NICE Ltd. (NASDAQ:NICE) Q4 2023 Earnings Call Transcript
NICE Ltd. (NASDAQ:NICE) Q4 2023 Earnings Call Transcript February 22, 2024
NICE Ltd. beats earnings expectations. Reported EPS is $2.36, expectations were $2.26. NICE Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the NICE Conference Call discussing Fourth Quarter 2023 Results, and thank you all for holding. All participants are at present in a listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded February 22, 2024. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.
Marty Cohen: 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 2022 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 fourth quarter 2023 results and the company’s guidance for the first quarter and full year 2024. You can find our press release, as well as PDF of our financial results on NICE’s Investor Relations website. 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 share-based compensation, amortization of acquired intangibles assets, acquisition-related expenses, amortization of discount on debt and loss from extinguishment of debt, and the tax effect of the non-GAAP adjustments.
The differences between non-GAAP adjusted results and the equivalent GAAP figures are detailed in today’s press release. The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties and assumptions. I’ll now turn the call over to Barak.
Barak Eilam: Thank you, Marty, and welcome, everyone. We are once again proud to finish another excellent quarter, fueling our industry-leading fully results. 22% cloud growth, $2.4 billion of total revenue, cloud growth margin of 70.5%, operating margin of 30%, 15% growth in EPS, a rock-solid balance sheet, and record cash generation of $561 million for the year. These results not only outperform our competition by a wide margin, they also put us at the upper echelon of enterprise software. Our cloud growth is at the highest in our industry and on a much larger scale, showcasing our accelerating market share expansion. NICE's best-in-class growth margin owing to our unrivalled cloud architecture allows us to substantially out-innovate while consistently delivering increasing profitability.
This market-leading profitable growth places NICE in an elite group of enterprise software companies and provides us a robust balance sheet, enabling the NICE team to consistently deliver quarter-to-quarter, shaping the future of our markets while remaining steadfast to our long-term strategy, uninterrupted. 2023 was filled with tremendous growth and expansion across the board, leading to additional successful milestones achieved throughout the year. We continue to increase our market share, adding nearly 1,000 new customers, displacing competitors with each newly acquired logo. We are leading the cloud migration at the high end of the market, with 26% growth in enterprise cloud customers, building over $1 million in ARR. We achieved strong international Cloud growth, with over 50% increase in our international cloud revenue.
Above all, 2023 will be remembered for two ever [ph] defining landmarks for NICE, taking command of the digital engagement market and charting the course of AI in the CX industry. As we enter 2024, following the great success of last year, it is now concretely clear that AI has become an overarching catalyst, unlocking multiple vectors of growth. Our leading edge AI, with its unique data assets, is increasing NICE's cloud win rates across the board, is the bedrock of our rapid expansion into digital engagement, is the convergence power igniting the adoption of our platform, and it is an endless source for a growing number of brand new AI-based solutions with incremental revenue streams. Let me delve a bit deeper into these four growth pillars.
With only 20% of the CX market shifted to the cloud, the most exciting part of this transition is about to happen over the next several years. We are already leading with the highest market share in the cloud, attributed to the breadth and depth, scalability, and overall superiority of CXone. AI is now turbocharging our differentiation, further expanding our win rates. In 2023, we saw a 32% increase in the total ACV of CXone competitive displacements. In fact, we delivered a 40% increase year-over-year in cloud enterprise deals, each with an ACV exceeding $1 million. For example, we signed a seven-digit CXone deal with a very large provider to the financial services industry. This customer used an incumbent Sika solution for multiple years, but their IVA failed to deliver the much-desired automation and AI capabilities.
We displaced that incumbent thanks to the completeness of CXone. But above all, it was our enlightened autopilot, providing scalable AI self-service that sealed the deal. AI also drove a seven-digit CXone win with a very large international airline. After many years of settling with multiple legacy on-prem providers, they conducted a comprehensive evaluation to migrate, consolidate, and upgrade to the Cloud. CXone was exceptional in all criteria, the decision becoming a no-brainer as soon as they experienced our vast AI offering. Another deal that demonstrated how AI is increasing our win rate is a seven-digit displacement of an incumbent with a large pharmacy provider. Once again, while NICE was the preferred vendor, it was Enlighten AI that made it clear that we were the obvious choice to become the future Cloud provider for all their CX needs.
