NICE Ltd. (NICE) Earnings Call Transcript & Summary

Tyler Radke here, Citi's Co-Head of U.S. Software. Welcome to the day 2 afternoon software track. We have NICE up next. Excited to have Scott Russell, the newly appointed CEO this year. And Beth Gaspich, the CFO of NICE. So Scott, thanks for making the appearance to the conference.

And just given that you recently joined the company, I think it would be great for the audience, a little bit of the background, just for those who maybe didn't know you at SAP? But what are your key priorities? And how do you kind of think about where NICE is in the evolution?

Sure. So good afternoon. Good to see you. So background, I've obviously been in enterprise technology for a long period of time. Before I joined NICE, I was the Chief Revenue Officer for SAP. And if you, I guess, over the 4 years that I was in that capacity and did that with running a number of their global businesses, we -- they doubled their cloud revenue from $8 billion to $17 billion. And then I think this year, they're delivering around $21 billion to $22 billion. So a significant acceleration of an on-premise company into the cloud and driving that, and I ran half the company. So I guess I have a good understanding of how to drive scale and growth and using technology in the international markets. When I come to NICE, and that's obviously why we're here, there is an incredible market opportunity. Why am I here? It's because this industry has been through multiple pivots. There was the pivot where you were trying to do automation many, many years ago. You saw the advent of IVR. You saw NICE's history around workforce management with call recording, then that moved into the contact center and the CCaaS space and the pivots that they made, and it was quite groundbreaking, but the biggest and the most impactful move is yet to come. So the role that AI plays, and it's not about AI itself, it's about what it allows companies to do in its orchestration and interaction with its -- with their customers is to be able to significantly automate, to be able to significantly improve the engagement that they have with their customers at scale more than they've ever been able to do before. And to do it in ways that doesn't rely on the intellect and the capability of humans that are sitting in the contact center. So what am I excited about? What are my priorities? Number one is to be able to spearhead and lead the industry in that transition. If you are in the CCaaS space and you do not have a clear underlying technology capabilities that manages the transition to AI, you are going to lose, because the market will move, is moving, currently happening. Our growth in AI that we've already done that we've shared in the 42% growth, which is now 11% of our total cloud revenue, is a testament that we're already well under the way, but significantly accelerating that pivot and change, and I can explain how. The second is to expand through partnerships. You will have seen that we've significantly enhanced our relationship and our partnerships with Salesforce, with ServiceNow, with Amazon, with Snowflake. We also are with our systems integrators, with other resellers. Why? Because as a company, we have great products. But we weren't necessarily leveraging and expanding through the ecosystem to bring us to market through their channels as much as we were through our own means. It also means that our interoperability of a Salesforce's AI and ours needs to be seamless. We don't operate in isolation. Service Cloud Voice and other capabilities will interoperate with ours, and we clearly are going to aggressively pursue that rather than react to it. The third is international expansion. We're very bold. We've made some significant investments around our sovereign cloud capabilities, which has borne fruit already in major wins like DWP, most recently in the U.K. or in Services Australia, but there are other cases where we see significant growth because the on-prem to cloud move in the international markets is nowhere near as progressed as what it is in the U.S. But even in the U.S., there's still a significant opportunity. So being able to capitalize on that. And then last but not least is, and I'll probably highlight it is given the pending onboarding of Cognigy post -- concluding on the closing process, our ability to be able to, at scale, deliver automated AI auto, so agentless platform and their agentic platform is game changing. Our data on their platform becomes an exciting opportunity that no one else in the CCaaS market can offer. So you put all those things together, it means we've got multiple growth drivers beyond the on-prem to cloud move, which has obviously been an important part and will continue to be. But let's keep it as busy.

