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Edited Transcript of NICE.TA earnings conference call or presentation 14-May-20 12:30pm GMT

Q1 2020 Nice Ltd Earnings Call

Ra'anana May 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Nice Ltd earnings conference call or presentation Thursday, May 14, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Beth Gaspich

NICE Ltd. - CFO

* Eran Liron

NICE Ltd. - EVP of Marketing & Corporate Development

* Marty Cohen

NICE Ltd. - IR

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Conference Call Participants

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* Daniel Harlan Ives

Wedbush Securities Inc., Research Division - MD of Equity Research

* Daniel Robert Bergstrom

RBC Capital Markets, Research Division - Analyst

* Patrick D. Walravens

JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst

* Rishi Nitya Jaluria

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Ryan Boyer Koontz

Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst

* Samad Saleem Samana

Jefferies LLC, Research Division - Equity Analyst

* Sanjit Kumar Singh

Morgan Stanley, Research Division - VP

* Shaul Eyal

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Tavy Rosner

Barclays Bank PLC, Research Division - Head of Israel Equities Research

* Walter Herbert Pritchard

Citigroup Inc, Research Division - MD & U.S. Software Analyst

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Presentation

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Operator [1]

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Welcome to the NICE conference call discussing first quarter 2020 results, and thank you all for holding. (Operator Instructions) As a reminder, this conference is being recorded, May 14, 2020.

I would now like to turn this call over to Mr. Marty Cohen, VP, Investor Relations at NICE. Please go ahead.

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Marty Cohen, NICE Ltd. - IR [2]

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Thank you, operator. With me on the call today are Beth Gaspich, Chief Financial Officer; and Eran Liron, Executive Vice President, Marketing and Corporate Development. Unfortunately, due to the death of his father, Barak Eilam, CEO, is unable to join the call today. We send him and his family our deepest condolences.

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, including the impact of the COVID-19 pandemic, is contained in section entitled "Risk Factors" in Item 3 of the company's 2019 annual report on Form 20-F as filed with the Securities and Exchange Commission on April 6, 2020.

During today's call, we will present a more detailed discussion of first quarter 2020 results and the company's guidance. Following our comments, there will be an opportunity for questions.

Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from Generally Accepted Accounting Principles as reflected mainly in accounting for acquisition-related revenues and expenses, amortization of intangible assets and accounting for stock-based compensation. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release.

I will now turn the call over to Eran Liron.

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [3]

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Thank you, Marty, and welcome, everyone. First, I would like to join Marty, and on behalf of the entire NICE team, extend our condolences to Barak for the loss of his father.

As for the business environment, we are operating in an unprecedented time. Never before have organizations had to reprogram the way they operate in a matter of days and then constantly keep adapting to changes on a daily basis amid the uncertainties they are all experiencing. After years of building organizational muscle centered on efficiency and experience, now extreme organizational agility has suddenly become the most important critical capability of any enterprise that wants to navigate these uncertain times. Changes that used to require years to implement must now be done in days. Organizational agility, which is the company's ability to renew itself, adapt and change quickly, to succeed in a rapidly changing, ambiguous and troubled environment, was stress tested beyond belief in the past couple of months.

At the same time, organizations are starting to rethink the long term, realizing that the need for agility is not temporary, but rather is here to stay, and rapid and abrupt changes are the new normal. For NICE, we are in the vanguard position to enable organizational agility for our customers. This is true for all markets we operate in, including Customer Engagement, Financial Crime and Compliance and public safety.

Over the past couple of months, we have enabled new and existing customers to respond to rapid changes in a matter of hours and days. Furthermore, these recent months were a testament to the mission-critical nature of our solutions as we have seen continued adoption along with a dramatic increase in volumes going through our platforms across multiple vertical markets. In response to the need of organizations to quickly adapt in the current environment, we launched new offerings at record pace.

At the onset of the lockdown, every enterprise with a customer service operation was faced with 2 enormous challenges, moving employees to work from home overnight and, at the same time, dealing with a massive spike in the number of interactions. In fact, industry-wide, 15 million contact center employees around the globe had to move to work from home while maintaining uninterrupted service. In response, we launched CXone@home, targeted at those organizations with contact centers using on-premise infrastructures from legacy vendors. While these on-premise infrastructures are highly inflexible and difficult to move to a remote environment, CXone@home can actually be deployed in 48 hours or less and supports work anywhere. Thus far, we have seen strong demand for CXone@home with a few dozen organizations already adopting the offering and many more in the pipeline.

It is important to note that many of these organizations that have adopted CXone@home were using a competitive on-premise solution and were not planning to shift to the cloud in the foreseeable future but decided to do so once they realized the extreme challenges that they were facing.

For our existing customers already on CXone, we have enabled the successful transition of hundreds of thousands of contact center agents to work from home within hours, [for organizations of all sizes and verticals] (added by company after the call). Those enterprises using CXone were able to maintain fully operational customer service levels without interruption, including both self-service and digital channels.

