that, I'm being asked this question numerous times in the last few years and it keeps evolving. A few years ago, you're right. It was about concerns about the cloud and the security and latency and ownership and things like that. Those disappeared. And we find ourselves less and less facing customers that don't want to move to the cloud or they have other reasons. And needless to say that in order for those customers to move to the cloud they need to gain trust in all the standard security, privacy and so on and so forth. And we support all of that as the market leader. But all of them I believe, understand all large enterprises that unless you move to a real cloud solution and native cloud solution, you don't gain the real benefit of the cloud, which is actually not even the economics and other thing. It's about the pace of innovation. And we actually see a wave of large enterprises that thought they have moved to the cloud and they basically went to the legacy provider and the legacy provider sold them a hosted “solution” which is called the cloud solution. And they didn't gain all of those benefits I've talked about including the pace of innovation, et cetera. And there is a better realization of these large enterprises that the real cloud solution is only cloud solution that is natively built on a public cloud, full feature rich, very fast cycles of innovation, and of course all the different security features and capabilities. So I think those hurdles are starting to disappear very, very fast. And the biggest hurdle for them today is mainly about managing the transition, justifying the economics in terms of past depreciations and things like that. And we support customers in that move. And that brings me to the second part of your question, how confident can we sustain and can we meet this at least 25% cloud growth in the next few years without the large enterprises. So I would say that large enterprises needless to say, are part of the equation of how we get to that. We see it happening. We don't believe there is a reason for large enterprises all of a sudden to stop a cloud adoption on the contrary, we think that post-COVID, it accelerated the realization of that need. So, we don't have that type of concern.

Our next question comes from Tim Horan from Oppenheimer. Please go ahead.

Thanks a lot, guys. There seems to be a lot of terrible products out there for digital interaction at this point. It seems like a lot of companies have the product. But - however, my experience has not been good anyway. Can you talk maybe a little bit about what percentage of the market you think has more of a cloud-based digital interaction? And maybe just a little bit about what you think your flow share is or market share on an incremental basis is in this market. Thanks.

Yes, it's a good view of the observation team. There is a lot of noise in what is digital, and let me try and help to create some clarity over here. So, if you think about the enterprise market, all enterprises or most enterprises already have some capability or a technology, or a solution to serve customers and consumers through digital channels. Whether that will be an e-mail, or chat, or synchronize channels and so on and so forth. But needless to say, we are all consumers. We are not very happy with the experience. I keep saying the type of experience we should get from our providers is the same as we have as we communicate with our friends and family. And from all the reasons, we don't get it today. The reason for that is that those joint gen 1 type of digital solutions that were adopted actually many years ago and still being adopted here and there is the Dell solution, they look at each channel differently. They don't have the breadth and depth and connectivity among the different channels. They don't connect well to the contact center. And while they might have some functionality of both, it's a very point solution that is address this thing in a very narrow way. What we have done after understanding the need from our customers in the last 18, 24 months, we have expanded CXone by making several technological acquisitions, as well as massive investment in R&D in that area to have the full capabilities on the one native platform, which is a CXone, which allows you to do exactly that to get the same experience you get with your friends and family with your service providers. And the secret sauce, if you would like over here is not just the capabilities, it's also the data. We have two decades of CX data that we mastered as well as the domain expertise. And this data is actually feeding the self-service, which is kind of the basics of digital. And that's what makes self-service works. There is an enormous amount of data that we have that enable us to train the self-service and to make digital work. That's a big difference. And this is what we see today where we interact with customers with large enterprises when we approach the start we have built, they actually understand, this is exactly what they were looking for, what they are missing in the legacy of the Gen One solutions. And an evidence for that is, as we said, 41% of the deals in Q1 had all or some of our digital capabilities.

So, it's an pretty incredible accomplishment, these products that you've kind of created. Do you think anyone is close to the features and functionality that you have at this point?

It's a highly fragmented market. And I'm separating here on purpose between capabilities and the data and domain expertise. You might find players there that might have the capabilities, but do not have either the distribution capability or the connectivity to something like CXone or they don't have the data which as I’ve mentioned it's something that we have. Thanks to being actually three decades in the customer engagement business. And it's a very significant differentiation that we believe that will serve as well as we can continue to progress into digital CX.

[Operator Instructions] Our next question is from Daniel Bartus from Bank of America. Please go ahead.

Thanks for taking the questions. I wanted to ask first about the financial crime and compliance business just at a high level. What is the benefit of having this along with the customer engagement business? And should you begin to separate these more or are they already pretty separated?

