Q3 2022 Nice Ltd Earnings Call
[music].
Welcome to the Nice conference call discussing third quarter 2022 results and thank you for your 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 November 10th 2022, I would now like to turn this call over to Mr. Marty Cohen, Vice President Investor Relations at Nice Please go.
Head.
Thank you operator with me on the call today are Barack a long Chief Executive Officer, and Best guess Fitch 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.
Information regarding the factors that could cause actual results or performance of the company to differ materially is.
Is contained in the section entitled Risk factors in item three of the company's 2021 annual report on form on.
On form 20-F.
As filed with the Securities and Exchange Commission on April five 2022.
During the call we will present, a more detailed discussion of third quarter 2022 results and the Companys guidance for the full year 2022.
Following our comments there will be an opportunity for questions.
Let me remind you that unless otherwise noted on this call we will be commenting on our adjusted results of operations, which differ in certain respects from generally accounting 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 and I'll now turn the call over to bra.
Okay.
Okay.
Thank you Marty and welcome everyone.
We continue to thrive and are pushing full steam ahead.
Evidenced by another quarter of double digit revenue growth.
We reported total revenue of $555 million, representing an increase of 12% or 14% in constant currency.
Compared to the same quarter one year ago.
This top line performance was driven by another solid results in cloud revenue, increasing 26% in the quarter and 27% at constant currency.
We then exited annual run rate of over $1 $3 billion, we are by far the largest cloud vendor among our competitors and we continue to display strong cloud growth at scale.
At the same time, our emphasis on profitability profitable growth has not wavered as demonstrated by an increase of 14% in operating income and an increase of 41 basis points in the operating margin driven by a 330 basis points increase in the cloud.
Gross margin in 14% growth in EPS.
We are experiencing an extraordinary time.
They will have been that are reshaping, our world and ushering in a new era.
We are in fact in a transition period, where the new rules of the next era are being defined marking the end of the previous era spending the past 15 years.
The unmatched events of the past three years triggered by the outbreak of Covid are forming several major underlying driving forces that will dramatically change the enterprise software landscape in this new era, creating massive opportunities for some an unbridgeable gaps for others.
First we can clearly enrolled.
The way the early 2000 Dot Com crisis created a new standouts were software companies will only viable if they demonstrated a clear path for revenue monetization and the current post free capital era, where software companies must also build solid and <unk>.
Sustainable economics.
Consequentially in the new era profitability and a viable business model. Our third thing took place at the global table.
Second following a few years of unprecedented disorder enterprises executive team outstanding helpless facing out of control complexities combined with extreme shortage and increasing cost of flavor.
We are transitioning to an era, where the software industry, we lead total a ization of enterprises.
<unk> can only be achieved by injecting purpose built AI to each and every process and is the only way to reach complete smart automation and efficiently manage complexity at scale.
Lastly, the disappointment with cloud platform that also limited and generic application coupled with the impossible to manage enterprise text clutter build from dozens of best of breed point solution will mandate the shift of the softer market to suite form.
<unk>.
Sweet form is the ultimate combination of our suite and our platform.
It will become the new market standup, a powerful fusion of an underlying cloud native platform at scale with a complete suite of seamlessly integrated applications.
Sweet form urbanization and the focus on viable economics are going to reframe, the enterprise software industry and the upcoming new era.
We are in a transition period between error and ninth is best positioned to lead during this transition and beyond.
Mission critical solutions, such as our platform.
Unshakable in relation to enterprise budgets, even during volatile periods.
The next one is the heart of enterprise customer service operation and is essential for empowering companies to elevate the brand and customer loyalty.
Excite our finance.
Carmen and compliance cloud platform in serving hundreds of the world's leading financial institution.
Bound by cyclical relation.
And evidenced central our criminal Justice cloud platform is addressing a market that is agnostic to any economic climate.
In addition to prioritizing, Michigan critical solution enterprises rally to find ways to overcome the shortage and cost of flavor in an inflationary environment.
Our complete platform infused by I R. The Goto solutions for customers to allow them to replace labor with automation.
Moreover, our platform a highly modular fast to deploy and deliver rapid ROI, which are fundamental requirements for enterprises in today's environment.
Our ability to lead in this transition ore extends to our financial excellence.
We are consistently highly profitable with unmatched unit economics, and expect to continue to grow operating income and EPS at double digit rates in both the short and long term.