Moving to the second pillar, 81% of consumer interactions with enterprises are digital and the volume continues to grow exponentially. Digital engagements provide the potential to be the most successful for consumer satisfaction, bring the greatest cost efficiency for the enterprise and deliver the outmost tech simplicity. However, most enterprises are still using basic and silent point solutions to engage with consumer digitally failing to deliver on this great potential. Over the past few years, we have been strategically trailblazing the digital engagement market, expanding the power of CXone to cover the entirety of digital engagement and fulfilling the void in the market. The momentum to our ongoing innovation accelerated dramatically in 2023 as we infused the digital engagement capabilities with AI.
This is now the fastest expanding part of our business, reflected by an astonishing 6x growth in the volume of digital engagements managed by CXone daily, cementing it as the industry's fastest growing platform. Our digital success in 2023 is also substantiated by a 53% increase in digital bookings. Our AI-driven digital engagement wins continues to accelerate in Q4. In a seven-digit ACV deal, one of the world's largest hotel chains, presently undergoing a digital transformation, came to us for our best-in-class AI digital engagement offering. They selected CXone to be their end-to-end platform, replacing multiple Gen1 digital pure play providers. While consolidation of the silo digital touch points was their top priority, it was our state-of-the-art AI capability, natively embedded in CXone, that fast-tracked their decision.
These same positive trends repeated itself time and again in Q4, including a seven-digit ACV win with a large insurance provider in the APAC region, and a seven-digit ACV deal with a well-known commercial provider of integrated security solutions, among many others. AI convergence power supercharging platformization is the third growth pillar. Similar to other enterprise software segments, CX buyers are pivoting 180 degrees from multiple-point solution to building and simplifying their tech stack by standardizing on a single platform. While the value proposition of platform is well understood, its adoption is now gaining a significant boost because it is the only viable way to implement AI that works. Platforms don't appear overnight. It takes strenuous planning with ongoing strategic decisioning, along with a significant decade-long engineering investment.
CXone is the only platform in the CX market that was built on these principles from day one, and we have seen the fruits of that investment significantly materialize. AI now adds a new tailwind for customers and prospects to standardize on CXone. In Q4, bookings from new customers adopting CXone as a platform increased to 100%. In these deals, customers selected CXone with three or more applications, displacing at least two incumbent point solutions. One of those AI-driven platform wins was a seven-digit ACV deal with a global provider of technology for commercial real estate. We're uplifting the experience of millions of their customers and thousands of their users by deploying CXone as an AI platform eliminating several incumbent legacy solutions.
This theme of AI initiative This theme of AI initiative, spearheading, platform decisions appeared in multiple other seven-digit ACV competitive wins in the quarter, including one with a large Northeastern utility company where we replace two incumbents and a large European technology consulting company undergoing complete CX modernization driven by AI. Lastly, while AI is powering a superior win rate in codification, digitalization and platformization, it is also a source for a growing number of AI driven use cases, each contributing to an incremental revenue opportunity. Unlike for individuals, the AI adoption cycle for enterprises is complex and it is even more so for CX, which is a highly specialized market. We are experiencing a spike in the number of customers and prospects approaching us after trying to leverage general purpose generative AI technologies unsuccessfully.
They come to us with clear realization that enlighten with thousands of CX specific models that are constantly expanding and evolving from billions of interactions is the only viable options. We are defining how AI is adopted for CX as demonstrated by an astounding 375% increase in Enlighten bookings in Q4. We signed a seven-digit ACV deal with one of the world's largest home furnishing companies for Enlighten Copilot and autopilot. In this deal, we replaced the incumbent and competed against two other large cloud and two pure play AI vendors with NICE winning for all for its all-encompassing single platform in CXone and its AI excellence. The wave of adopting Enlighten AI, including Copilot and autopilot, led several other seven-digit ACV deals, including one with a marquee business service company, one of the largest banks in the world and a very large telecommunication company.