So we have these two businesses in the company. We're very, very familiar as an executive team with both businesses. And one of the greatest benefits we have mentioned, two among others, is that if you think about what I describe in the last three years and the evolution and the journey and how we transformed the customer engagement business, it's actually very similar to what we’re doing, what we have done and what we are going to do in the financial crime and compliance business, it’s the cloudification. This business has a ton of opportunity given digital banking and the digital disruption in financial services, and the whole notion of AI analytics. So, we are sharing a lot of the platform which allows us to accelerate quite nicely. Actually, the fundamental of CXone are helping us a lot with X-Sight and that's one great thing. The second thing is that while the customer engagement business is not just for financial services. We are very strong in the financial services vertical within customer engagement. And with many of the large banks, they enjoy very much to have one vendor provide both in terms of relationships and the brand. And lastly, there are multiple use cases where information in the contact center is being used in our platform to improve the detection of a fraud and providing some unique capabilities that many other fraud or anti-fraud, provider do not have.

Okay, great. Thanks for entertaining that, Barak. And then, maybe just a quick clarification for Beth, I think the guidance for the full year implies 11.5% growth this year. And I keep hearing the language of you guys expect to accelerate that going forward. So, is it right to assume 12% or more growth for 2022 and 2023, or am I - am I reading into this a little too much? Thanks.

Yes, thank you for the question. So, you're correct that we've just recently revised and increased our full-year guidance with 11% growth expected at the midpoint of our guidance for 2021. And of course, given the health that we've seen in our cloud business this year and in prior years as well as well as really the increasing kind of predictability and visibility we have on a go-forward basis. That combined with the mix that we're seeing changing to become more and more cloud centric with cloud actually reaching a high this quarter of 54% of our total revenue. We expect to see those trends continue. And so in short that means yes. As we look on the annual growth of our total revenue we do expect that to be something we see annually in the future as well that that top line growth for total revenue will continue to accelerate.

Our next question comes from Tyler Radke from Citi. Please go ahead.

I wanted to start with just a higher level question just as you think about kind of the return to a lot of these call centers getting back in person. Do you think that's a catalyst for accelerating investments, obviously - the trends around the hybrid workforce in remote work were strengthened in many ways in looking at the call center solutions? But just kind of curious as things reopen up in years where you've seen that - if you've seen that play out as a catalyst as people kind of go back to full in-person?

Yes it's a great question and it’s a kind of - it continues to evolve but remind you that March of last year where all of those contact centers virtually overnight had to move, actually move virtual to work from home. We're talking about 15 million people that almost together went to work from home and not from the offices. And that was the first kind of shock for a lot of those contact centers realizing that actually it's very hard for them to enable it. If they don't have the agility and the solution like cloud, et cetera which accelerated, as we know, the shift of this adoption. So that was the first part. And since then we've been seeing a lot of those organizations, indeed, accelerating understanding that they need to be more flexible in the future because there is a lot of uncertainty whether it will be a full comeback to the offices or kind sort of the hybrid. So it started with the basic of the ability to work from anywhere. But then if you have your employees work from anywhere and starting to raise other thing that requires our technology, how do you monitor the experience, how do you monitor the cost, how do you allow more agility and flexibility to the work for especially the younger generation. So it allows us to expand quite significantly our offering to many of our customers and support them with that need. From this point on the type of conversation with our customers, it’s exactly as you suggested. It's about supporting full hybrid. And at the same time having more analytical capabilities in order to monitor the level of experience and how this move between back and forth from office to home is working. And needless to say, cloud, so it's accelerating all the above and we believe this is here to stay regardless of how long the coverage will stay with us. Hopefully, not for long for COVID, but it's basically accelerated things we felt will happen in few years down the road and they're happening now.

And if I could ask a follow-up for Beth and apologies if you covered this in detail I've been popping around a few earnings calls this morning, but just wanted to unpack the second half guidance a little bit. It looked like a pretty strong raise across the board, but just trying to see if that raise was mainly coming from cloud and any type of further breakout you should give us, how to think about kind of the moving pieces in revenue that are implied in your outlook?

Yes, sure thanks for the question. I think I've talked to - about it a little bit but I'm happy just to kind of emphasize again. I think looking on the second half of the year comes on the back of a really strong performance this quarter. And of course, a strong performance in the first half generally, that gives us greater visibility looking forward into the second half of the year as well. We've seen growth rates both on top and bottom line in the teens in both Q1 and Q2 of this year. And given kind of the strong level of confidence we have, we're increasing the midpoint of our revenue to by $35 million in terms of the total revenue guidance for the year. And so, we feel really positive and that we've set great healthy targets for the full year that are both in the teens with midpoints around 11%. And of course, the revenue is mostly continuing to come from the confidence and the health we've seen of our cloud business and specifically CXone is a continued driver in that growth.

This concludes our question-and-answer session. I would now like to turn the conference back over to Barak Eilam for closing remarks.

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

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.