Unlike many other vendors in our industry, we are flushed with capital, giving us the fuel to continue to innovate and acquire to grow our business.
Innovation has put us at the forefront of the cloud and digital transformation, taking place in our industry. While most other vendors are in growth in myriad of debt and have to rely on the capital market to fund their business with the skyrocketing cost of capital.
Lastly, we have a seasoned and committed management team that has been with nice for many years has decades of experience and has weathered successfully navigated various economic and industry cycles over time.
Enterprises are already turning towards software companies that we'll be able to prevail. During this period and the one that will lead into the next era.
Evidence of this actuality is the significant amount of business, we are winning in the market, including the growing number of competitive replacements of legacy vendors key win against cloud competitors as well as further expansion within our customer base.
In fact, the total value of competitive replacement deals increased by 96% in the third quarter compared to Q3 last year and.
And the average deal size of those competitive replacements grew by 85%.
Legacy vendors have struggled to adapt to the rapid changes taking place in our industry and have not kept pace with innovation around cloud and digital.
This has led to tremendous opportunities for us to grab market share from these vendors and in Q3, we continued to replace several legacy vendors, including an eight digit deal eight digit deal with a large state employees credit Union.
We wanted to deal with this customer wants to consolidate onto a single platform and the all in one complete solution of six one meets their needs.
We signed another eight digit deal with one of the largest U S banks, which is adopting cloud broadly across the organization and standardizing a nice in doing so.
We signed another eight digit deal with one of the world's largest industrial companies as these customers has solidified our decision to move entirely off the legacy incumbent solutions and one to our six one platform.
Other legacy replacement deals included seven digit deal with a large financial institution one of the largest <unk> in the world and large well known insurance company and one of the largest worldwide hotel companies, which greatly value our digital roadmap and durability to grow with nice.
Enterprises are striving to reduce complexity with the IP landscapes and for the most part our cloud competitors are unable to deliver due to their incomplete platform or owning only a single point solution.
As a result, we continue to win strategic deals against these cloud competitors in Q3. These wins included a seven digit deal with a major energy company, a large well known healthcare company allows property and casualty insurance company and a very large diversified financial services company among others.
<unk>.
With thousands of customers and a fast growing portfolio of solutions.
There is an enormous opportunity for continued upsell and expansion within our customer base.
Expansion deals in Q3 included an eight digit deal with a well known BPL. This large expansion deal in the conversion from on premise to cloud the longest and upsell of additional users and solutions.
We signed a seven digit expansion deal with a major health insurance company, winning the deal for a speedy ability to go live the solutions flexibility to ramp based on seasonality and the overall trust and nice to deliver based upon the entire scope of the relationship and previous successful six one implementation.
<unk>.
And a European based entertainment and media company, which was grappling with customers churn, we're struggling with new customer acquisition and needed to improve overall operational efficiency to corner analytics and AI in a seven digit deal to help them resolve their issues.
In summary, we have entered a transition period and are rolling into a new era and <unk>, the enterprise software landscape and with it.
It will come massive opportunities for some an unbridgeable unbridgeable gaps for others.
We are in a prime position to outpace the market with our cutting edge technology.
Market, leading platform and our ancestors innovation.
Which are all supported by our strong and fast growing profitability combined with a.
Solid overall financial profile.
We are looking forward to a strong finish to the year and the opportunities ahead of us in 2023.
I will now turn the call over to Beth.
Thank you Barak and good day everyone.
I am pleased to provide an analysis of our financial results and business performance for the third quarter and our outlet for the full year 2022.
Our third quarter financial results were strong on both the top and bottom lines.
Revenue for the third quarter with $555 million, an increase of 12% and 14% in constant currency.
Earnings per share was $1 92.
An increase of 14% and 17% at constant currency.
Total revenue and EPS were at or exceeding the high end of our guidance range.
Our total revenue growth has consistently been in the double digits over the last seven quarters as a result of our concerted cloud first strategy for new sales, coupled with the migration of our existing customers to the cloud.
Cloud revenue in the third quarter represented a record 60% of total revenue up from 53% in the third quarter of last year and increased 26% year over year and 27% in constant currency.
Product revenue, which represented 10% of total revenue in the quarter decreased 12% to $59 million and services revenue, which represented 30% at total revenue was $165 million and was flat year over year.
The composition of our cloud and maintenance revenue are the stalwarts of our recurring revenue, which results from the mission critical nature of our solution.
