Greetings. And welcome to NICE First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, May 11, 2023. I would now like to turn this call over to Mr. Marty Cohen, Vice President of 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 30, 2023. During today's call, we will present a more detailed discussion of first quarter 2023 results and the company's guidance for the second quarter and full year 2023. 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 also like to remind you that we are hosting our Investor Day on June 6 in conjunction with our Interaction [inaudible] Conference in New York City. The special program for analysts and investors, presentations from NICE executives and access to the solutions showcase. We have received the registration email. Please email us at ir@nice.com. And I will now turn the call over to Barak.

Thank you, Marty. And welcome everyone. We are pleased to begin the year on a high note with strong first quarter results as we continue to outpace the market. We reported total revenue of $572 million which exceeded the high end of our guidance range and represented 9% growth at constant currency. Driving the great execution on the top line was once again our industry leading cloud business ss cloud revenue grew 25% in Q1. Along with our top line growth, we continue to lead in that exclusive club of profitable growth as we turn in another highly profitable quarter. The cloud gross margin improved by another 140 basis points to 70% compared to Q1 last year. The operating margin increased 30 basis points to 28.6%, and earnings per share came in at $2.03, also exceeding the high end of our guidance range and represented growth of 13%. We are proud of our healthy rule of 40 mix, going 9% in total revenue with an EBITDA margin of 32%. Our continued strong performance and clear market leadership are attributed to the tight alignment between our strategic priorities and sharp execution centered on expanding cloud market share, championing the AI opportunity and our emphasis on profitable growth. Our cloud growth continues to lead the market and this growth is not only unique in its magnitude, but in its consistency as well. Our strong performance over the past several years had led to rapid increase in scale, evidenced by $1.5 billion in cloud ARR. Even at the current scale of our business, we believe we are only at the beginning of our cloud potential with the lion's share of our cloud opportunity still ahead. For us, our success in the cloud has always been and continues to be about opportunity, strategy and…

Thank you, Barak, and good day, everyone. I'm pleased to provide an analysis of our financial results and business performance for the first quarter of 2023 and our outlook for the second quarter and full year 2023. Our financial results in the first quarter continue to demonstrate the strength of our business, with both total revenue and EPS exceeding the high end of our guidance range. Total revenue for the first quarter was $572 million, up 8% year-over-year and 9% at constant currency. Cloud revenue increased 25% to $368 million in the first quarter, performing at the high end of our expectations and outpacing comparable market growth. Across all our markets, we continue to see further penetration in the cloud with increasing adoption by large enterprises. This was evident in the record 64% mix of cloud as a percentage of total revenue, up from 56% in Q1 last year. Services revenue, which represented 28% of total revenue, was $160 million, a slight increase of 2% year-over-year. Product revenue, which represented 8% of total revenue in the quarter compared to 14% of total revenue last year, decreased 41% to $44 million. This shift in the mix of our revenue was in line with our expectations as our overall revenue growth is increasingly driven by our cloud platforms. The resilience of our business model is evident in our recurring revenue, which increased to 85% of total revenue in the first quarter, compared to 79% last year. Recurring revenue is comprised primarily from a combination of cloud and maintenance revenue. From a geographic breakdown, the Americas region, which represented 83% of total revenue, grew 12% year-over-year. The EMEA region, which represented 11% of our total revenue, decreased 13% year-over-year and 8% in constant currency. The APAC region, which represented 6% of total revenue,…

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

Hi, good morning. Thanks for taking my questions. Barak, I appreciate how much time you spent on talking about the opportunity with AI. I wanted to maybe drill into that just, there is a lot of debate going on right now in the investment community about how AI impacts different companies' business models. And I am curious how you think about the potential for it being deflationary to the number of seats in the market versus the monetization that exists by making the platform more powerful for the brands that you are ultimately powering. So can you maybe just help us think about what you have seen in at least early contracts where you are including AI and the deal and how that compares to deals that you have had involved or just how you think about balancing those two elements and how you think about the revenue opportunity.