Additionally, we are experiencing unprecedented increase in CXone volumes from both existing and new [state] (added by company after the call), local and federal agency customers. As the only FedRAMP-authorized cloud platform, we are very proud to take part in providing government agencies with the ability to support tens of millions of citizens. We were able to flawlessly support a five-fold volume increase in this vertical due to the intrinsic agility and scalability of our platform.

Also, with hundreds of thousands of employees working from home, supervisors are faced with a new challenge for managing a remote workforce. In response to THIS urgent need, we launched WEM@home to both new and existing customers to provide advanced remote management capabilities. With WEM@home, supervisors can now gain control and focus employees on shifting customer priorities.

The public safety sector is also challenged. The need to conduct investigations doesn't go away in the current environment, and they must strike a balance in the ability to continue to conduct investigations while still maintaining the safety of their employees. Therefore, we immediately launched NICE Investigate Xpress. NICE Investigate Xpress eliminates the need to physically handle evidence. It enables the electronic sharing of information, both internally and externally, and even allows quarantined public safety personnel to continue to work from home. Thousands of public safety personnel across the U.S. and the U.K. already started using the new solution in the very first weeks, and interest is steadily growing. This is another example of how the current environment is accelerating the digital transformation in the public safety sector.

We are also seeing similar requirements in our Financial Crime and Compliance market [as well] (added by company after the call). A few weeks ago, the government launched the CARES Act., and due to the provisions of this act, financial services organizations are facing an unprecedented influx of loan applications, and they need to provide accessibility to the Paycheck Protection Program [funds] (added by company after the call) in record time. Despite this large influx of loan applications, financial organizations are still required to follow all Know-Your-Customers regulations and procedures, but now in an expedited time frame. In response, we launched KYC Xpress. KYC Xpress Is a cloud solution, which automates manual KYC procedures, reducing hours of manual steps to minutes, minimizing errors and dramatically increasing the speed of KYC processes by more than 80%. Across all segments of our business, we are pleased to see that we have witnessed great response to these offerings for the immediate need to provide agility to organizations.

Over the past couple of years, we spoke about our strategy to enable organizational transformations related to digital, cloud and analytics. While we continue to address the short-term needs of our customers, we are also starting to see organizations prepare for the next phase. The recent events demonstrated to them that it is now critical to accelerate these transformations. Furthermore, their ability to respond very rapidly in the last few months and manage in days changes that they thought would take years is giving them the confidence that they can transform quickly. Among other things, this will dramatically accelerate the shift to the cloud, fast forward digital to be a mainstream component of their operations and alter their mindset from just experimenting with AI to massively adopting it. We are in a prime competitive position to enable organizations to expedite their transformations as they overcome their immediate challenges and begin to prepare for the future.

Our cloud and digital leadership, as well as the mission-critical nature of our solutions, is demonstrated by our strong first quarter results. In Q1, total revenue increased 9% to $411 million, driven by another quarter of accelerated cloud revenue growth, which increased 27%. The strong top line results led to a further increase in profitability. Operating income was $111 million, which is an increase of 14% compared to Q1 2019, and operating margin increased 120 basis points to 26.9% compared to Q1 last year. These strong operating results led to a 14% increase in earnings per share to $1.34.

The 27% cloud growth was once again driven by CXone with multiple 7-digit ACV deals and many new logos. The CXone deals included a 7-digit ACV deal with a large financial institution that decided to standardize on CXone with our full analytics portfolio and in the process we replaced 2 of the incumbents. We also signed a 7-digit ACV CXone deal with a large state agency. We also signed a 7-digit deal with a major telecom for analytics and a 7-digit deal with one of the largest insurance companies in the world, also for analytics.

In Q1, we also received 2 8-digit orders, one with a large global financial services integrator and the other with a major federal agency. We signed several 7-digit deals for our financial crime and compliance solutions, including a large payment processing company and some large global banks. In addition, we signed several 7-digit deals for our Essentials [cloud solution] (added by company after the call). In the quarter, we also experienced significant expansion in our partner ecosystem. We signed a new strategic partnership with Infosys for our Financial Crime and Compliance Solutions. This global partnership will allow Infosys to resell our AML and fraud solutions to their very large customer base around the world.

We also signed new reseller partnerships for CXone. One was with a major European telecom [company] (added by company after the call) to help extend the reach of CXone in the European market, and the other with the largest resell in the contact center industry that is moving more of their business to the cloud. Our other recently signed partnerships are doing well and continue to rapidly grow their business with NICE.

Moving to our financial outlook. As you saw in our press release, we are providing Q2 guidance, but given the uncertain economic conditions, we are withdrawing our annual guidance. We continue to have high confidence and expect strong growth in our cloud business. However, our license business depends, in part, on large upfront capital expenditures by our customers, and we are being cautious about such expenditures in the near term. As a company continually focused on profitability, we do expect to maintain strong growth in our earnings.