Yes. Well, sounds like a lot of exciting things to tackle, as your first year. Maybe to follow up on a few of those. So you talked about how AI is going to be kind of the biggest evolution this industry has seen. So I guess just, clearly, there's a lot of concerns on a lot of software companies out there including yours and you saw Salesforce report last night as well. But like how do you think about your business? I mean, obviously, the AI growth is impressive, 42% accelerating. But then -- how does that play into the rest of the business? Like is there a part of the business that's kind of more traditional at risk? Like how do you -- or is this all just -- do you think the growth accelerating for you?

Incremental. So I'll get -- Beth, you might be able to comment a little bit on the financial side. But strategically, there's a few data points that are really important. The volume of interactions between consumers and their brands continues to increase and it is unabated. It is increasing invoice. It is increasing in memo. It is increasing in chat. It is increasing in all digital channels. So all of the routes in the -- that their consumers are interacting with their brands is not declining, it's increasing. And so the demands on the existing contact center are actually increasing despite the role that AI is starting to play. The second is, you cannot solve complex user customer cases with generic AI. If you could do it, we -- the simple cases are easy. OpenAI can do it. Microsoft can do it. We can, anybody. The simple stuff is not where the money is. It's the things that are more complex that require deep understanding of the interactions, the use case, the knowledge, the workflows, the tasks in an enterprise that are not just in the front, the mid, in the back office. For the first time ever, we've got the ability to use AI to automate that, that we've never been able to before. So we've been stuck at handling the call or the chat, but then handing off to another platform. We don't need to hand off anymore. And then the third thing that I would say is consumers' interactions with their brands are not limited to the problem where it's a problem that I need solved. Will you use -- you'll have a conversation with your brand of choice. Sometimes it's because you've got a problem, sometimes it's because of [indiscernible]. But you're not going to log into a website to go and enter a whole lot of data to go and -- you're just going to converse. So the platforms and conversing that conversational platform that handles voice at scale, which we already have in all the routing, but also the AI becomes an integral part of the way you're able to provide that to the customers. So right now, that is not leading to any decline on seats. The number of seats actually still increases. But what I would call it is it's a flattening because what any productivity gains we're getting, so not a large number of our customers use Copilot. Then that is able to give real-time insights for them to have a more productive call, reducing call handling time. So the average handling time is down, the call resolution is faster. But you're not reducing the number of agents, you're handling that increased volume that's coming in, and you're able to do so in a more productive way. I think what we will see is as we're able to do more and more automation of more complex scenarios, which we are uniquely placed to do, if we capitalize on it and that takes investment, we're able to manage that transition where the monetization exponentially grows through the AI side, and we manage, obviously, the seat base. So if you were looking at our business, I would be looking less about the number of seats and more about the number of interactions, the number of sessions because increasingly, that's going to be -- and we're already seeing that in our AI business. And maybe Beth...

Maybe I'll just share a couple of data points. I think AI, we see as a key growth driver of our business. If we look at our new bookings across all segments of the market, but across markedly, if you look at the 1 million ARR plus customers, we see AI in almost every single deal. It's a key growth driver. You've seen the acceleration in our AI and self-service revenue. We went from 39% in the first quarter, up to 42% in the most recent quarter. And when you look on where that's coming from and in terms of the pricing model to the customer, more than half of that now is originating from the AI and self-service pricing model, which is non-agent based. So we're already seeing that taking hold and really driving the growth.

Got it. So -- you talked about kind of the opportunity to address some of the more of these complex service use cases. Obviously, that requires more deeper workflows. It's -- to bring that into AI, it's a lot of different systems you're touching. So help us understand how this kind of looks because we hear from ServiceNow was here yesterday talking about kind of their agentic push. Salesforce has agents force. I know you had ServiceNow at your conference. You have partnerships with both. What are you doing? What are they doing? Why should investors not be concerned about their own -- those companies push into agents?

