Welcome to the NICE conference call discussing first quarter 2022 results, and thank you all for holding. [Operator Instructions]. As a reminder, this conference is being recorded May 12, 2022. I would now like to turn the this call over to Mr. Marty Cohen, Vice President, 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'd like to point out that some of the statements made on this call will constitute forward-looking statements. In accordance with the safe harbor provisions of the Private 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 2021 annual report on Form 20-F as filed with the Securities and Exchange Commission on April 5, 2022. During the call, we will present a more detailed discussion of first quarter 2022 results and the company's guidance for the second quarter and full year 2022. 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. We'd also like to remind you that we are hosting our virtual Investor Day on May 24, in conjunction with our Interactions Live user conference. The program is for analysts and investors, and it will include presentations from NICE executives and product and technology sessions. If you haven't received the registration e-mail, please e-mail us at ir@nice.com. And I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. After a very strong 2021, a year in which our business significantly accelerated, we are happy to report that our momentum continues into 2022 as reflected in our outstanding Q1 results. Total revenue increased by 15% and cloud revenue grew 28% year-over-year. We continue to drive excellent top line growth and at the same time, further improve our unmatched profitability as demonstrated by a 16% increase in operating income, 17% growth in EPS and continued strong operating cash flow with a record of $193 million generated in Q1. These stellar Q1 results reflect the strong and durable demand for our solutions. The total value of 7-digit deals increased 93%, the average value of these deals grew 52% and the total deal value of competitive replacements increased 113%. In addition, our enterprise customers highly value the power of our platform with tightly integrated solutions as reflected by an 89% increase in CXone add-on new bookings. Moving forward, the pipeline reveals a similar story. Our pipeline is at an all-time record, growing 55% in Q1, and moreover, we are witnessing a strong and increasing pipeline in multiple verticals that are back to or greater than pre-COVID levels. What set us apart from the rest of the industry are 3 driving forces: our widening leadership in the large enterprise market, our industry-leading international footprint and our unparalleled next-gen digital and AI offering. Starting with our increasing leadership in large enterprises, it is far and away our domain. From our vast experience in this market, we know there are 2 key elements to winning the enterprise, having a fully integrated and complete enterprise class platform and the ability to deliver complexity at scale. We see a clear priority from customers and prospects to invest in CXone by taking…

Thank you, Barak, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the first quarter of 2022 and our outlook for the second quarter and full year 2022. Our first quarter financial results were outstanding on all levels, demonstrating our exceptional financial profile of growing the top line along with best-in-class profitability and cash generation. Total revenue for the first quarter increased 15% year-over-year to $527 million, and non-GAAP fully diluted EPS increased 17% year-over-year to $1.80. Our total revenue growth is mainly attributed to the growing contribution from cloud revenue, which increased 28% year-over-year to a total of $295 million and represented a record 56% of total revenue, up from 50% in Q1 last year. Product revenue increased 16% to $76 million and represented 14% of total revenue in Q1. Services revenue, which totaled $157 million and represented 30% of total revenue, decreased 3% year-over-year in line with expectations as existing on-premise customers continue to gradually shift to the cloud. One of the main differentiators for NICE is our unrivaled CX portfolio. Not only did the number of customer engagement portfolio deals increased over 50%, but each deal on average increased 67% in average deal size, a testament to our expansive offering and cross-sell opportunities. From a geographic breakdown, the Americas region, which represented 81% of total revenue, grew 14% year-over-year. The EMEA region, which represented 14% of our total revenue, grew 29% year-over-year and 34% on a constant currency basis. APAC, which represented 5% of total revenue, grew 7% year-over-year and 9% on a constant currency basis. The contribution from our cloud revenue continues to expand. We recorded more than 100% growth in both EMEA and APAC cloud revenue, and APAC recorded its largest cloud deal ever. Moving to…

[Operator Instructions]. Our first question comes from the line of Samad Samana with Jefferies.

Good to see the strong results, Barak and Beth. Maybe Barak, if I can start on a question for you. The quarter itself looked really good, and the commentary on bookings is, obviously, very positive from you on the quarter itself, but maybe could you give us a real-time view now that we're halfway through into 2Q, maybe what you're seeing in terms of pipeline build more recently? And if you're seeing activity stay at the same healthy levels as you saw in 1Q? Or if you're seeing any changes just with a little bit more macro uncertainty out there? Just what are you guys seeing in real time?

