Q2 2021 Nice Ltd Earnings Call
[music].
As a reminder, this conference is being recorded August F..2021 I would now like to turn the conference over to Mr. Marty Cohen VP Investor Relations at Nice. Please go ahead.
Thank you operator with me on.
On the call today are rocking along Chief Executive Officer, and Best guess fish 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.
Yeah.
Thank you Marty and welcome everyone.
We're pleased to announce an excellent quarter marked by an acceleration in all our key financial metrics.
Revenue continues to flourish with 32% growth with total revenue continued to accelerate well into the teens, increasing 16, 6% year over year.
During this acceleration.
Moving this acceleration is a solid and consistent execution in cloud during the past 5 years.
Unlike traditional cloud transitions that are focused on simply switching customers from license to subscription model. Our overall revenue growth is accelerating due to a combination of 2 day.
To our cloud business.
First net new cloud business and seek us digital and self service solutions that we did not previously offer in the on premise model.
And second cloud conversions of our existing on premise products, resulting in higher annual revenue per customer.
As our cloud revenue continues to experience rapid growth and is becoming a larger share of our total revenue we expect that the acceleration in the growth of our total revenue will continue over the next few years.
While the classification of our market continues to speed up we're experiencing another major opportunity in the CX market as it expands to full digital CX.
And just like 5 years ago in cloud nice is well positioned to take on and grow its leadership position with yet another great market opportunity in digital.
Back in 2016, we made a major strategic transformation at nice by making an aggressive move to the cloud with the acquisition of in contact.
It was a strategy to capitalize on rapidly changing market a market in which enterprises of all sizes, we are beginning to shift to the cloud.
Customer service organizations, we're exploring the cloud for its agility pace of implementation, our cecity scalability and overall lower total total cost of ownership.
At the same time, the expected customer service solution with a full set of capabilities and applications combining to a single cloud native suites.
With the acquisition of <unk> contact we embarked on a massive investment to deliver what organizations of all sizes needed and that resulted in 6.1 the market leading native CX cloud platform.
Since then nice became the clear leader of this parcel volume market.
Our leadership is achieved for full contributing unique ingredients.
The first is our assets, particularly omni channel routing walks first engagement management high value analytics, AI digital and self service, all native too and seamlessly integrated into 6.1.
The second is our on impeded focused on the <unk> market.
The third is our distinct competitive advantage in large enterprises due to the breadth and depth of our platform our domain expertise at the high end of day market and our global footprint.
And the force is a relentless innovation demonstrated by the 1 hundreds of added features and functionalities in 6.1 every year, our cutting edge AI with lighten and unique enhancements that evolved fix 1 into a full enabled digital platform.
All 4 of these ingredients are critical factors in delineating our market leadership.
Yeah.
In cloud, we identified a rapidly growing market set a clear strategy and executed well.
As a result, we are now a $1 billion revenue run rate company Cloud company cloud revenue continued to exhibit rapid growth and it's now represent more than 50% of our total revenue compared to less than 5% prior to the launch of 6.1.
And today digital is similar to what cloud was for us 5 years ago.
And like cloud the opportunity in digital is enormous.
The expansion of customer service interactions into full digital is in full swing with a growing part of consumer journey, taking place a digital touch points.
There is a clear realization that gen..1 CX solutions, which have a disjointed interaction management approach and cannot cover and maintain context through the entire customer journey are preventing organization from participating in the most critical part of their consumers experiences that are taking place in digital.
This realization creates a major disruption and increasing demand for unified Nextgen CX platform that can manage all interactions across every consumer touch points from digital to voice for any service needs in both a responsive and proactive manner.
With the investments we've made in digital CX, both organically and through acquisitions over the past 18 months, we have evolved 6.1 into a complete platform with a unique set of solutions that can now cover all consumer touch points.
The next 1 now allows organizations to move from managing interactions just in the contact center to owning the entire customer journey.