Yes. Thanks for the question, Samad. So I was trying in my earlier remarks to give some color about what we feel and believe is a tremendous opportunity for us, as I said, and we are already seeing as demonstrated by Q1 deals, a lot of our deals driven by AI, as well as accelerating if you would like to move to the cloud. So there is some interrelationship between AI and Cloud. In terms of the monetization opportunity, if you would like, as I mentioned, organizations are seeing the potential in three areas. One is the augmenting really the need that they have of skilled labor, obviously decision velocity of the enterprise, and then the mass personalization at the scale. What we are seeing right now in terms of the opportunity, since 90% of the spending the customer services are still on labor, this is the real opportunity to amortize if you would like on technology and seeing greater return. A cost of an employee in a customer service is roughly $50,000 a year, and the ROI hands on AI is very significant. And what we see in all of those deals that I've mentioned, the customer of ours in the classic contact center that has AI capabilities, which allows us, by the way, to expand way beyond the contact center, we see anywhere from 3x to 5x ARR increase versus just a typical per seat opportunity. I want to add, based on your question, one thing you're asking about what we see with customers, so maybe just one more thing to add, and this is kind of what, we have thousands of customers, and we speak to them regularly, and I speak to customers on a regular basis. And in a way, I would like to describe it,…

Hey. I appreciate that response and the thoroughness there. Beth, maybe a follow up for you. There's some uncertainty in the financial services sector and I know both to the financial, crime and compliance segment and then somewhat and CX side that, nice expression there. Was there anything in that vertical that impacted the quarter. And maybe what are you seeing so far from that end customer base in the second quarter so far?

Yes. Thank you for the question, Samad. First, I'll say that what we saw with the segment overall in the quarter didn't impact our first quarter results. What we see in our first quarter results, of course, is an acceleration of cloud in that market furthering the cloud mix overall and that's a trend we expect to continue to see in our FCC segment. When we look on the banking sector, first I'll highlight that those customers that were highlighted in the news, they were an immaterial amount of our overall business that relates to the FCC segment, so no impact there. And if you think about our FCC business, it's a business we've had for decades where of course we started at the very high end of the market with the largest FIs in the world. Those large FIs are continuing to do quite well in this economy and that's what we see with our customer base. I think it's also reflected in our cash generated from our operations that we have a strong customer base across NICE with the high credit worthiness of our customers.

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

Yes. Thanks for taking the question and good morning. Following up on Samad's question on generative AI, I guess maybe to ask it more directly. Hypothetically, we see a 20% reduction in agency accounts across the industry. How are you just thinking about the impact? How are you thinking about your ability to maybe evolve your pricing model? Should we see some deflationary impacts just impact the number of seats out there?

So we don't know to predict if and when agency will drop. We need to remember that generally, and I've been in this industry for almost 25 years now and I remember 25 years ago when I predicted that number of agents or agents would disappear and here, we are today with much higher number than it was a decade or 15 years ago. The reason for that is that eventually the number of transactions or interactions is actually going to continue to grow exponentially. It grew 100 folds in the last 15 years. The overall number of interactions over a variety of channels. And we see more of simple transactions going to an unattended channels and unattended form, but the more complex interactions still require to be manned if you would like. Having said that, for us, either direction is a tremendous opportunity because most of our business today has been predominantly inside the contact center. And what we've been seeing in the last year and a half with us expanding into digital and AI is that we are now covering the entire customer journey. And we monetize not only on 20% of the journey, which is the contact center, but over the entire journey and over that part of the journey, the number of interactions is growing exponentially and we managed to monetize on that because organization further understanding that there is huge potential and huge impact positive and negative on the brand to cover all aspects of customer interaction, not just those that are inside the contact center. So we are happy with both directions and our strategy allows us to expand as we by the way expanded in the past. And we think it's a tremendous opportunity and just from this quarter alone, think about the number of deals that I've mentioned with respect to AI. The lion's share of them has nothing to do with the attended per agent opportunity, but rather completely outside of the contact center.

That's helpful perspective, Barak. Thank you. So I wanted to actually talk about some of those large deals you sign in the quarter. It sounded like pretty healthy, kind of seven, eight figure deal momentum despite it being fiscal Q1. How did the large deals kind of compare relative to your expectations? And then to what extent are you seeing kind of the competitive tailwinds that you referenced around Avaya and some of the bankruptcy related issues drive those large deals? Thank you.