Sure. Thanks, Samad. Yes. No different to what I said on the earlier remarks. Throughout 2021, we spoke about the momentum that we see in the business, both as we reported revenue as well as in the booking and in the pipeline. We saw that momentum continues in Q1, and it's no different in -- since we closed the quarter, same level of activity, high momentum. I mentioned on my call, the different driving forces to our business, the large enterprise, the international markets and the shift or the expansion into digital and AI with smart cell service. All of those continue to drive the agenda of prospects and customers and accelerating. So we don't see any difference. Obviously, we also read the newspaper that you all read, and we will look at the market. But in reality, in real time right now, same as we saw last year and in Q1.

Great. That's great to hear. And then Beth, maybe just on the guidance. I know you've given cloud for the year. Could you maybe just help us think about if there's any difference in the seasonality? I know the last couple of years have been a little bit different just in terms of the timing around cloud revenue ramps. Just how should we think about the cloud revenue seasonality for the rest of the year?

Yes. Thank you for the question, Samad. And the trend that you're seeing this year is what we expected that we've seen in prior years as well that, that will continue, where -- as a result of the fact that we have consistent strong growth in the cloud and a higher level of recurring revenue, that means we see a more equal distribution of both revenue and profitability throughout the year. So you see that strong growth in our Q1 results. And that's a trend that we expect to continue to see. So there is less seasonality. Of course, we always tend to see some seasonality in certain quarters like the fourth quarter with retail and other. But generally, you'll see a pretty consistent spread throughout the year.

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

Barak, you talked about some large upticks in the competitive replacements that you saw this quarter. I was wondering if you could unpack that. What do you think is driving the increase displacements of your competitors?

So yes, great question. I'll give you a bit more color on that. The first one, the incumbent -- we're in a market where -- while we see momentum of cloud, let's not forget that the -- still the penetration of cloud is still relatively low to other markets. And even customers who thought they move to the cloud, realizing that they basically shifted to kind of a hosted version of a legacy competitor. And they realize right now that it's not cloud, and the only real cloud solution is one that was built natively in a complete manner that have the complete offering like we offer and what we invested in the last many years, 5 or 6 years, and that's what we have today. So that's one of the driving forces, realization of customers that they need to move quickly into that and replacing the legacy incumbent provider. The second thing that we see when it comes to competitive replacement, goes to CXI. And this is a customer that understand that it's not just about moving the customer or the CX operation to the cloud. It's about an opportunity to unify their operation into a single platform doing it with digital self-service and inject -- and a platform that is fully injected with AI. So we find ourselves in those cases, winning all the solutions together, replacing not just one incumbent, but multiple other vendors and the customer buy from us the complete set of solutions or multiple solutions. I mentioned on the call earlier, about the significant growth we see of the portfolio, the overall portfolio adoption. And last but not least, is customers who did buy cloud solutions in the past, let's say, couple of years. And it was either, too -- wasn't mature enough because it doesn't scale for them. So they realize that they need a more established platform like ours. Alternatively, they kind of committed to build-it-yourself type of platform from different components, and they are tired of being a system integrator and they want to build -- they want to buy a fully proof and a fully and complete platform like ours. So these are the sources of where we see the incumbency losing to us and a significant surge in competitive replacements.

And Beth, we saw product revenue come in stronger, at least in -- the Street was modeling this quarter. Could you help us understand the driver of that? And as we think about the rest of the year, how does your pipeline look just in terms of product revenue? And how should we be thinking about the growth versus decline in that revenue line?

Yes. Thanks for the question, Tyler. Our product revenue had a great performance in the quarter, grew 16% year-over-year, and it was coming really solely from the financial crime and compliance business. The financial crime and compliance business had a tremendous quarter with 20% growth year-over-year. And what you see is that in certain markets, and that includes FCC, cloud is still not as mature in terms of adoption there. So it gives us a great opportunity looking forward on the cloud. But certainly, with the size of some of the deals on the [indiscernible] front, those product deals tend to be large and lumpy and difficult to predict. We were very pleased with the performance with that part of the business. So as we look forward into the second half of the year, for both of our businesses, our pipeline continues to become more and more cloud-centric, but as highlighted, there are certain aspects of the market and that includes FCC, where some of those customers tend to still buy from time to time on-prem. So you should expect to see that you'll probably see some ongoing variability in the future, looking forward on product. But certainly, we do see that continued shift in opportunity to the cloud, and that includes the FCC business.