This was achieved with the recent launch of <unk> smartphones and 6 on expert that expanded 6.1 into a full profit of engagement platform using advanced conversational AI driven by state of the art knowledge management in more than 35 digital channel.
Moreover, what also makes our platform rise well above other solution in the market and the glue that makes our platform unique is the massive amount of data we have processed over the past few decades.
These data coupled with AI and machine learning is crucial to enable smart conversational sales service among all the digital channels.
This large volume of data our domain expertise and 6.1 as the best seamless integrated digital platform in the market today and body a powerful combination of assets.
With these assets, we now have a major opportunity in front of us as we put our digital CX platform in the hands of organizations worldwide and take the clear market lead in digital and self service.
Now, let's switch gears and tailored to our quarterly results in which we reported very strong metrics across the board.
Digital transformation strong growth in the large enterprise market analytics, and AI and international are the key business pillars that are driving our success.
First the number of deals that included digital increased 41% in Q2.
6.1 digital deals included 7 digit ACB deals with a very large financial services company, a well on European based home improvement retailer and 1 of the largest digital broadband providers in the U K.
They also included a large healthcare company, a well known clothing retailer a state government agency and a cloud based HR software company among many others.
Many of these digital deals are being signed by large enterprises and almost all on competitive replacement of the incumbent legacy Gen..1 providers that cannot meet the digital demands of today's consumers.
And that brings me to our success in the large enterprise market in Q2, we saw an increase of 60% in 7 digit deals.
Moreover, we are witnessing an increasing quarterly trend where multiple 6.1 applications are being sold in each deal.
This is a testament to the seamless integration and the breadth and depth of our 6 on <unk>.
As well as our strength and leadership in the large enterprise market.
This competitive differentiation enabled us to gather more revenue per seat and more total overall fits.
A few examples of large enterprise deals included 7 digit <unk> deal with 1 of the world's largest hotel chains.
Digital payments company, and a large well known health insurance company.
It also included a large broadband provider the business Outsourcer and an online marketplace for health insurance.
Analytics and AI are key areas of strength at nice.
Our injected into almost everything we do.
In Q2 for example, we signed multiple 7 digit deal flow and lighten our market leading AI solution.
The deals, including a leading lodging online market based company and a provider of vehicle lifecycle management software.
And let me take <unk> and AI are also driving accelerated growth in our financial crime compliance business, including 3 very large 8 digit deals.
1 deal with a very large insurance provider and to deal with very large financial institutions.
Another key area I mentioned is international.
We have continued to expand our global go to market to our partner ecosystem as well as growing our local presence and we're seeing that positive impact in our results as international bookings doubled in the quarter.
In addition, the number of deals outside of the U S continued to rapidly grow in number and sites.
For example international deals included a 7 digit deal with an Australian energy company and a 7 digit deal with a very large Japanese telecom company.
We signed 7 digit deal with large European Bank, a large U K based insurance broker and 1 of the largest banks in Germany.
In summary, Q2 was very strong quarter on all fronts. We are now beginning to witness the impact of cloud revenue representing more than half of our business, which is driving the acceleration of our total revenue growth.
Our strong financial performance reflects the increasing leadership GAAP between 90 and our competitors.
This widening gap is being driven by our solid execution in cloud and digital are.
Strength at the high end of the market, where we believe we are unmatched in our offering and domain expertise and CX 1 the most complete customer experience platform in the market today.
We are excited for the continued opportunities ahead of us with only 10% of the market that has converted to cloud and digital and self service barely in the first innings of its transformation.
As the clear leader in our industry. We believe we are by far in the best competitive position to capitalize on the opportunities ahead.
Thank you and I will now turn the call over to Beth.
Thank you Barak and good day, everyone I am pleased to provide the analysis of our financial results and business performance for the second quarter of 2021 and provide our outlook for the third quarter and full year our.
Our second quarter financial results were excellent with 16% year over year growth on the top line.