As we plow steam ahead into 2024, our energy and momentum is at a level higher than I've ever witnessed before and a record-setting pipeline. At the heart of our expanding win rate is our first-class global sales team with unmatched domain expertise, augmented by the industry's largest partner network. This ecosystem continues to grow as partners are always drawn to market winners. And in 2023, 75% of our business was closed with all new partners. The foundation of the great results of 2023 and the just-stream-like momentum we are carrying into 2024 is our 8,400 NICErs, the most energetic, dedicated, and talented group of employees in our industry. I want to thank them for their continued commitment to making NICE the world-class company that it is today.
I also want to take this opportunity to thank you, our customers, partners, and shareholders. We appreciate the confidence you place in us and your unwavering support. For us, this great journey to date is only just the overture. The main act is yet to come. I will now turn the call over to Beth.
Beth Gaspich: Thank you, Barak, and good day, everyone. 2023 was another record year for NICE, tapped off by an impressive fourth quarter with strong momentum going into 2024. Both the fourth quarter and full year 2023 once again demonstrated that our financial results shine in the enterprise software market with best-in-class cloud growth in the CX industry coupled with our ever-expanding profitability and cash generation. Before I move to our fourth quarter results, I'd like to start by reiterating that the financial results for Q4 do not include any contribution in the P&L from the LiveVox acquisition, which will only contribute to NICE's results starting in 2024. In Q4, both total revenue and EPS came in well in excess of our expectations.
Total revenue for the fourth quarter was a record $623 million, a 10% year-over-year driven by the ongoing strength of our cloud business, which now represents a record 69% of our total revenue compared to 63% last year. Cloud revenue increased 20% year-over-year and 6% sequentially to a record of $429 million in the fourth quarter as we continue to see increasing adoption of our CXone platform by large enterprises driven by demand for our digital and AI solutions which serve as key differentiators in clinching deals and driving our high win rates. Digital and AI are among the key drivers of growth for our business. The opportunity that we provide with these expanded capabilities make our cloud offerings the preferred choice for enterprises that desire to deliver cost efficiencies while simultaneously increasing consumer satisfaction.
The further adoption of digital and AI act as significant opportunities for incremental revenue streams into the years ahead. Services revenue, which represented 26% of total revenue, was $162 million, an increase of 1% year-over-year given higher professional services revenue resulting from large enterprise adoption. In line with our expectations, product revenue from on-premise sales, which represented 5% of total revenue in the quarter, compared to 9% of total revenue last year, decreased to $32 million. With the ongoing expansion of cloud business across all our segments, our recurring revenue further increased to a record 88% of total revenue in the fourth quarter compared to 85% last year and crossed the $2 billion threshold for the full year 2023.
Recurring revenue is comprised primarily of a combination of cloud revenue and maintenance revenue, which is a component in our services revenue. From a geographic breakdown, the Americas region, which represented 84% of total revenue in Q4, grew 10% year-over-year. The Americas region has continued to excel, primarily from the success of CXone sales in the region. The EMEA region, which represented 10% of our total revenue, increased 2% year-over-year. The increase in EMEA was due to significant growth in cloud revenue, offsetting a decline in on-premise related revenue, primarily from the financial crime and compliance segment. The APAC region, which represented 6% of total revenue, increased 11% year-over-year. The foreign exchange hedge wins in APAC and tailwinds in EMEA offset each other, such that the net currency exchange impact on total revenue was negligible.
The international market is highly under penetrated in comparison to cloud adoption in the U.S. This represents a significant growth opportunity for NICE, as we have already made considerable investments in our partnerships, data centers, and go-to-market to capitalize on the growing interest in our cloud offering across the globe. Cloud revenue now represents nearly half of our total international revenue. With respect to our business segments, customer engagement revenues, which represented 84% of our total revenue in Q4, were $523 million, a 12% increase. CXone, the most complete customer experience cloud platform, is the growth driver in customer engagement led by our enterprise-grade CX AI. Revenues from financial crime and compliance, which represented 16% of our total revenue in Q4, and totaled $101 million, delivered as expected and decreased slightly year-over-year.