Recurring revenue increased further year over year to 82% of total revenue in the third quarter compared to 79% in the same period last year.
Our high percentage of recurring revenue provides a consistent and predictable business model.
Moving to our regional performance the strength of the U S. Dollar continued in the third quarter, creating foreign exchange headwind against our revenue, which were stronger than previously anticipated predominantly impacting our EMEA region.
Excluding foreign exchange headwinds each one of our regions as well as both our business segments outperformed our expectations coming into the quarter and demonstrated double digit year over year growth in revenue.
This impressive performance highlights the ongoing strength of our business across every region and vertical we operate in.
From a geographic breakdown, the Americas region, which represented 83% of total revenue grew 12% year over year EMEA.
The EMEA region, which represented 11% of our total revenue increased 7% year over year and 19% on a constant currency basis.
APAC, which represented 6% of total revenue grew 23% year over year and 27% at constant currency to.
The growth in both EMEA and APAC is primarily driven by the accelerated adoption of our cloud solutions.
Moving to our business unit breakdown.
Customer engagement revenues, which represented 81% of our total revenue in Q3 were $452 million, a 12% increase and 13% on a constant currency basis compared to last year.
<unk>, our customer experience cloud platform continues to serve as the main driver behind the growth in customer engagement that includes our digital and conversational AI solutions, which continued to experience rapid growth.
Revenues for financial crime, and compliance, which represented 19% of our total revenue in Q3 and totaled $103 million increased 13% year over year and 16% on a constant currency basis.
Given by growth in both our cloud and on premise business.
Our gross profit grew 14% year over year to $408 million.
Gross margin increased 120 basis points to 73, 5% compared to 72, 3% in Q3 last year.
The increase in gross margin in the quarter was mainly attributed to an increase of 330 basis points and the cloud gross margin, which was a record 74% in Q3.
Our cloud gross margin, which continues to expand significantly sets us apart in our industry as a result of our deep seated ability to drive profitability at scale, given our cloud native platform, coupled with our broad portfolio of our <unk> suite.
At nice we have always strategically targeted the right talent and growing the topline while simultaneously delivering strong profitability.
Our inherent ability to stay centered on the financial fundamentals of our business or once again evident in our quarterly financial results.
In Q3 operating income increased by 14% year over year to a quarterly record of $159 million and our industry, leading operating margin increased to 28, 7% compared to 28, 3% last year.
There was an immaterial impact from currency on our operating income due to a combination of natural hedges that exists in our business and our effective expense hedging strategy.
Earnings per share for the third quarter totaled a record $1 92.
An increase of 14% compared to Q3 last year.
The revaluation of non U S dollar accounts on our balance sheet in the third quarter reduced our financial and other income excluding this foreign exchange impact our EPS would have been higher by four.
Our growth of 17% compared to Q3 last year.
Cash flow from operations was $94 million aided by 17% increase in collections year over year, which were more than offset by the impact of the positive transformation in our business model from a perpetual on premise for a company with a multi year an advanced payment model.
To a cloud software company with a monthly payment model.
We continue to use the change in the market environment, coupled with access to our strong cash portfolio as an opportunity to expand our share repurchases by $22 million in the third quarter to a total of $120 million for the first nine months of the year, which is nearly two and a half times the amount.
We purchased in the same period last year.
Total cash and investments at the end of September totaled $1 billion and $461 million our debt net of the hedge instrument was $541 million.
Resulting in net cash and investments of just under $1 billion.
With this strong net cash position.
With ongoing strong cash generation, we announced earlier today, a new share repurchase program and the amount of $250 million.
This new program demonstrates our confidence in our business and a rock solid financial profile. It also reflects our ongoing commitment to return capital to our shareholders as disciplined capital allocation is fundamental to our overall strategy.
I will conclude my remarks with guidance.
We are raising our 2022 non-GAAP full year total revenue and fully diluted earnings per share guidance based on constant currency.
This quarter, we are providing additional disclosure of full year guidance in constant currency as a result of stronger than expected foreign exchange headwinds.
Full year 2022, non-GAAP total revenue is expected to be in a range of $2 billion and $168 million to $2 billion and $188 million and represents.
Presents an increase of 13, 1% at the midpoint and 13, 8% at constant currency.
Full year 2022, non-GAAP fully diluted earnings per share are expected to be in a range of $7 40.