A 32% increase in cloud revenue and further improvement in the cloud gross margin, which is a testament to the scalability and efficiency of our cloud business.
Total revenue for the second quarter reached a record of $459 million compared to $395 million in the same period of last year.
Total revenue growth was again, driven by <unk> cloud revenue in which its relative share of our overall revenue continues to increase and stood at 54% of total revenue in Q2.
Product revenue represented 10% of total revenue and services revenue represented the remaining 36% of total revenue we exited the quarter with an annual cloud revenue run rate has more than $1 billion. Our cloud business is expected to continue to thrive as we further penetrate the market.
To add new logos and convert existing on premise customers to the cloud and which the conversion typically result in a significant uplift in annual contract value.
On a recurring revenue increased to 82% of total revenue in the quarter compared to 80% last year.
Our cloud revenue is primarily being driven by <unk> and all segments of the market with market momentum shifting to digital and self service or.
Our new solutions CX, 1 expert and CX, 1 smart reach were both significant and winning some of the key large enterprise digital deals in the quarter.
The Americas region today is still our primary market, which represented 80% of total revenue in Q2, and which grew 15% year over year, we are continuing to see more growth in the international market. As we are driving further traction with our international partners, we reported very strong growth.
In EMEA, which represented 14% of our total revenue and grew 43% year over year.
Pac represented 6% of our total revenue in Q2.
Moving to our business unit breakdown Custer.
Customer engagement revenues, which represented 83% of our total revenue in Q2 totaled $381 million for the second quarter, an 18% increase compared to the same quarter last year and.
In financial crime and compliance revenues were $78 million for the second quarter, which was an increase of 9% from Q2 last year and represented 17% of our total revenue.
Our gross profit year over year growth accelerated to a record 18% totaling $332 million in the second quarter compared to $281 million for the second quarter of 2020.
For the first time cloud gross profit represented over 50% of our total gross profit.
Gross margin increased to 72, 2% compared to 71% in Q2 last year.
The increase in gross margin was mainly attributed to an increase of 200 basis points in the cloud gross margin, which reached a record 67, 7% in Q2, we continued.
To expect improvements on our cloud gross margin as our cloud business expands.
In Q2 operating income increased by 16% year over year to $130 million compared to $111 million in Q2, 2020, and operating margin was 28, 2% like last year.
Earnings per share for the second quarter totaled $1.57, an increase of 15% compared to Q2 last year.
We experienced another strong quarter and operating cash flow, which totaled $81 million in Q2, an increase of 37% compared to last year.
Total cash and investments at the end of June 32021 totaled $1 billion and $408 million.
Net of debt of $613 million or net cash totaled $795 million on.
Our strong cash flow generation and healthy balance sheet continue to provide us with the flexibility to capitalize on strategic acquisitions that are consistent with our digital growth strategy and capital allocation plans.
I will conclude my remarks with guidance.
For the third quarter of 2021, we expect total revenue to be in the range of $460 million to $470 million. We expect the third quarter 2021 fully diluted earnings per share to be in a range of $1.51 to <unk>.
$1.61.
For the full year 2021, we are increasing the range of our guidance for total revenue to be in the range of $1 billion and $835 million to $1 billion and $855 million.
We are also increasing the range of our guidance for the full year 2021 fully diluted earnings per share to be in a range of $6.26.
To $6 and 46.
I will now turn the call over to the operator for questions operator.
Thank you we will now begin the question and answer session to ask a question. Please press Star then 1 on your Touchtone phone. If you are using a speakerphone. Please pick up the headset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then 2 we will pause momentarily.
Early to assemble our roster.
Our first question comes from summit.
Apologize Simon Samana.
From Jefferies. Please go ahead.
Hi, Greg Good morning, and thanks for taking my question debt.
Great to see the cloud results.
Maybe we'll kick it off the top end.
Sales like you talked a lot more about digital and your and your efforts there this quarter and I'm curious just if you think about the up market success that you are seeing how do you feel about digital as far as expanding maybe the average deal size as.