Our next question comes from the line of Pat Walravens with JMP.

Great. I think this might be for Beth. I mean you guys are executing great. Congratulations. The market is super challenging. So your stock is down, I think, 40 percent-ish year-to-date. And so Beth, you said you bought back, if I heard right, $64 million in the quarter. How do you guys think about future share repurchases?

Thanks for the question, Pat. As I highlighted on the call, we are in a unique position relative to, really, the competitors in our industry generally, where we have such a healthy balance sheet. We have about $1.5 billion of cash and investments, and that gives us a really unique opportunity, both on the share repurchase front, but clearly also on the M&A front as well that we are well financed. So as we look forward to the rest of the year, we consistently believe that we have really strong momentum in our business. And so of course, we're going to use that opportunity to continue our buybacks during the course of this year.

Okay. And then maybe if I could do a follow-up. So Barak, I'm actually in Tel Aviv this week. But so clearly, the funding for the private companies is going to start driving up, how do you feel about doing more M&A?

I believe that this market will open up some great opportunities for us as a company, both in the private and the public markets. As Beth mentioned before, we have a great balance sheet. We are generating -- just this quarter, we generated $193 million, and we are generating close to $0.5 billion or more on an annual basis, and we have a great balance sheet. I think that we already see, by the way, a lot of so far small start-ups that do not have the runway. The amount of incoming, let's call it, incoming inquiries from small start-up grew tenfold in the last few weeks versus what we saw on average. Obviously, we are -- have a great muscle in the company of not just doing M&As, but also have a great ROI from them. So we're actually excited about the opportunities ahead. And as Beth said, we'll balance nicely between that. We always have been prudent on acquisitions. But at the same time, we feel that there is also an opportunity to have great return with an aggressive buyback program.

Our next question comes from the line of Rishi Jaluria with RBC Capital Markets.

I wanted to go back to a comment, Beth, you had made on the prepared remarks, which was this large deal -- large cloud deal in APAC. Maybe taking a step back, can you help us understand what are you seeing in terms of the appetite for cloud outside of the U.S.? I know historically, the U.S. has always been a stronger market and more ready to move to the cloud, but it seems encouraging to see a large cloud deal out of APAC. I think you actually said largest cloud deal ever. So maybe can you talk to us about the environment for cloud in both India and APAC? And then I've got a follow-up.

Yes. Thanks for that. So generally, I will say that we are, as a company, every quarter, we report many, many 7- and 8-figure cloud deals in a very consistent manner, and we see that trend continues to grow. I just mentioned that when we mentioned the value of the deal we mentioned, the immediate committed value by the customer and not necessarily the full potential, which usually is much higher just to kind of give you some color. With respect to international markets, as I said in my prepared remarks, we see great momentum. We have great presence in most key international markets, and we continue to put more and more investment in that, both with our own team as well as growing the ecosystem that grew dramatically in the international front. And yes, the adoption is going very, very nicely. As you said yourself, it used to lag the U.S. Now I think in terms of the acceptance, it's par to the U.S. But the starting point is much lower in terms of cloud penetration. So we believe the opportunity is significant and we'll continue to seize those opportunities moving forward.

All right. Wonderful. And then, Barak, you talked about some of the uptick that you're seeing with AI, IVA and Finastra. Maybe, again, just thinking from a macro perspective in this environment where companies can't hire fast enough. It's a super tight labor environment. Can you maybe -- I guess, a, talk is that an actual tailwind you're seeing to adoption of these solutions to make existing contact center represented as more productive? And b, can you remind us what does that sort of ARPU uplift look like with the core CCaaS deal once you're adding in AI and IBA capabilities?