To $7 60, which represents an increase of 15% at the midpoint and 15, 6% at constant currency.
Excluding these headwinds full year 2022, non-GAAP total revenue guidance would be $15 million higher in 2022, non-GAAP fully diluted earnings per share would be <unk> higher.
I will now turn the call over to the operator for questions operator.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Samad Samana with Jefferies. Please proceed with your question.
Hi, This is Mason Marion on for smart Thanks for taking my questions.
The cloud growth was impressive year over year and sequentially. Despite macro headwinds that were hearing from others in the industry.
Is there anything any reason that makes you more insulated from these pressures whether it's your customer mix or Geos and then how is asking for chronic appliance cloud factoring into this performance.
Yes, thanks for the.
Thanks for the question Yeah, we continue to see a.
Consistent and high growth.
In our cloud the numbers and also at the very highest scaled very loud scale I mentioned that the exit for cloud is one 3 billion at the end of Q3 and as I mentioned on the call and some of the example that I gave a little deals.
It's multiple factors first of all I believe we have a very large customer base.
A very loyal and continue to expand our platform.
Including a very vast portfolio and customers continue to expand not just to.
Take more users, but also.
Many other solutions that we have and I believe that we continue to win very nicely on the market share in different fronts.
Thank you.
Understood.
Last one for me is if you think about your existing tier one customer base are you seeing any changes in their in their usage or are they flexing seats up or down any differently than they have in the past.
No. We don't we don't see a change from what we've seen in the in the past and actually we see.
Quite a lot of expansions with customers.
In many of the large enterprises that we won in the past and continue to win.
And many of those number one we see expansion as the initial win was more of a beachhead and we continue to displace the legacy platform. The on Prem legacy platform that they had and the second factor is I've mentioned with many of those customers is expansion to other products predominantly by the way.
Two digital and AI are we.
It allows us in many of those customers to sometimes double and triple and here, we see from such a customer.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.
Hi, good morning, Thanks for taking the question so it sounded like some really impressive <unk>.
Competitive displacements this quarter, both in terms of the volume of transactions.
Deal sizes.
I'm curious is that a function of the macro environment do you think or do you.
Is that a reflection of the challenges that competitors are facing and then.
If you could just kind of contextualize those deal sizes are a competitive displacement is it is it larger than your average deal size of this.
Six seven figure deals just give us a little bit color.
The size of these transactions when you are displacing a competitor. Thank you.
Sure.
Let me divide it into.
Into two so you you pointed correctly.
There is still the penetration of cloud in the CX business, specifically in the <unk> market is still relatively light, especially the higher end of market and most of those are enterprises still have on Prem solutions.
Solutions from legacy vendors that a didn't invest in innovation for more than a decade and half and second right now are struggling under a very significant debt and whether the public companies or private companies in that we see the Dell also cutting headcount and there is genuine concern with this customer and not just about the finance.
Viability, but also of those companies' ability to continue and innovate for the long run even if they will survive.
Financial if you'd like.
So we've seen the last few months more and more of those enterprises are accelerating.
Their decision or accelerating their transition to the cloud too.
Modern solutions our solutions.
That's one reason and the second reason I believe speaks to the breadth of our portfolio.
In many cases, it's not just one.
Legacy platform, our legacy vendor that we are replacing in many cases, where we are.
Mid to those enterprises, they show us their technology stack when it comes to the CX and its build some time from 20 different vendors.
And they realize that they want and orchestrate the customer journey and are spending the time orchestrating 20 different vendors instead of focusing on the consumer.
There is I believe realization that one is too.
And consolidate into a single platform we call. It now sweet form as I've mentioned in my earlier remarks, which I believe is a combination of a real platform at scale, but the one that is.
Each with applications like like six one and the other platforms that we have for the auto market and the combination of all of that I believe allows us to accelerate.
Both the displacement rates that we see in the market, but as I mentioned also the value, which almost doubled the value of those displacements.
Great.
Beth I wanted to ask you about cash flow. So I know you made some comments just around some of the difficult compares from a year ago.
As you are transitioning to more of a cloud model, but how should we think about your.
Operating cash flow relative to operating margin this year I think.
Operating cash flow in the last nine months is down relative to a year ago.
Is there any headwinds that.
We should expect just as you transition to a cloud model just differences in invoicing just help us think about the relationship between operating cash flow and operating income. Thank you.