As you attach that more and more frequently and is that making larger enterprises accelerate their shift to the cloud.
Yes, thanks for the question so.
I said in my earlier remarks.
This shift or expansion actually that we see to digital as both what we do from our customers as well as what we put as a strategy a couple of years ago and we've been executing in the last few quarters, both organically and through.
Who acquisition first I would say that we believe the day leadership.
In a secret if you remember when we stepped into because we have converged.
Secrecy, Wm and analytics and became a leader with 6.1 is that in today, we believe that the future is by converging debt with digital that's what we hear from our customers. That's what they want to see in terms of the potential.
It's the normal.
If you think of CCAR and the way we think about it is technology that is the.
Supporting and connecting consumers to contact center agents, the beauty of digital and self service that if it is done right with can actually eliminate the need for the agent and the cost of an agent today is about $50000 per year on average can get up to that level.
So in the industry there are 15 million agents.
By the time, when we get to a point that we can start reducing this number by moving into digital and self service you can easily calculate the potential of this market needless to say that in order to do that you need the full suite of the offering combining zika and full digital CX.
And I talked about the notion of organization on wanting to see the next generation of digital CX versus the first gen.
Dilution.
So if.
If you take all of that what we see is that in those deals that I spoke about it increases the wallet share of broth quite dramatically.
And definitely at the high rent on the market and we believe that will continue to see the trend as both the clarification on farmer market together with digital.
Are starting to accelerate.
Great and then and then just maybe as a follow up.
I have to ask Theres, obviously, a huge news in the industry with with.
Slide 9.
Announcing that they're planned debt to merge together. So I'm just curious on maybe what you think the what the implications are for nice and what.
What you see as an opportunity coming out of that potentially or how you think about <unk> positioning in the market as a consequence.
Okay.
So first I'll tell you 1 thing we can 1 insight from this particular transaction.
Is that we see what we said all defined on the book.
Cancel on the customer engagement market is huge.
Usually large players on the.
Don step and on to quality into markets that do not have a big Tam.
Think of that particular transaction as well as others.
Present, the potential of the future time, the current and future Tam on this market. So that's the 1 more proof point to debt.
Second if you'd like a lesson learned from that is that.
Anyone that they have the desire to organically build.
And develop into this market.
It's to link with the highly complicated feature rich market that requires a lot of domain expertise and in order to build and be competitive in this market are there.
The only way for someone to get into this market is to buy into this market and there arent too. Many players in this market actually $5.9 we're not the leader in the Gartner MQ and them being taken out by our video collaboration video collaboration player is actually a good news for us.
On the last 1.
Going back to what I said on the call. We believe that in order to win the customer engagements markets the direction.
And the need from customers is to offer full digital CX offering that includes <unk>.
<unk> worked with engagement analytics, and AI digital and self service.
We were busy in the last 18 months and this is where we see the success today in.
In this particular transaction I don't think Zumiez.
Zoom is giving a 5 minute any of those assets. So I don't see how it solve their problem. So quite frankly, we're happy with the upcoming disruption to them and we believe we have a really solid position both.
With our offering as well on as many other partners that we have and we do great business together.
Great and then maybe just 1 for you Beth and then I'll turn it over just the cloud revenue was really impressive staying well above 30% even weighted.
The comps got tougher can you maybe just.
I know you've got total revenue guidance can you, maybe just help us understand it.
In shorter term, how we should think about.
The linearity of cloud revenue growth.
The company's given longer term guidance, but just how should we think about the short term cloud revenue growth trends.
Yeah. Thanks for the question <unk>. So you know as you've seen we've been consistently delivering a really healthy growth in on our cloud business I'm looking on the first half of the year gave us confidence obviously on on the visibility and line of sight looking forward.
We remain.
Really are optimistic and in a good place with respect to cloud revenue looking forward and as you know we don't give specific guidance with respect to our cloud, but I can reiterate what we've shared already in the past, which is that if you look over the next few years and we're confident that we will see a 20.