Sure. So let me start just to explain what's the reason why do we see this great momentum in AI that driving smart cell service. Almost every customer we need these days already had some experience in trying to put spot into their CX environment, hoping that, that will free up labor or at least save them the need to hire more labor into the CX operation. And what we hear across the board is a major disappointments because they adopted a lot of bots from a variety of point solution companies and small companies. The reason of the disappointment, the reason why they are engaging with us the putting the bot is not enough. It's just a framework. The real power is and the ability to inject sophistication, knowledge and understanding into the bot. Otherwise, it's almost useless. We are in a unique position where we have a ton of data. We have 25 years of data that we've used in order to build models in order to make those bots from something that doesn't work to something that work in a very meaningful and very effective way. And that's thanks to ENLIGHTEN AI, which we just keep seeing the record number of deals signed for ENLIGHTEN AI. So that's the reason that we see that. And I believe that we are slits at the beginning of what can be a tremendous growth opportunity for us. And again, we're in a unique position because we have the data, and the data is the most important thing when it comes to that. In terms of the uplift, when you look at what you call, let's call it, CCaaS deal of a classic CXone deal, and then you add to that, I will on purpose say, digital and smart self-service because usually they come together. It's more than double the ACV we see from such a customer. And the reason for that and the reason why it can be a little more, going back to your point about labor, a typical contact center agent, depending on the geography, cost about $50,000. That's the cost of labor. If we can replace and we can replace some of those agents with AI and even offer taking up just 25% of the labor, you can understand the full potential over here with a market that has about 50 million agents out there.

Our next question comes from the line of Chris Reimer with Barclays.

Congratulations on a great result. Most of my questions have been asked already, but Beth, one for you. The R&D spend has been elevated the last couple of quarters. I was just wondering if you could give some color on how we should be looking at that going forward. And maybe what kind of spend -- what is the spend contributing to?

Sure. Thank you for the question. In general, of course, our CXone cloud platforms are leaders in the market. We are always focused on ongoing innovation within our solutions and our offerings. And you see that in terms of the investment that we have in our R&D teams. So it's really just reflective of the focus we have internally to really continue to build out the complexity, the depth and breadth of the cloud platforms that we offer. If you look at the R&D kind of as a percent of revenue, generally, year-over-year, we're pretty consistent. And so you can expect that it stays roughly in the same range, 14% to 15% of revenue when you add back capitalized R&D. So that should be the expectation, but again, it is driven by our focus to continue to fuel our innovation back into our cloud offering.

I want to add something, and thank you for the question. It's a topic that's close to my heart. So I'm very proud of our R&D investment that if you neutralize the amortization, it transits about 15%, 16% of our revenue. But the more important thing is that when you think about our R&D investment, the ROI is tremendous because the way we have built CXone in a native way with all of the solution, allows us already and also in the future to improve our cloud gross margin because we have our own solution. It's fully complete. We don't need to resell at a very high-priced other solutions. The customer enjoys a complete and a native solution. And you see the result of that, the improvement at scale in gross margin. Well, other companies that will try to do that or not doing that, we'll actually experience deterioration in gross margin as they go and resell a lot of other solutions that they don't have in-house.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

A couple of questions. One more just digging into details. Just if you could give any color on the FX impact in the guide going forward since there was some impact in Q1. And then maybe a more in-depth question. I just want to get a sense of how initial RFPs are coming in. Are they for [indiscernible] over been replaced? Are they for digital only? You spoke to -- seen a lot of kind of bot replacements. And so just wondering what you're kind of seeing as the initial foot in the door with implementations. Is it smaller? Or is it for the whole implementation?

Yes. Thank you for the question, Meta. I'll address the FX-related question, then I'll hand it back to Barak. On the guidance question, if we were to adjust it for the impact on the exchange rate, you would see even higher guidance than what we provided. So that would be the impact on a constant currency basis, and I'll let Barak address the rest.

Yes. With respect to RFPs. One of the things I'll mention here is that a few years back when we just started and built CXone and we're the first one to converge routing with WEM, with analytics in the cloud. As a result of that, we drove a change in the market, and we saw more and more RFPs are taking our approach. And after that, a lot of RFP came as a consolidated [indiscernible] replace of all of it together. And as a result of that, we had a great outcome. What we see these days is that the framework I've talked about before of CXI, which is actually further convergence of what I said before, plus digital, plus self -- or smart service -- smart self-service is also starting to get into RFPs that customers understand that in order to make it a reality, they can't keep buying point solutions from multiple vendors and try to integrate a deal and they need to buy a platform that is native with all of those solutions. So we're starting to see that change already in RFPs, and we believe it will give us a great advantage in the future.