Yes, Thanks, Tyler for the question and given the strength that we're seeing in our recurring revenue business both in cloud and in premise duration based deals what youre seeing is really the positive impact that has on our business. There is a timing difference that is created in the <unk>.
Upfront revenue recognition.
Relative to when the cash comes in so for example on the duration based deals Youll see that the revenue is recognized upfront.
However, the cash of course has received over the duration of the agreement and.
And coming through Covid, what we've seen is really a shift of customers buying both.
Cloud as well as more duration based agreement.
What that means in terms of the cash model is that.
Several years ago, we had a more of a perpetual on premise model with a large one.
One time upfront payment.
And now that same cash has moved and shifted to a model which is over a duration. So youre seeing the health of our business, making that shift to a greater recurring revenue.
Joe itself in the cash when you look at the actual underlying data of our business. We saw that our collection activity actually increased.
And a very healthy way actually 17% year over year, which was outpacing even our revenue growth. So there is no macro overhang in terms of our collection. They remain very healthy and what you see in the cash is really the shift in our business model, which is very much aligned to our strategic direction of shifting.
Moving to the cloud and being a cloud first company.
And I would highlight as well if you look on our cash generation relative to <unk>.
The other players in our industry. We continue to have some of the strong cash generation from our business extremely healthy margin and.
Of course, that's resulting in a strong net cash position, we have which is almost $1 billion.
Thank you.
Thank you. Our next question comes from the line of Pat Walraven with JMP. Please proceed with your question.
Oh, great. Thank you and let me add my congratulations.
<unk> can we walk through the.
Our cloud migration.
Revenue opportunity and help a multiplier.
Works there.
Get that question a lot.
So.
Do you want to do it or should I do it and you tell me if its right.
And Pat Hi, Thank you for the question sure. So first of all when you look at the cloud revenue growth you've seen over the past few years. It should be noted that most of the cloud revenue. We have is incremental to our business and it's coming from a lot of the displacement.
Of the legacy vendors in the market and we are adding that revenue into our cloud stream.
Today, most of our existing legacy nice customer base and that maintenance stream has yet to move.
That is business, we have with very large enterprise customers that will be coming and shifting over to the cloud in the coming years.
We've seen based on the experience we have with the migration of those customers is it typical that we see an uplift of.
Of three times or more and there are and sometimes that can be up to a 10 times multiple.
And the multiple uplift is really coming from the the depth and the breadth of our CX one in all of our cloud platform.
We talked about all of the seamlessly integrated applications that are part of CX, one that fit the needs of our customers in the contact center and that is what's driving that multiple uplift that as they shift they have the opportunity to utilize multiple apps.
Locations that Barack talked earlier today have automation and AI is Asian, which really can benefit their business. So that's on top of the business what they've done with it. So it creates a very attractive opportunity for us looking forward and will be one of the drivers of our continued growth in the cloud.
And if I could just have a quick follow up there I mean is it fair for us to assume theres about $500 million in maintenance and <unk> uplift is like a 1 billion dollar opportunity.
I think it's fair to assume that out of this maintenance.
You're referring to we don't believe these specific number about a we have a very healthy maintenance base and that is in <unk>.
Immediate opportunity relatively speaking to double itself in the cloud and much more if it's not just a classic like for like conversion.
But rather a broader part of our portfolio.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Rishi <unk> with RBC. Please proceed with your question.
Wonderful thanks, so much for taking my questions.
Wanted to ask about the <unk>.
<unk> you gave around competitive displacements I imagine those are primarily Cisco and Avaya and a lot of legacy on premise with you ever see kind of cloud to cloud lands and especially against other maybe see cash centers that can't scale tier level, and then I have a quick follow up.
Sure. So the answer is absolutely, yes, and we'll give you a bit more color on that so needless to say on the legacy on premise vendors.
We have a viable cloud solution that has always been the lion's share of these competitive replacement and taking market share from as the market is shifting from.
On Prem to cloud, but we indeed see more and more.
Of.
Especially at the higher end of the market, but not just.
Displacements of.
Let's call it the pure cloud competitors the competitors that are pushing cloud very heavily due to disappointment of customers or lack of ability to deliver and the lack of delivery.
<unk> deliver and fall under I would say three different categories.
Number one is the issue of scale.
And they failed to deliver a complexity at scale.
Number one second is.
A lot of.
I call it.
Bait and switch to those vendors.