5% growth or higher.
And in the current year, we are comfortable that will be in excess of 25% growth.
Great. Thank you for taking my question congrats on the quarter.
Thank you.
Our next question comes from Pat Walraven from GMP Securities. Please go ahead.
Oh, great. Thank you and congratulations.
He brought back to the sort of the.
How the industry is changing.
A question I had sort of a 2 part question part 1 is.
How important is it to have the call center software writing directly on top of them.
The global communications infrastructure, so that would be the idea I guess.
Slide 9 and zoom and then people say that's also.
Part of the appeal.
On top desk, writing on top of Twilio.
Good to hear your thoughts on that theme and whether that's that's really important or not and then also your thoughts on.
Talk to us competitively.
Okay.
So.
Thanks for the.
Thanks for the question.
Most of our deals are not.
Breathing or combined with the unified communication and fulfill not with our video collaboration we haven't seen any traction with that it's a different buyer.
Between the video collaboration and nice tick on.
The other thing that we're seeing and I've talked about it a lot in past quarters.
While there is a there is some of that behavior in the lower end of the market as you go up market.
So usually decision.
Taken separately.
And also the fact that in the higher end markets the need from customers is much more about the expanding from.
Kickoff to a full digital CX offering with everything that I've mentioned before.
Before it's a very feature rich offering.
Very complicated.
Complicated if you would like a sales cycle in that regard because the sales cycle is complicated because of the type of transformation customers are looking for.
<unk> is significant.
So we don't see too much of that and especially in north or the higher end of the market.
And specifically about I think you asked about the doctor clients.
Right.
We don't see them a lot I think there are competing more on the lower end of the market. There are much much smaller player as far as we know there are private companies adopt more for sure.
We don't bid on not a leader in our market.
1 more 1 more competitor in the markets that we see and the lessening of course, a lot of the things we have done both organically and through acquisition.
And the completeness, if you like of the suite.
Great. Thank you for that perspective.
Our next question comes from Kashi Rosner from Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking my questions I, just wanted to talk a little bit about the transition to the cloud. So I guess the first part of the question would be you.
You can get a sense of you know what.
What proportion of new revenue is coming from.
<unk> customer transitioning to the cloud as opposed to new logos and I guess as a follow on.
I am assuming debt nice sales approach kind of your entire customer base and try to convert them from on Prem to.
So T X, 1 and I guess do you ever get.
Pushback from customers, saying listen where we are happy with our on Prem solution. It's working no need for CX, 1 at least no need in the near future I'm just just curious.
It's good when you that we have the.
And that is to your question that is the predominant allowed to parts and the largest share both of the revenue as well on the new business.
It means that there is still a pretty long gone way for us to continue to do that and at the same time to start and accelerating the conversion of the existing customer base that we have that are still on the on premise and by the way when we do that in most cases, we see a major uplift because a.
A given full of like for like the annual revenue run right from such a customers will at least double but if we managed to sell the flow 6.1 sweet which is the case in many in many administration. The multiple is much more than just a doubling.
Until the last part of your.
Question, whether we get a pushback from customers.
I'll say that today.
For most customers. The question of you know a.
If they're going to move to the cloud is no longer on the table, it's mainly about the sick sequence and when and how and we'll find ourself as a leader in the market in many cases.
No just the vendor because a consultant to our customers and we have a lot of customers of the higher end of the market that fear that the trusted adviser.
And many of those loans customers from variety of rhythms are doing it in a moderate that way I think that the the last thing I'll say about the beauty of that is we are expanding the offering that we haven't fix 1 and a customer can have it all to install it in 1 set of solution or a different set of solutions.
We see a lot of customers that have some initial concerns as you hinted at the beginning.
I'm actually starting with some part of 6.1 now starting adjusted digit on it'll just starting justice analytics and they gain confidence and then to expand from debt. So we seen the last 2 quarters a lot of those beaches.