In closing, the challenges of the current environment have opened the eyes of companies around the world to the importance of organizational agility. This is underscored by the inflexibility of today's on-premise solutions from legacy vendors. We believe this bodes well for an accelerated adoption of our cloud platforms and our mission-critical solutions as the current environment has delivered a harsh warning to organizations that they can no longer delay their cloud and digital transformation. As the clear leader in both cloud and digital, along with a strong balance sheet, strong cash generation, a stable and well-established business and an acute focus on profitability, we're in the best competitive position to capture the opportunities ahead of us.

Let me finish by thanking our employees who are now working from home for their dedication and support during these unprecedented times and for continuing to give 100% of their effort and commitment to driving the success of NICE.

I will now turn over the call to Beth.

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Beth Gaspich, NICE Ltd. - CFO [4]

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Thank you, Eran, and good day, everyone. I am pleased to provide the analysis of our financial results and business performance for the first quarter of 2020 as well as our outlook for the second quarter and full year 2020.

Total revenue for the first quarter reached $411 million, an increase of 9% from $378 million in the same period of last year. Our total revenue growth was driven once again by our impressive cloud growth, which was up 27% in the first quarter of 2020. Our recurring revenue increased 400 basis points over the prior year from 71% in the first quarter of 2019 to 75% in the first quarter of 2020. This increase demonstrates the continued acceleration we are experiencing in the shift to cloud.

Cloud revenues accounted for 42% of total revenue for the first quarter compared to 36% in the same period last year. Product revenues accounted for 16% of total revenue in the first quarter, and Service revenues accounted for the remaining 42% of total revenue in the first quarter. Both our segments contributed to the year-over-year growth. Customer Engagement revenues for the first quarter were $328 million, an 8% increase over the same quarter in 2019 and represented 80% of our total revenues. Financial Crime and Compliance revenues for the first quarter increased by 14% and were $83 million, representing 20% of total revenues.

Looking at geographies, Americas contributed $337 million to total revenue in the first quarter, which represented an increase of 17%. Revenues in EMEA were $48 million in the first quarter, and APAC revenues in the first quarter increased 7% to $26 million.

And now to profitability. Gross profit in the first quarter reached $292 million an increase of 9% compared to $267 million in the first quarter of 2019. Gross margin grew 40 basis points to 70.9% driven by our cloud gross margin, which continued to increase and reached 62.9% compared to 59.8% in the same quarter last year. Operating income increased 14% to $111 million, and we continue to expand our operating margin to 26.9%, an increase of 120 basis points. Earnings per share for the first quarter grew 14% to $1.34 compared to $1.18 in the first quarter of last year.

Our tax rate was 21% during the first quarter. It will continue to vary somewhat from quarter-to-quarter based on the mix of profitability and different tax jurisdictions, however, we continue to expect it to be in the similar range we previously communicated between 21% to 23%. We continue to generate healthy cash flow from our operations and exceeded the threshold of $1 billion in total cash and financial investments at the end of the quarter. As we look forward to the future, we will continue to manage our expenses prudently and expect this strong cash generation trend to continue. The leverage we maintain in our financial model will continue to provide us with strong liquidity for further investment back into our business and in parallel to support our capital allocation programs. At the end of the quarter, total debt was $467 million, net of issuance cost and the equity component associated with our convertible debt.

I will conclude my remarks with some commentary regarding the strength of our business, the outlook for the rest of 2020 and our financial guidance. Our customer base is well diversified across multiple industries, geographies and business segments. We have more than 25,000 customers, of which more than 85% are Fortune 100 customers. We do not have any one customer, which represents more than 5% of our overall revenue. We have numerous go-to-market partnerships that span across the globe.

The economic future for the remainder of 2020 is uncertain. We expect that some customers may delay certain decisions in the short term, which may make it difficult to predict our license-related revenue. And therefore, we are withdrawing our full year guidance. With that being said, as Eran highlighted in his comments today, we continue to see robust demand for our cloud solutions and expect continued strong cloud growth. Furthermore, as we have done each and every quarter, we continue to be committed to grow our profitability as evidenced in our first quarter results and our second quarter guidance. For the second quarter of 2020, we expect total revenue to be in the range of $387 million to $397 million. We expect the second quarter of 2020 fully diluted earnings per share to be in an expected range of $1.28 to $1.38.

I will now turn the call over to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Shaul Eyal of Oppenheimer.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2]

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Beth, Eran, Marty. Glad that everybody is doing well. Please send our sincere condolences to Barak. Congrats on the strong first quarter performance, Beth, I wanted to start by touching on cloud growth. So really great 27% year-over-year performance. How should we be thinking about this cloud ongoing growth in light of the fact that fiscal '20 is being removed, the guidance for the year?

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Beth Gaspich, NICE Ltd. - CFO [3]

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Thanks for the question, Shaul. And we're also quite pleased with the performance of our first quarter. With respect to our cloud growth, looking forward, we continue to expect to see the strong cloud growth that we've been experiencing. As we looked on the first quarter, we've experienced a lot of increases in volumes, transactional volumes, and that spans across multiple verticals. So as we look ahead, we expect that trend to continue. And as Eran highlighted today as well, many of the organizations that adopted our CXone@home offering during the quarter were organizations that were using on-premise solutions that shifted to the cloud and really in order to give them the agility they needed in their organizations. So we've seen that trend. And we've also seen that, that really reinforces the stability and the overall strength of our platform and our ability to really confidently support a large enterprise, given some of the dramatic increases in volumes. So looking forward, we're quite confident in the continued growth in our cloud revenue.