Yes, thanks for the question. I'll give you my interpretation to what we see right now in the marketplace. First, let's start at a more high level view. We grew in the quarter at 25%. That's our cloud business. And same goes for the previous quarter. And this is while we see around us, both on those at our public company who are reporting official numbers, but also from what we hear about other companies, that this is by far a much faster growth than anyone else around us involves the narrow definition of the market and the wider definition of the market. And I believe that there is only one way to look at it is that we are taking a market share. We are outpacing the growth of the market. Now, the reasons behind it, I believe, goes to a few things, and this is talking to customers even in this economy enterprises. understand of customer service is a high priority. They actually see high demand for that. The needs that they had a year ago did not change, actually even further accelerated. But they also understand that they want to partner with a vendor that doesn't just speak about innovation, but can also deliver and have the means to deliver it. So you mentioned Avaya like and others, and I think everyone understand that this is not going anywhere positive. And customers are looking to migrate and also like for like, but like for better. Like for much better. The other thing is that we see a lot of companies around us that are struggling, have never been profitable and have poor unit economics and now focusing their efforts on the bottom line. And when you don't have this muscle and all of a sudden you decide to focus your efforts on the bottom line, you start to cut. You start to cut on your R&D, you start to cut on your go-to-market. And that impacts customers. And they see it as a negative. And there are some private companies that are highly leveraged, carrying a significant debt, paying right now, or spending most of the time about struggling to servicing the debt. And because of that, they have to take tactical decisions instead of strategic decisions that are hurting their customers. And I think all of that eventually customers see through that and they decide to partner with us.

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

Wonderful guys. Thanks so much for taking my questions. One question on generative AI and then a follow up. I appreciate all the color and helping us think through the business model. I want to talk a little bit about use cases. A lot of the focus from the investment community on generative AI has been on IVA, chat bots, but it feels from when we're having conversations with customers and partners, there's an equally big, if not bigger opportunity on kind of the post call side of the equation, which is more complementing existing agents. And maybe can you talk a little bit about some of those use cases and how that can work alongside your leadership in WFM? That'd be helpful. And then I got a quick follow up.

Sure, absolutely. And you're absolutely right. And that goes to my first point, that this industry does have a lot of labor. We're talking about 50 million people. And in this economy, enterprises are really struggling both to find people, but also to find skilled labor. And even if you find that skilled labor, the thing that they need to master are really, really hard. So even in the example that I gave in the Q1 deals, not all of them was just for consumer led interactions. Some of them are actually, as I mentioned, to augment the user, the agent, if you'd like, the employee himself or herself with AI capabilities. I like to describe it as giving them superpowers. Now, the reason why you cannot just take generative AI to do that is that basically in order to be able to have that assisted bot, it must be educated and constantly trained with the latest and greatest information that sits between the public domain and the private domain, which is the proprietary information and data of the enterprise. And enterprises do not want to take it, put it in the public domain and have generative AI being trained on that. Not to speak about the fact that there is nothing generic about what brands are trying to do when they provide service. They are trying to make sure that their consumer is being led to meet their own business goals. They want to sell certain things, they don't want to recommend on certain things, they don't want to recommend on the competition and they don't want any opportunity for embarrassment and saying the wrong thing for the customer. And that's exactly why Enlighten that sit on this mass amount of information over many, many tens of billions of historical information but including one that are very current is the one that is helping them to achieve that goal. Again, both for the consumer but also a bot that is sitting next, if you would like, to that employee and really empowering them to become extremely proficient at their job.

Wonderful. That's really helpful. And then I wanted to talk about, it seems like you're starting to see a number of displacements from other real cloud CX vendors. I know you've mentioned a few before and you mentioned a few this time. Can you talk about maybe some of the financial reasons why that's happening. But can you maybe talk a little bit about, a, how you're finding those deals? Are these customers that are coming to you? Are you able to kind of go out there and find those dissatisfied customers and are there actual technical limitations of some of the true cloud competitors that you're seeing out there, that you're able to offer a depth and breadth that they're not? Some additional color there would be really helpful. Thank you.