We are continuing to execute on our strategy to cloudify the segment of the market, both to the high-end and mid-tier financial institutions through adoption of our cloud platforms, X-Sight, and Xceed. In Q4, the cloud revenue growth year-over-year was offset by a decrease in cost and services. We expect to see this cloud growth materialized in the revenue stream for financial crime and compliance in future periods, and for the segment to return to growth as the cloud revenue becomes more meaningful. Our focus on continued expansion of our profitability is unwavering and was demonstrated once again in our robust results in the fourth quarter. Our outstanding cloud growth margin reached a record 71.1% in Q4 thanks to our scalable cloud architecture.
Our complete CXone platform continues to deliver an ever-expanding cloud gross margin as a result of higher attach rates as we go up market, which contributes incremental cloud profitability. In Q4, operating income increased 15% year-over-year to $187 million, and our healthy operating margin increased 140 basis points to 30% compared to 28.6% last year. Earnings per share for the fourth quarter totaled a record $2.36, a 16% increase compared to Q4 last year. Cash flow from operations in Q4 was $180 million, and for the full year was a record $561 million, an increase of 17% compared to 2022. Our industry-leading free cash flow generation and profitability are the direct reflection of the consistent focus we maintain on delivering increasing operating leverage in our business.
Due to our sales wins and laser-focused expense management, we achieved a 26% free cash flow margin in Q4 and 20% for the full year 2023. The strength of our cash flow generation enables us to execute our capital allocation priorities of M&A like our recent acquisition of LiveVox to continue to cement our market leadership and to execute on our share buyback program to return capital to our shareholders. Accordingly, in 2023, we accelerated our buyback program, purchasing $288 million of shares, nearly double the amount purchased in 2022. At the end of last year, we announced the introduction of an even larger plan of $300 million, which we expect to complete by the end of 2024. We successfully completed the acquisition of LiveVox near the end of December 2023.
Our balance sheet was consolidated on the closing date and reflects the acquired assets and liabilities of LiveVox. Accordingly, total cash in investment at the end of December totaled $1 billion and $408 million. This healthy year-end cash position is post-the-closing and outgoing proceeds for the acquisition of LiveVox. Our debt, net of a hedge instrument, was $544 million, resulting in net cash and investment exceeding $864 million. In conclusion, our fourth quarter performance caps off a strong year for NICE, reflecting the foresight of our comprehensive strategy of seamlessly implementing CX AI with quality, accuracy, and security on a single platform at scale. Our new bookings in Q4 served as a positive reinforcement of the growing demand we are seeing for our CX AI solutions, and we are excited to continue the strong execution of our strategy across all our business segments in 2024.
Before I conclude my remarks, I would like to highlight a few expectations relative to our 2024 outlook. We are reiterating our expectation of cloud growth of at least 18% in 2024, excluding the contribution of LiveVox. We expect LiveVox to contribute approximately $142 million to total revenue, which will be attributed to our cloud revenue line from the start of 2024. We assume some revenue redundancy in the initial year of transition and expect this acquisition to show growth in 2025 and beyond. Our total cloud revenue is expected to exceed $2 billion for the full year 2024. We expect our effective tax rate throughout 2024 to be in the range of 20% to 21%. Now I'll close with our total revenue and non-GAP EPS guidance for the first quarter and full year 2024.
For the first quarter of 2024, we expect total revenue to be in the range of $650 million to $660 million, representing 15% year-over-year growth at the midpoint. We expect the first quarter 2024 fully diluted earnings per share to be in a range of $2.40 to $2.50, representing 21% year-over-year growth at the midpoint. Full year 2024 total revenue is expected to be in a range of $2,715 million to $2,735 million which represents an increase of 15% at the midpoint. Full year 2024 fully diluted earnings per share is expected to be in a range of $10.40 to $10.60, which represents an increase of 19% at the midpoint. I will now turn the call over to the operator for questions. Operator?
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