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Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [4]

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And my follow-up, Beth or Eran. We can definitely see and understand the mission-critical nature and benefits of the CXone and the X-sight platform. When we think about NICE's overall broad product offering or probably when your customers are thinking about it, are they taking the same nondiscretionary view, so to speak, when they're considering RPA, Nexidia Analytics? And again, these are just examples. So pretty much, are they taking the same nondiscretionary approach for the entire portfolio? Or are there some diversions between some of the products?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [5]

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Shaul thank you. Obviously, there are -- different solutions have different value. However, the 2 specific solutions that you highlighted, RPA and Nexidia Analytics are both having a very strong demand these days. Keep in mind that 2 things are happening. When people ship to move from home and then, of course, would probably need to shift back and maybe partially and there's a probability that they will need to shift yet again back home, the processes need to become much more agile. RPA specifically allows to create a lot of organizational agility and to make fast changes and processes that are required in order to support all these changes. As for Nexidia Analytics, what we've seen over the last few weeks is that working from home and working during COVID is not just simply a matter of the seat you sit in. The nature of the calls and the way that people handle the interactions actually changes both on the customer side as well as the employee side. And they've been using Nexidia quite extensively to understand the trend, how are the calls changing? What is changing in the call? And how are people handling them? And also what makes for a good handling of a caller interaction? And what makes for a poor handling of an interaction? And therefore, specifically for the 2 solutions you've asked about, we're actually seeing an increase in criticality during these times.

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Operator [6]

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Your next question is from Dan Ives of Wedbush.

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Daniel Harlan Ives, Wedbush Securities Inc., Research Division - MD of Equity Research [7]

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So Beth, can you maybe talk about, from a cost structure perspective, how you're thinking about things? Like, are you cutting maybe more like a stress test-type scenario over the coming quarters? Just maybe to how you think about expenses, especially just given uncertainty.

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Beth Gaspich, NICE Ltd. - CFO [8]

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Thank you for the question, Dan. And as we emphasized when we read through our script earlier, I think that it's clear that as a company, we have and always continue to be highly focused on our profitability. We have strong leverage in our financial model. And it's of importance to us and something that we continue to keep really a very keen focus on. So as we look forward in terms of the rest of the year as well as the first quarter, we are obviously reprioritizing where we invest in the company. We don't have any plans in terms of workforce reductions. We are really focused around making critical hires that will continue to drive the growth that we've continued to see in the cloud. But as I highlighted, from an overall standpoint, as we look at some of the discretionary spend, of course, we have made some changes to ensure that we will continue to see the health and deliver on the profitability increases that we have in the past.

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Daniel Harlan Ives, Wedbush Securities Inc., Research Division - MD of Equity Research [9]

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Got it. And for Eran, could you just talk about just sales cycles? Like walk us through, are you starting to see April, first part of May, maybe more normalized versus March? And just maybe walk through going from face-to-face to virtual, just from a day-to-day perspective, how you're kind of seeing those, I guess, challenges and opportunities?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [10]

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Yes. So in terms of the sales cycles, actually, we are positively surprised that we're able to close very large deals completely remotely. If you had asked us this a year ago, I would have never believed that the type of deals that we are able to close from cradle to signature without physically meeting the customer, it's surprising and encouraging. In terms of the pipeline, et cetera, that actually looks very healthy. In terms of the close rates, we are off to a good start, but I have to caution that, as you know, and as in every software company, the last month of every quarter is the more critical one. And so we will have to wait patiently until the month of June to have kind of a very sharp understanding of the impact on sales cycle. So far, we haven't seen any dramatic changes in the length of the sales cycle.

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Operator [11]

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The next question is from Samad Samana of Jefferies.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [12]

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Hi, good morning thanks for taking my questions. Maybe if I could ask one on CXone@home. Beth, I think you said -- or sorry, Eran, I think you said a few dozen customers have already adopted it. I'm curious if you could give us an idea of maybe how many seats that represents and/or any characteristics around those customers? Are they more mid market? Are they more on enterprise? Are they doing more tactical deployments or full deployments? Just any color around that would be helpful.

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [13]

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Sure. So first, I have to qualify. These are all customers that were completely new to the -- to us in terms of the pipeline. It's not a conversion of customers that were already in the pipeline and just close the CXone@home. In terms of the size of the customer, it spans a gamut. We have seen midsized customers and some very significant enterprises. I can't give you an exact number on the number of seats, but it is well in the thousands in terms of the seats that are already deployed. And the pipeline looks very strong. In terms of the specific verticals, we have seen a movement from verticals that you would have never expected to run a sales cycle from first contact to signed in a matter of days. And some of these literally took less than 10 days from the first time we talked to them until they signed. And this includes the verticals by government, which is mind-boggling that could move this quickly, it includes financial services, it includes telecom. So we see it on a pretty broad set of verticals. All of which are verticals that I would have traditionally considered verticals that run more conservative processes that take a fairly long time.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [14]

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Great. That's helpful. And then, Beth, maybe one for you. I appreciate the kind of lack of visibility on the license side and the commentary on cloud. Could you just maybe triangulate at least a little bit more on 2Q, what's embedded for cloud growth with the current guidance given for the second quarter? Just -- and then maybe what are some of the assumptions underneath that?