Vendor deeds Beijing customers was the fancy slides and then switching them to legacy platform or two less.
Less of a native solution because of the fact that there are solutions are looking a lot of the functionality capabilities or features.
Customers understand that and the third one is the fact that we have a global footprint.
And some of those smaller cloud vendors do not have what it takes to deliver on a global basis.
Got it that's really helpful bracket.
Wanted to maybe think.
About macro right like the biggest question, we tend to get in the spaces.
What's happening with head count of call centers. So I guess part one have you started to see any call centers, maybe slow down the rate of hiring or even start to cut the amount of heads they have and psych and if you think about.
The whole.
Factors of maybe you have offsets from getting more analytics or AI on top even if headcount cuts reduced how should we be thinking about those offsetting forces. If there will be in fact head count reductions at some of your customers. Thanks.
So I'll start with the first part and I'll say that today, we don't see.
EMEA a reduction in the <unk>.
What we call the MAU monthly active user actually on the contrary, we see a significant increase in I don't see from customers.
The reduction in cost and so what we do hear from customers.
He's a challenge that they have.
We have a the shortage of labor and the cost of labor in the contact center and a lot of dialogue, we have with these customers and how can they.
Provide.
And then.
Outstanding experience to their consumers using automated solution through digital channels and I've mentioned on my earlier remarks, and we've seen it in other quarters as well as in this one.
We have tremendous opportunity that is starting to evolve and I believe with just in its infancy about taking over a bigger share of the interaction and much bigger share of the interaction.
With our automation tools, because one important factor the number of interaction is not going down on the contrary it keep growing exponentially over different channels and being able to cover the customer journey.
From the very far edges of it.
All the way to the core of it is is what we've been working on the last few years.
And that's what gives us a.
Tremendous opportunities beyond the number of employees in the call Center.
Our wonderful that's very helpful. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Michael Funk with Bank of America. Please proceed with your question.
Thank you Mark.
Questions today up to what degree do you attribute your relative resilience in your business to vertical exposure or customer size. In addition to your platform strength.
So Ali I'll refer to.
All of our three businesses I'll start with that.
I'll start with the CX business and I think we can also go you know I've been with nice for 23 years and I've been in this market for that long time investors as well as and we have a management team that knows the market inside out and is highly committed to the market and incentives in multiple times of the past in volatile Mark.
And so on and so forth. So if you look on the three businesses that we have in the <unk> business.
We spread across I would say 12 different verticals.
And customer service, both in if you'd like.
Good economy or programmatic economy.
<unk> you understand that eventually keeping.
Their customer experience and loyalty is important and I believe that provide a certain level or a good level of resiliency to add to the business. We've seen at Baidu has recovered we've seen it through other times as well.
The second business that we have in the financial crime and compliance we cater today to 90% of the large banks in the U S and more than 70% of the worldwide banks and if you go into the mid market of banks we have.
Many many hundreds of them and what we're doing this business is 100% bound by either regulation or by the constant and neither of those customers to fight with the fraud that is actually increasing at a time of <unk>.
North America economy, if you would like and a third business in the Justice criminal Justice business the budgets over there.
Even by.
The level of crime and government budgets in both state and local and we believe that this is very resilient.
And almost agnostic.
Too early.
Any weather.
No that's great one more if I could squeeze.
Can you comment on deals that youre winning.
Through partnerships.
Today, maybe versus in the past and how that's driving the business.
Sure Bob.
<unk>, a very important critical part of our business a lot of our deals are either through partners, who are influenced by partners and we continue to invest heavily in that what we're seeing in the last few months.
Is it certain realization to realizations of different partners. One is partner that we're holding on steel.
To the legacy vendors.
And vendors that have limited the capabilities in the platform, especially again either vendors that have.
The concerns on the financial side or concern that they are discontinuing variety of platforms that they have those partners in the last few months actually.
Tightening the relationship with <unk>, because they understand that what we've been saying all along that our investments in innovation and the strength of our platform is what will allow them not just to win the customer, but also to make sure that they keep their customers and not being displaced by other partners, who embraced nicely already.
So we will continue to invest in that and I believe that our partners are realizing.
Who are the.
Potential winners of this market.
Thank you for the questions today.
Thank you.
Thank you. Our next question comes from the line of James Fish with Piper Sandler. Please proceed with your question.