Sure, no problem. And I gave few examples in the quarter and I mentioned it was more than one. And it's starting to be not kind of ad hoc thing. It's starting to be a phenomenon of ice. A customer deciding on a competitive platform, but coming back to us few months later, six months later after the initial deployment, experiencing disappointment and deciding to move to us. And I would say that the reason for that is twofold. First of all, they are coming to us because we are recognized, as I mentioned before, by the Gartner, Forester of the world and others as the market leader. And after a disappointment of choosing a vendor that is not the leader or maybe was selected for the wrong reason, they don't want to fail twice. And they come to the leader and we have a very strong market awareness to our brand. And then this is how they are coming to us. The reason why I believe those vendors are failing and we can deliver eventually go to our architecture. And it's not something that you can fix overnight. We have spent cumulatively 40,000 man years in building CXone. And we have done it from the ground up with all the functionality in order to meet two very important things. One is scalability. It is, we don't need to put band aid or to stitch things together in order to meet scale. And in this market where the enterprises starting to adopt it, scale is extremely important and it's completely different ballgame to operate at scale. So that's the first reason. And the other reason is the completeness. We have all the application, 45 different CX application that was built natively by us on CXone. And it’s not, we're not sending the customer to bring other vendors and integrated in and become the system integrator of this environment and have a very complex Frankenstein stack, as we call it, with those vendors. And that's the reason why customers are coming back to us.

Our next question comes from the line of Jim Fish with Piper Sandler.

Hey, this is Quinton for Jim Fish. Thanks for taking our questions. Barak, maybe for you. What is the team seeing in terms of deployment or implementation timelines, especially in those larger eight figure deals? Has there been noticeable increase in those cycles year-to-date, maybe compared to prior years, or has macro uncertainty not really had an impact on those timelines?

No, we don't see a big change from before. Needless to say, the larger the enterprise is, it takes longer to deploy, by the way, not because of our solution. Our solution available to those customers literally days after we get the purchase order. In most cases, it's about their internal readiness. But if I compare today to a year ago, I would say it's the same.

Got it. That's helpful. Thank you. And then, Beth, maybe for you. Last quarter, we talked about cloud growth of 22% to 25% for the full year. Is that still the target the team's looking at? And maybe any additional color you want to provide on kind of cloud expectations from here. Thank you.

Thank you. Of course, we were quite pleased with the 25% cloud growth that we delivered in the first quarter. We still remain with the expectation that for the year, the range will be somewhere between 22% to 25%. And, of course, we're optimistic looking forward, since we are seeing strong bookings in the first quarter combined with a healthy pipeline. So, yes, we stand behind and still have that as our expectation for the year.

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

Thank you for the question this morning. A bit more on the AI opportunity and roadmap, if I could. I think that maybe there's some perception that AI democratizes or even standardizes CX, so less opportunity to differentiate. Your strategy, though, with AI is slightly different, the investments you're making internally in headcount and in engineers. So maybe just touch on and dig into the differentiation that you believe you can drive in AI relative to competitors.

Sure, I think I related to some of it in my earlier remarks, but I'll emphasize a few points. Thank you for the question. I think that when it comes to CX, it's actually the opposite. Meaning that AI, as I mentioned, has tremendous potential to solve some long standing challenges in this market with respect to the challenges with skilled labor, decision velocity and mass personalization at scale. But to do that, as I said, there is nothing generic about it. And it doesn't reduce the level of investment one needs to do in order to deliver on that. And we've seen it numerous times in the past. Not to be too repetitive, but I'll mention once again, I can't emphasize enough from our real experience and our customer experience how critical it is to have these mass decades of historical data that is at a high quality, highly labeled, and it's nothing, again, this is not a public domain information. And we have it because we have thousands of customers. And we’ve seen throughout the history. Hundreds of billions of interactions go to our platform, and we have the derivative data from that. So you can take 5,10, 100, 500 people and try to replicate or imitate that. It's just impossible to do that. And we did not start doing it yesterday. Second, you need to have a well adopted platform that can be added to. So otherwise, the effort is just tremendous. And that's what CXone is all about. CXone has thousands of customers well adopted across the board, and it's an add-on. And it was designed and developed to be infused with AI. And last, I must tell you again, what we hear from customers is a real concern about security. And there are two aspects of security and trust. This is number one, what do I share with the AI engine at the public domain in order to make it extremely precise and accurate? And that's something that we provide to customers, and they don't need to go to the public domain for that. And second, this is not a generic approach because you want your AI to service the brand and aim to assert certain goals. So, for example, if the customer is seeking to ask, well, what is the best thing I can do with my service? You don't want the AI engine to offer the customer to go to a competitor or to say something that will embarrass the brand and to do all of that. That's exactly what we've been doing for years and it's very, very hard to imitate or to catch up to what we're doing. I actually think AI increased the barrier of entry to CX and doesn't democratize it or taking it down.