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Beth Gaspich, NICE Ltd. - CFO [15]

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Sure. Thanks for the question, Samad. So as we look at Q2 specifically, first of all, I would say, as you know, we don't ever guide on specific line items. What I can add in terms of some overall color, as I've said, is that we continue to see and expect similar cloud growth that we've been experiencing and so looking at the past several quarters, I think we will assume that we'll still continue to have this growth. We've talked about the increase in volumes that that we've experienced during the quarter. We're seeing this maintained in kind of the early part of Q2.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [16]

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Great. I'm just going to slip one more in, and I apologize for it. But when we think about the license sales, how much of that is typically to completely new customers versus selling back into the existing customer base?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [17]

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So obviously, the majority of our sales are into existing customers. But there's a fairly significant portion that -- non-negligible that goes into new customers. And at this point, however, when it comes to license sales, obviously, whether it's new or existing, even where existing customers, in many cases, it is a new product for them. So it's expanding the -- our footprint and the number of products that they use from us. And so it would still require them to kind of have a project around it.

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Operator [18]

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The next question is from Sanjit Singh of Morgan Stanley.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [19]

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Thank you for taking the questions and we definitely send out our condolences to Barak and his family. I wanted to, Eran, get -- have a question around how you're thinking about the market over the next 12 to 18 months. And if I sort of go back to this time last year at sort of Analyst Day, the message, at least in terms of the large enterprise market, that it was going to be a steady shift to cloud, no major inflection points. And so in terms of your investment profile, we're going to grow margins as you sort of execute against that cloud penetration opportunity over time. I'm wondering how you think about that now as we get through and get out of COVID? Is this going to be a forced accelerator to the cloud? And how does that sort of alter or not alter your thinking on investment profile? This is a once-in-a-decade shift to the cloud. Do you potentially increase your investments, not necessarily in the near, near term, but in the coming months or in the next year to capture that opportunity?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [20]

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So let me handle the first part of that question, then I'll hand over to Beth to discuss kind of ongoing investment. Obviously, we look at it in kind of a few horizons. There is the very, very short-term where we're looking at still the kind of the height of the COVID situation. And these turbulent waters are pretty hard to predict. Had you asked me 2 months ago what I would have expected, I would have probably guessed that we would see more of a freeze. What we've actually experienced, especially when it comes to the cloud, the deals are coming in, new customers are signing up, new environments are going up. So I'm actually positively surprised that this -- kind of what's happening in the eye of the storm. However, this is -- this period shall pass and hopefully pretty quickly.

Then when we look at what's going to happen in kind of the second horizon, which is the COVID, kind of, work from home is over and now we're dealing with the repercussions. As I talked about extensively in my remarks, we believe that the cloud adoption will accelerate, and it will accelerate in 2 ways. First of all, more organizations that did not think of adopting cloud will now adopt cloud. So the potential market will grow. But there's another part of acceleration, which is simply that we believe the sales cycles will get shorter because companies have gotten a lot better at making fast decisions. We see this. I don't expect that sales cycles will condense to a week like we've been seeing in the last couple of months, but still, we believe that sales cycles will accelerate.

And as you think through that, obviously, I would say 2 things on the strategic side. One is when you want to scale quickly, partners matter and we've been working extensively on adding and growing our partner ecosystem, which is a -- it's a lever that allows one to grow our reach, get better on the front end of the sales without massively increasing and growing the sales force. The second point is as sales cycles become shorter, the efficiency of a salesperson grows. So a single person can do more. So those are 2 kind of positive backwinds that we expect that would be as a result of both our actions in the next -- in the last couple of years as well as the dynamics that we see in the market now. As for specific future investments, I'm going to hand it over to Beth.

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Beth Gaspich, NICE Ltd. - CFO [21]

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Yes. I would just add to what Eran said. If you think about it more from an operational perspective, first, I think it's really important to highlight that at NICE, one of our strengths is that we really work in an iterative fashion on a regular basis, meaning that we are always reprioritizing and shifting our investments internally to ensure we're really driving our continued success and the growth we've seen in our operation. And more specifically, ensuring that we are really feeling the continuation of our cloud growth. So there's -- we'll continue to do that as we have done in the past. And if you look at some of the targets that we've previously shared from a longer-term perspective, we've talked about far exceeding $2 billion in revenue, having cloud revenue be 60% or more of our total revenue and our operating margin reaching 30% or more, those targets stay on track. If anything, we expect that the cloud concentration as a percent of the overall revenue maybe happening faster than what we previously expected, but we are certainly committed to those longer-term objectives in reaching them.