Hey, guys. Thanks for the questions Ken Brock can you talk about what attach rates will be AI modules, you are seeing or what percentage of your <unk> X one customers now.
Hey, Rod module.
And then on the guide for the year are you guys reiterating the 27% constant currency for cloud or how should we think about the mix for cloud versus the rest of that business.
In Q4 here.
Okay. So I'll start with the first question and then Beth will take the second one so we see tremendous increase in the what you call a what you referred to as the attach rates of more and more AI models to CX, one bulk with new deals as well as we have a customer base of thousands of <unk>.
Customers.
That that style.
Really want to adopt it so we have a separate efforts going both through the base, but also attach it to two new new.
New deals if you would like or new new.
New customers.
And the reason for that is that it goes to what I said before about the increase that we see in the demand to master the digital channel, but doing it right without adding.
A lot of labor in order to do that consumers are digital already 100% organizations are trying to catch up they want to catch up without adding significant amount of labor and DIY is just a staggering just to give you. An example, if you need to add an agent to your contact center again, depending on the geography.
Fee in order to deal with.
The volume of demand.
Demand on average it's caused adjusted labor itself cost about $50000, a year give or take.
The technology that is around this agent today, the overall technology spend is roughly.
Five to $7000 a year.
But our AI model Kim.
<unk> actually 100% replace the need for additional labor.
So the rois very significant including the potential uplift.
Two our revenues so all in all we see high demand we have something that we believe we know that others do not have and customers understand that and this is enlighten enlighten our.
AI solution is not just about the strength of the technology and the algorithm. It's the breadth of the amount of data historical data that we have.
Tens of billions of interactions that allows us to get those AI.
Our solution not just to be deployed with actually work and provide the full value.
For the second part of your question I'll hand, it over to Beth Yes. Thank you Barack with respect to the expectation and we have in the cloud growth. This year and we remain committed and continue to expect that 27%.
Growth in a constant currency on our full year cloud revenue. If you look at the cloud growth. So far this year at constant currency, we had 27% or higher growth in our cloud year over year of course.
We continue to see that our business and our customer base is healthy and thriving and we remain confident in.
And look forward to the opportunities ahead, and so therefore, yes, we are reiterating the 27%.
Thank you that's helpful. Brian .
Just wanted to follow up actually on the cash flow side of things.
The next couple of years here, how are you thinking about free cash flow conversion rate or EBITDA to free cash flow and really it's kind of.
Trying to understand when you expect the model transition headwinds to abate as cloud is now over 70% of our recurring revenue so that that headwind should start to.
Stop here for you guys here in the next couple of years now.
Yes, absolutely and to your point I think we've already seen a lot of that transition from the cloud happening already on our cash flows what you've seen in this year is making it more pronounced is actually an increase in more duration based deals with <unk> predominantly in the app.
<unk> business so on top of the cloud transition that we had in the past we've now seen more of these duration based sales also coming into play which creates that additional timing difference in recognition of the cash relative to the future, but what we expect in that part of the business and we are seeing already.
<unk> is also a significant shift to the cloud so as that happens that payment is actually happening faster and at a more accelerated basis relative to those duration based premise deals. So you will see it start to even out.
And so therefore, we expect that if you we look forward into next year, our cash flow generation will is expected to increase along with the growth we see in our business.
Thanks, guys.
Yes.
Thank you.
Thank you. Our next question comes from the line of meta Marshall with Morgan Stanley . Please proceed with your question.
Great. Thanks.
Your cloud gross margins are kind of gross margins overall continue to increase and just wanted to get a sense of particularly on the cloud side some of that accretion just due to the.
More attach rates.
AI products or is there anything with FX that we should be mindful of there and then.
Maybe second.
As you're seeing.
Advantages that customers have of moving towards the cloud and kind of the need for that has there been any kind of.
Change to the decision.
Whether to kind of incentivize customers to move ore.
End of life.
Our customers have some of our more.
More premise products. Thanks.
Yeah.
Thanks for that question Meda, and I'll start and maybe then that Barack can chime in a little bit first I would say that our cloud gross margins. If you are to look on a constant currency basis that would even be higher right. We mentioned that there.
There was actually about a point difference on our cloud revenue growth year over year. So if you looked at.
Excluding the FX impact they would be even more sizable I think what.
What you see in our business and our cloud margins is really just the way that we have intentionally managed our business. The way we build our solutions the way, we manage our expense base relative to the cloud and of course as we've talked about a really strong attachment rate of all of the applications, we sell on our <unk>.