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

Yes. A couple, if I could. So I appreciate that Europe has been a couple of years behind the U.S. with the cloud migration. That's certainly been a positive tailwind. Would love to know though, how you're thinking about the macroeconomic environment. I understand shifting to cloud can be a longer-term cost savings for enterprise, but obviously, there are high upfront costs as well with that migration. So if we do hit a more difficult economic environment, do you anticipate that migration will slow? Or do you think that, that pace will be maintained?

I've been with NICE for 22 years, and I've been here back in 2000 and back in 2008. And I can tell you about the line of -- at least our industry. Our solutions are extremely mission-critical. Customer service, if you look on the CX business, brands need to provide outstanding service to their customers whether there is a positive economy or negative economy. This is customer, and consumers are the most important things to brands. So we're really mission-critical to customers and that at least was my past experience, and I believe now is no different than before. We don't see right now any change in demand -- or negative change in demand due to the macroeconomics in any geography. On the contrary, as I said before, we see some verticals that were somewhat muted during COVID back to -- back and actually greater than pre-COVID time. And we believe that in our industry in all the markets we operate both in good times and bad times with the economy, there will continue to be a very strong demand and durability of demand.

One more, if I could. Obviously, we're hearing a lot that inflation and specifically increased energy cost. So great to see the improvement in margin in your cloud business over the last couple of years. But what is the ability of the provider to pass on those higher energy costs at the data centers? And if there is a potential pass-through to you, how would that impact your margin in that business?

At least for now, we don't see -- it's very marginal for us. And the results speak for themselves. You see the gross margin improvement continues this quarter versus last year. You see our overall profitability keep improving. Also the guidance we gave for profitability is very healthy, and you see it also in the cash generation. So we're a software company that is in the cloud, and I think that those fluctuations have very minimal impact on our business.

Our next question comes from the line of Paul Chung with JPMorgan.

So just on the pricing environment, given such strong demand trends, are you seeing opportunities to kind of raise prices kind of across solutions? How is the competitive pricing environment in your view?

We don't see any dramatic change right now. Our business, the complexity that inherited in CX, we don't -- we didn't see in the past and I don't think we'll see in the future commoditization of the solutions. On the contrary, as I said before, we see ourselves where we see more customers adopting a larger portion of our portfolio that give us a very nice uplift. I do believe that down the road, a lot of those hyped private companies that were buying or trying to buy into the very lower end of the market and losing a ton of money, I think I'm not sure that their approach is sustainable in this market, which eventually will normalize the market in a way that will be positive to us.

Great. And then you're seeing wins quite broadly across several different verticals. Were you seeing some strength across industry verticals and kind of some of the bigger opportunities there for cloud adoption?

Can you repeat? I'm not sure I got...

In industry verticals. Maybe I'll start.

Yes. Go ahead. Go ahead.

Yes. I would say, Barak actually mentioned it in the script. When we see both in the bookings that we signed recently as well as in our pipeline, specifically, certain verticals that were kind of sluggish during COVID are now back at levels that are pre-COVID, so that looks like hospitality, travel-related companies. Those verticals are coming back quite strong. And so you see that is being reflected in our business, but also in forward-looking pipeline as well.

Great. And then lastly, after a big rebound in OpEx in '21 to kind of fuel some growth and have some expenses come back. You're seeing the pace of OpEx growth kind of more in line with revenue. Is this the right way to think about the pace kind of moving forward, slightly below revenue growth kind of reverting back to your typical model?

Yes. Generally, what we're seeing is that in terms of our OpEx, first of all, we don't see any material impact from expenses that were in place like travel that was much heavier pre-COVID. It's something that we start to see come back, but of course, was anticipated in terms of our budgets for this year. So in general, we iterated last quarter as well that we expect to continue to see expansion in our operating margin. And so that's reflected in the cost base. And so that's what you should continue to expect for the course of this year and of course, is also embedded within our guidance.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you all very much for joining us, and we look forward to see you on the 24th on our Investor Day. Thank you. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.