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Sanjit Kumar Singh, Morgan Stanley, Research Division - VP [22]

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Appreciate the thoughts. Very thoughtful color there. Maybe as my last follow-up, a more tactical question on the cloud momentum. So I understand that the license business is -- obviously has more volatility associated with it, but cloud usage also can spike up and spike down. And so I wanted to get a sense of how much of kind of the surge in demand in March that you saw drove upside in the quarter? And how do you think that usage sort of sustains? And if you can give us any sort of insight on -- in terms of your -- an average customer's sort of subscription contract, how much flexibility do they have to spike up and spike down without incurring charges on the platform?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [23]

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Sure. So we have had some customers that have spiked up quite dramatically in March, but our cloud business is getting to the scale with literally thousands of customers that it just becomes a law of large numbers. As you can imagine, some spike up, some spike down. All in all, we did see an increase, but it is not as extreme as these customers who have spiked fivefold in specific verticals. In terms of the license flexibility, the way our license works, they do have the minimum commit. There is no limit on how much they can spike up, but they are limited in how much they can go down. They can obviously go down as much as they need, but they will have to pay for below the minimum commit. The amount that they can go down is different and -- with different customers and different size customers. But the way you could think about it is, on average, we will be above the expected usage because the customers that spike up do more than the customers that spike down. In terms of the sustainability of it, it's hard to predict kind of these spikes, but I don't think that if you look at kind of our performance in the last quarter, I don't think that this is a result of a onetime spike. It is more a testament of the sustainable growth in the business.

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Operator [24]

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The next question is from Tavy Rosner of Barclays.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [25]

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Please pass on my condolences to Barak. Most of my questions have been asked. Just wondering if you can comment on the competitive environment. I'm thinking about your strategic positioning with regards to some of your more legacy competitors, such as Verint or Genesys, where would you see yourself at the moment? Anything would be helpful.

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [26]

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So I prefer not to address specific competitors. All I can say is we feel very comfortable with our position. If you follow kind of the analyst reports that cover our market, such as the Gartner Magic Quadrant, you would see that there's kind of a very broad recognition that our CXone platform has a significant differentiation against anything that is out there. And also, there is a matter of scale. It is probably a multiple of anything else that is -- anyone else that is competing against us in terms of the number of agents, the scale, the revenues on the platform. So we feel very comfortable. We don't see any dramatic change in dynamics. We are all innovating. Our competitors keep innovating as well, but we feel that the gap is widening rather than shrinking.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [27]

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That's helpful. And into the M&A question, I guess, it's relevant to ask you your thoughts with regards to M&A. I guess, do you feel that beyond potential small deals, is there any room for maybe large ones down the road? Do you feel that anything is potentially missing or could be value-adding to your organization?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [28]

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I'm sure there are things that are value-added to the organization. We always examine and look at opportunities. We don't feel that we have a gaping hole that requires some significant moves that we have to make. However, we can see a lot of different things that could be helpful in building up our strategy. At the same time, as you probably know, we tend to be very disciplined around how we do M&A. And the value, the integration as well as the valuation. And so if we see something that is strategic, that we think that we can integrate well and that is priced in a way that will create shareholder value for our shareholders, we can see doing it, whether it's small, medium or large.

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Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [29]

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Congrats again for the good results.

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Operator [30]

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Your next question is from Patrick Walravens of JMP.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [31]

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Great. And let me add my best wishes. So I guess my first question would be with the massive shift to working at home, some investors might actually expect the cloud business to accelerate. So what are the factors preventing that from happening? What's sort of the other side of that?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [32]

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Well, we do feel that the cloud business will accelerate. I think that we've been very clear on the fact that there's a lot of strength there.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [33]

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Maybe I got my numbers wrong, but it was 27% last quarter, 27% this quarter, and the guidance for next quarter seems around the same based on what Beth said. Did I get something wrong?

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Beth Gaspich, NICE Ltd. - CFO [34]

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Our growth in last quarter in cloud, Patrick, was 25%. So we experienced an acceleration to 27% this quarter. And of course, recall as well that typically, we have the highest level of seasonality even in the cloud in the fourth quarter.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [35]

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All right. Great. And so you think that can happen again, Beth?

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Beth Gaspich, NICE Ltd. - CFO [36]

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As I've said, we're -- as Eran and I both have said, we're highly confident in the continued growth of our cloud. So we expect a similar comparable growth to what we've seen in quarters past.

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [37]

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I would add one thing, Patrick. As you know, it feels like we've been in this crisis for 18 years. It has been 1.5 months. And you probably well acknowledge -- know the dynamics of cloud revenue and that they take time to translate into so -- business trends to translate into revenues.

So I think with the expectation that things will turn on in a week is probably a little too optimistic.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [38]

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It does feel like 18 years. Two other quick ones. How is customer churn? And what are your assumptions for that for the rest of the year? And then what's your plan for eventually returning your employees to work here but also in Tel Aviv?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [39]

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We don't see any changes in the customer churn. Our customer churn is -- in the cloud is very healthy and sense of it is low. And we haven't seen any dramatic changes in that in either direction. Obviously, we -- it will depend on kind of the longer-term economic conditions. As for -- I'm sorry, what was the second part?