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

Great, thanks. Maybe first question. Just can you just walk through kind of initiatives to make sure that existing customers are kind of initiatives to attach enlighten AI CX to them? Just making sure that you're getting in front of customers before somebody else may kind of get in front of them. And then second question, just whether there's any kind of macro impact on the installed base understanding kind of new deals are coming in at a very healthy clip, but just kind of any commentary about install based seats would be helpful. Thanks.

Sure. So about the first one. One of the beauties that we have and when you operate with such a scale in the cloud and the way that we operate as a company, unlike many other companies in our space, that right now we hear reducing those force and cutting in different departments, we are expanding. And we've been doing it, we've been operating in a prudent way throughout the past several years and we have a very, very large and effective go-to-market team that is constantly in touch with all of our customers. And those conversations about all of our products as well as Enlighten are happening on a daily basis. I myself, together with the executive team are attending multiple meetings and I must say to customers, as I said, are coming to us because they know that we are their CX platform and they have the appetite to do that and there is a lot of noise out there. But these are serious customers that understand what CX is all about and are not planning to deploy a technology just that is available out there without working with us. So that's one thing and we believe that we have a great coverage to conduct those conversation and cost sale to the base as well as winning new customers. And about the macro impact on our customer base, we have an outstanding both growth retention rate and ARR. It actually increased in Q1 and it's even better than it was at this point last year. So I would say that we continue to see customers expanding. And I think that the reason for that is regardless of macro when you think on our businesses, whether it is in the CX business or it is in the financial, crime and compliance that is bound by regulations or it is in the public safety domain where we are helping organization to manage the digitalization of the criminal justice system. These are such mission critical things. And these are among the last few things that customers will avoid spending on. So that's the reason why I think we see this strength when it comes to our customer base.

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

Oh, great. Thank you so much. Hey, Beth, can we take this opportunity to have you remind us what the opportunity is that remains in terms of taking your maintenance base to the cloud over time?

Yes. Hi, Pat. Thanks for the question. If you see our recurring revenue base, of course, it's a combination of cloud and maintenance. And we continue to see that maintenance space slowly shift to the cloud. We have a great track record. And from the customers that we've already seen make that change, their ARR typically increases anywhere from 3x up into really a 9x and even 10x uplift from recurring revenue that they have with us of a customer. Barak talked about [inaudible] but of course, we have a broad and really deep set of portfolio solutions embedded within CXone. And so we find it is typical that as those clients make that transition to the cloud, they are at the same time taking the opportunity to really enjoy a broader set of our offerings. So that is what we typically see. And of course, over time, we expect to see maintenance continuing to reduce as a result of that as those large enterprise customers shift to the cloud.

And then just a quick follow-⁠up is how far through that process are we?

So it is still very early days. That maintenance space is really associated with our legacy customer base. That is the very high end of market. So there is still a considerable amount of that core that will be one of the drivers of our overall cloud growth in the years to come. And we have reached the end of the question-and-answer session. I will now turn the call back over to CEO, Barak Eilam for closing remarks.

Thank you everyone for joining us today. We look forward to see you at our largest industry events, Interactions [inaudible] Conference in New York in early June. And we look forward to meet you after several years in person. It is going to be awesome. Have a great and nice day. Thank you very much.

This concludes today's conference. You may disconnect your line at this time. Thank you for your participation.