In multiple accounts, which we believe Ah.
Create for us.
Strong expansion on opportunities in the future.
[noise] great. Thank you for the detailed feedback I appreciate it.
Thank you.
Our next question comes from Rashi.
You Lora at da Davidson. Please go ahead.
Hey, this is actually a rishi jewelry on from RBC.
Thanks for taking my questions first I wanted to go back to the question on on C cash and you cash that Pat had brought up there.
And I know you partner with some of the U cash vendors out there that the white label CX lunch. So there's there's I guess some evidence of having the same buying center first you cash and see cash, but but maybe can you talk a little bit philosophically do you not see any any convergence of this over time as a partnership the right strategy or what would need to have.
And in the market for you to consider having your own you cash solution and then I've got a follow up.
First of all we have is instead of a lot of partnerships.
In the.
And variety part of our ecosystem mucus is 1 of them and we have 1 was being sent on and she logarithms on very very happy of these thousands hip and give us a great expansion to always go to market.
And.
It's also allowing us to focusing on on being leaders in sekos and someone like creamed drink to be a leader.
New cost and video collaboration and both companies are doing extremely well and will continue of course to do that.
At the same time, we're seeing that the right investments for US is not to go in that direction and definitely note into vehicle liberation, but rather to do what's on our customers. Once a month and this is to expense sekos.
To the full offering an expanded into digital I spoke about the opportunity before that's what we've been doing in the last 18 months.
Think that players debt.
And could not execute to invest strategy had to sell themselves.
And being taking out from the market.
And this is the right investments for the long run thusly on our customers need.
This is what's consumer preferences are in the customer service and customer engagement and market.
And this is probably the right use on <unk>.
On both organically and also too.
The right acquisition strategy for us.
Okay, Great. That's that's helpful.
And then I just wanted to maybe drill down on the FCC side of the card business can you talk a little bit about what what sort of momentum or traction you're seeing the on on the cloud side, they're both with migrations as well as new customers. Thanks.
Sure.
So.
Heard both for myself and bit earlier, we're very happy with what we always seen was the financial common compliance business.
I spoke specifically by the way about 3 very large a digit deals.
For this business 1 of them is the largest in the history of of the financial common compliance division or business. So we're very happy with the most.
Momentum debt, we see there.
And what.
What are we starting to send this business that is historically a very on premise business. We are starting to see a shift to the clouds, yet seated in the revenue, but we definitely state in the booking and it's divided into 2 parts of the market.
1 part of the market is the medium market. Following the acquisition of Gouge on analytics, we now have the platform call exceed which is 100% cloud.
For us it's a brand fewer upset because we did not have the right product nor the go to market to go off to the mid market and that's exactly what we are doing these days on succeed. So that's 1 area of clouds growth for financial Carmen compliance.
And the rest of the business is just now starting eighth glorification process and we are starting to see the dynamic moving there.
It is behind if you would like.
Versus the customer engagement business behind meaning.
Evolution to the cloud, but I would say, it's where our customer engagements was 3 years ago in terms of fiscal dislocation cycle.
But we're starting to see the acceleration and we are ready for that and more and more customers are asking about it and it's a great opportunity and we also see them. They're in this business day ability to accelerate the business.
Similar multiple I talked about in terms of the conversion from on trial on from 2 cloud.
Alright wonderful thank you.
Thanks.
Our next question comes from meta Marshall from Morgan Stanley. Please go ahead.
Hi, This is Dave will cargo on for me to Marshall.
2 questions from our own Turkey for the questions.
First Florida customers start down the cloud transformation path, what are you, saying as far as what will be the biggest hurdles to getting them to transition.
That'd be security complexity scope of how to think about digital transformation.
And second as you do you think you can maintain 25 per cent cloud growth rate targets without larger customers really making a more meaningful move towards cloud.
So.
In other words concurrent channel support that growth.