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [40]

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What's your plan to have your employees go back to work in the U.S. and in Tel Aviv?

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Beth Gaspich, NICE Ltd. - CFO [41]

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With respect to our plans in terms of returning to our employees back to our offices closed, we've been working from home really smoothly in the last couple of months with no interruption to our customers. We're working in across the company kind of in a cross-functional manner to ensure that we're comfortable at the appropriate time to move back in our offices. So we haven't set in stone the specific time line yet to return our employees to either Israel or any of our offices. But certainly, we will be reopening those offices first and giving priority to the countries that are more advanced and where they are with respect to being on the downside of the curve with respect to COVID. So as we look at our offices, we certainly would expect that Israel will likely be one of the offices, if not the first office, that we would look to reopen.

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Patrick D. Walravens, JMP Securities LLC, Research Division - MD, Director of Technology Research and Senior Research Analyst [42]

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Great, thank you and congratulations again.

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Operator [43]

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Our next question is from Dan Bergstrom of RBC Capital.

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Daniel Robert Bergstrom, RBC Capital Markets, Research Division - Analyst [44]

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Thanks for taking my questions, maybe to build on Dan and Sanjit's questions earlier. Could you talk about the cadence of business or what customers were doing the quarter -- during the quarter from an activity level compared to normal? I guess, did you see a pullback in mid-March on the license deals? Or was there actually more activity going on, getting customers up and ready to work for home with CXone@home?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [45]

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So our overall activity level has increased. And obviously, you can imagine, I talked during my remarks about launching several offerings that were specifically targeted at helping our customers make this a massive shift to work from home. Again, when people move thousands of employees to work from home, it's not simply where the end of the line for their telephone or for their computer. It's a very, very different way of working. They don't have eye contact with their employees. They don't -- they can't walk the halls and talk to them. So they need a lot of tools that help them keep the machine, so to speak, going. We've also seen dramatic changes in dynamics and how employees expect to work from home. On the one end, they can jump in and start working immediately on -- but on the other hand, they expect more flexibility if they need to take a break, they need to go attend to their kids, et cetera. So this is a very, very different work environment, and they need tools to help them deal with that. So we've seen a lot of activity, a dramatic increase in activity around that.

In terms of the actual deal signing, as I said, we've signed many deals that we were -- I was surprised that we could actually sign without meeting face-to-face even once, but they did sign. There are obviously interruptions. We have customers in sectors that were heavily impacted. Some sectors that were impacted for the -- and got positive momentum and some that got negative momentum.

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Daniel Robert Bergstrom, RBC Capital Markets, Research Division - Analyst [46]

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Great. And then maybe just on the strength in the Americas, 17% growth, really strong, some of the strongest we've seen in several years. Impressive. Is that largely the response to getting customers up on work from home? Or is there more of an underlying strength there?

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Beth Gaspich, NICE Ltd. - CFO [47]

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The Americas growth is really very directly tied to our cloud revenue growth overall, and that gets attributed directly to CXone. So certainly, the strength we saw in the Americas in the quarter was directly correlated to really the growth we talked about, most of it really being driven by CXone but also some more general growth across other aspects of our business as well.

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Operator [48]

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The next question is from Ryan Koontz of Rosenblatt Securities.

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Ryan Boyer Koontz, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [49]

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Beth, wondering if you could summarize just at a high level some of the puts and takes that go into the June guide as it relates to COVID-19? And how you think about that and how you factor that into your guidance?

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Beth Gaspich, NICE Ltd. - CFO [50]

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Sure. Thanks for the question. As we looked at Q2, the considerations we took into consideration were really around primarily the difference mixed model that we have here at NICE. So of course, as we've highlighted over and over, we're highly confident on the cloud growth and how that will factor into the quarter or early indications, to date, we're still seeing large transactional volumes and increases in CXone. On the flip side of that is the license aspect of our business. And even before coming into COVID, we've seen that there is variability from quarter-to-quarter, which we've experienced in our on-premise license aspect of our business. So certainly, with the overall environment, we know organizations are looking at their budgets and pulling back in certain aspects. So we've taken that into consideration because, clearly, from an on-premise perspective, typically, most of the activity and most of the buying happens in the last couple of weeks, if not the last week of each quarter. So you have less visibility into understanding how you ultimately end up with respect to the license model. So we've taken both of those into consideration. With respect to our services, again, we continue to see the strength in our overall services predominantly with respect to the support and maintenance we provide for our customers and providing our critical need systems. And we're also really focused on driving a lot of the recurring services as well, which also support them during these times.

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Ryan Boyer Koontz, Rosenblatt Securities Inc., Research Division - MD & Senior Research Analyst [51]

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It's helpful. And on that decline in visibility, is that tied to particular segments or types of customers? Is there any -- is it tied to the kind of travel and leisure? What kind of exposure do you have to these consumer segments that are really looking like they've been hurting for a while?