<unk> offerings.
That increase in <unk>.
Spanned our arc, who over time with our customer base. So our cloud gross margins are really just reflecting the health of our overall business.
And maybe I'll add over here.
Same on the same point.
Zinc.
We've tackled that we talked about it multiple times in the last few years, but our emphasis on building the solution rights natively and scale with all of this dilution.
Days I believe is giving us tremendous differentiation.
As we will continue to expand the cloud gross margins that are already 10 points or higher.
Then than our peers.
Which allows us to continue to invest in innovation.
And without what we see with other these days that there actually.
Reducing the R&D for us an investment innovation and the ability to expand because of the pressure they have coming from the gross margin. So looking forward I expect that the gross margin will continue to expand from where it is today because of the way we develop the technology and the result of that also operating margin will continue to.
<unk> expense.
And then my customer transition or just thought of.
Kind of any thing to accelerate those months.
We constantly.
For our customers and with.
And the prospects out there I think that it's clear that customers are moving both to cloud and managing their digital transformation and we are working with.
With the market. If you would like there is a room for a certain acceleration those transitions are not easy for customers not because our solution is not the right one in the country just because you know this business is.
Business with a lot of complexity to it and when customers do that they're willing to do it right, but I believe.
Actually in this potential economy. There is a reason there is a merit for customers to do accelerate some of this move it also will provide them certain.
Economic benefits, we have the ability to.
And manage as I said, both the shortage in labor, but also the increase in cost of labor.
Great. Thank you.
Thank you.
Okay.
Thank you. Our next question comes from the line of Tim Horan with Oppenheimer. Please proceed with your question.
Thanks, guys can you give us maybe a little bit more color on what percentage of your existing customers are using the cloud product now and maybe a little bit more what percentage of them then are even using digital and the same for the AI modules or other value added modules. Thanks a lot.
So I think Beth and thank you for the question I think Beth mentioned before that what we what you've seen US building our cloud business right now at the $1 3 billion.
As of end of Q3.
The lion's share of it almost all of it came from purely incremental.
Mental so it's before converting.
Most of our customer base, so to your question without putting a number to it.
Almost I would say very small amount of our customers converted to the cloud. So there is tremendous opportunity there.
In terms of the attachment rate or the how many of them already have.
Digital or AI.
Many of the new deal is actually the majority of the new deals youre, winning coming with certain digital components, but digital is a very.
A larger opportunity.
And it's not just about the amount of channels. The boat show of the interaction will covering digital what is the level of automation, how many components of Autonation. So also here I would say that regardless of the current attach rate and this is before I even spoke about the customer base that we have in the cloud already.
The opportunity is tremendous with AI.
And it gives us a very very long runway to fuel our growth in the next five to seven years.
And when some of those customers you mentioned have 20 different suppliers when they go from those 20 to you can you give us a little bit more color how much they can save on <unk>.
Their monthly Bill and maybe what type of productivity improvements you're seeing.
It's a great question.
I myself attended.
Multiple meetings in the last few months meeting different CIO and business executives.
Moving Tonight, and they provide we asked them to provide us.
What is their technology Stefano current currently engage when it comes to managing customer service <unk> as a whole and is a shocking diagram first of all it takes them a one proven produce it but it's built for so many best of breed component by the way no very intense or anything they were just <unk>.
Trying to address the need that they have but it just got too convoluted and then they realize on one hand are saying, we would like to offer our consumers.
A seamless orchestration of the interactions across all channels with all data et cetera, and here we are.
We are spending our time.
They are trying to navigate to orchestrate, though connect 20 different vendors may be best of breed solutions, but we as the enterprise of serving as a system integrator in the industry.
So there is a 100% logic can be fully understand why it makes sense.
To put all of it on a singular platform. So first of all before we speak about the financial is just a matter of the viability you can create.
And interaction journey orchestration with such a very convoluted and complex technology stack Needless to say the other savings first of all there are saving of their own IP.
Not needing any more.
Become and development Center, and then will come the building itself. If you like of the solution and we offer compared to what.
They have a significant reduction if you'd like on the spend that they have within that technology.
Thank you.
Thank you we have no further questions at this time I would like to turn the floor over to Mr. <unk> for closing comments.
Thank you everyone for joining us today and have a nice day. Thank you.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.