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Beth Gaspich, NICE Ltd. - CFO [52]

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Yes. Again, the decline in visibility is really no different than what we would experience pre-Covid, right? With respect to our -- the on-premise business, as I said, that's typical that you see the buying behavior really happening in the last couple of weeks of a quarter. Of course, the difference is that, at this time, you have less certainty as to if the -- those same organizations will change their decision-making process at the very end of the sales cycle. So under typical situations and a normal buying cycle, you get to the point where you're quite comfortable with the -- an organization's ability to have the budget and commit to making a deal and to closing the deal. I think in this environment, of course, again, there is that uncertainty, which is heightened as organizations could ultimately, as they get to the very end of a sales cycle, decide to pull back. And so that's the difference in what we're seeing today versus a typical quarter.

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Operator [53]

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The next question is from Rishi Jaluria of D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [54]

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Thanks for taking my questions and glad you all stay safe and my condolences to Barak and his family as well. Wanted to start out by asking about CXone. First, with CXone@home, if I read right, it's offered for no charge for 45 days. Maybe help us understand what's the path for customers that weren't CXone customers, they adopt CXone@home, do they -- after that 45 days transition to kind of a lighter version of CXone, is there an upgrade path to get on the full CXone platform? Maybe alongside that, to follow-up on some earlier questions that I think Sanjit was asking, on the pricing side since CXone is billed in arrears, can you just directionally remind us how much of the revenue is kind of a fixed price per seat versus consumption base? And then I've got a follow-up.

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [55]

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So in terms of the CXone@home, in order to get people up and running in less than 48 hours, we do -- we have created some pre-packages. There is a path to upgrade for, obviously, ones who're up and running and for, obviously, additional license. Therefore, what we've seen in many cases, as people start, they get going, they start to handle interactions, which is kind of think about it as, like, emergency procedure, they're now -- and then they start expanding to additional capabilities. If we had created the richness of our -- the capabilities in CXone and all the options, if it was an a la carte menu, then it would just take longer to -- for the customer to even define what they need. So that's the idea. And we see that as a potential plus because, again, we've seen multiple of these customers come back and expand their purchase because they want more of the CXone capabilities.

In terms of the mix, CXone is billed in arrears. It's not a portion of it. It's virtually all of it that is billed in arrears. It is true that there's a significant portion of it that is committed but we still wait until the month is over to see what was actually consumed and then bill, whether if it was below the minimum commit, we bill the minimum commit. If it was above, we bill the overconsumption.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [56]

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Okay. Got it. That's helpful. And in the prepared remarks, you talked -- or in the Q&A section, you mentioned that you're seeing more interest in RPA, and I think it makes sense to all of us that RPA is going to become increasingly important in this environment. Just curious, if I'm not mistaken, RPA is an on-premise solution right now? Given the environment we're in and the fact that we're going to be remote working for a while, should we -- does that, I think, increase the need for a cloud-based RPA solution to kind of make it easier to deploy? Or what's your thought process on that side?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [57]

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We actually launched, a few months ago, a cloud capability for RPA in response to -- even before the crisis, some of the dynamics that you just described. So you're right, and we're on it.

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Operator [58]

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The next question is from Walter Pritchard of Citi.

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Walter Herbert Pritchard, Citigroup Inc, Research Division - MD & U.S. Software Analyst [59]

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A question for Beth on the Europe business was down quite a bit. How much of that was just lumpiness of large deals? Was there any trend that you saw emerging there? And obviously, the COVID impact was there first. And then I had a follow-up.

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Beth Gaspich, NICE Ltd. - CFO [60]

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Thanks for the question, Walter. Really, if you looked at the revenue for the first quarter for EMEA, the important thing to look at is where we landed in Q1 of the prior year. So looking back to Q1 of '19, you might recall that we had extremely strong growth in Q1 of '19 of 18%. So it was really a difficult compare. If you look at the EMEA region, again, we have a healthy customer base there, remain optimistic about the outlook. We've talked about our focus around international expansion, specifically with CXone in our international markets, including EMEA. Of course, as you're looking at CXone, with cloud, it takes much longer to ultimately be apparent in the revenue line item, but we're trending in a positive direction there with the growth we're seeing in CXone.

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Walter Herbert Pritchard, Citigroup Inc, Research Division - MD & U.S. Software Analyst [61]

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Great. And then Eran, the -- there was an acquisition in the quarter it looked like from the cash flow. Can you just help us understand what that was? And where that technology acquired fits into the product portfolio?

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [62]

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Yes. It was a small technology acquisition into the Financial Crime and Compliance business that would help us with certain types of advanced analytics for AML processes. It is primarily a technical capability.

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Operator [63]

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We have no further questions rising. I will now hand the call back to Eran.

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Eran Liron, NICE Ltd. - EVP of Marketing & Corporate Development [64]

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Thank you, everyone. And we hope that -- to meet you again in our next quarterly call. Thanks.