Yes. I think there's a few things. So first of all, there is an enormous amount of tasks to be done in an enterprise that can be automated and agentically delivered that has nothing to do with customer service. And so both of those organizations and many others, if you think about whether it be purchasing, supply chain, procurement, employee, HR, let alone, sales, marketing, et cetera, there is a lot of space here. When it comes to customer service, because it's not just about a task to be done, you've got a consumer at the other end of the line, one way or another, which means your engagement with them and how you handle that engagement is incredibly important. It's not enough to have an agentic capability if you're not handling the customer in a way that is congruent to their expectations according to your policies, according to the flows. So you've got to be able to do that, and it's got to be able to interoperate. So what we expect is fulfilling the needs of a consumer who are waiting, who wants fast resolution in a human-like way will require not only a great single pane of glass engagement platform, us, but then the execution of tasks, jobs to be done, a credit card limit increase, a claims approval, whatever those -- and that will either be done by a human agent that will trigger maybe something that ServiceNow have built or it will be our AI agent to their AI agent and we fulfill the task, which is why I've done the partnerships. So what am I actually doing with Bill and with Mark's teams? We are prebuilding the AI flows between our platform and theirs. So as they build it out, we natively can exploit their -- what they're building. And then everybody then says, well, that then they could then take over ours. They will not take over the CCaaS platform because they don't want to. Why would you build a partnership if you could replace it? They're not going to do the voice. They can't do the routing and the scale of it, and no one at the enterprise is going to be able to hand it all to AI. It will not happen, not in the next foreseeable future. Too much complexity, too many rules, the quality of the data, the consistency of it, you can't be wrong to your customers. So our system of engagement platform becomes a really critical asset, which they see, which is why they want to partner with us because they want to leverage that but still initiate and leverage theirs as it goes into the mid and back office. I want to be clear. There is an overlap at the front. You can do some of their capabilities in the front office. The last thing that I will say is many companies have been forced to use a disparate set of technologies, a conversational bot here, a Service Cloud Voice here, a CCaaS platform here, and they're trying to stitch it together. What happens? An inconsistent poor consumer experience with their brand, you're not reducing cost because you're still keeping the same number of agents, you're not getting the consistent flow of data, and the task to be done isn't any more efficient. So we believe as an engagement platform, single pane of glass, we have a unique opportunity to be able to have an end-to-end platform that can fulfill that. How deep I go into the mid and back office is a question mark. But what I will tell you is, if I can perform the task from the point of interaction that solves the consumer requirement at the get-go, why do I need to go to another system? I'll do it myself. But if I need to, then we will.

Got it. Okay. And you talked a little bit about the different pricing model, obviously, in the AI business today, I think about half of it is not agent-based or seat-based. Where do you think the customers are at in terms of kind of philosophically buying into more of an outcome-based or value-based selling, this idea that you can capture a greater share of the labor pool, right, if you do see those seats come down. Is that something that you think is widely adopted or still kind of early innings of...

Early innings. Early innings. So -- and Beth, you can comment on it as well. I think they're very interested. Yesterday, I had my customer advise -- Executive Customer Advisory Board. So we had a group of 15 of our largest companies, customers around the world that came together. And we were going through our road map, and we talked about pricing and value-based and things like that. They're very interested. Their primary concern right now is not having a deterioration of the customer service that they have invested heavily with us over years to deliver a great outcome from their customers. So the infusion of AI within that framework is really important to them. It cannot result in an inferior outcome for their customers because that's ultimately where they're measured, average handling time, resolution time, call handling time, et cetera. But they're excited about the automation opportunities where you're able to then ultimately reduce the number of seats and then transition. So I think the value-based pricing is a potential future one. Right now, what they're wanting is an interoperable platform that as a consumer contacts them, they can fulfill and resolve through AI quickly. If it gets more complex, it's seamlessly hands to a human agent, then back to AI. It can be done synchronously or asynchronously and can be done on a single platform. That's what they're driving towards. In the future, I suspect they're going to come to us and say, well, now give us the savings and can you guarantee that through that, but that's not the economic model today. The economic model is very much on a session basis for the AI versus seat basis for their agents.

Yes. I would just add to that, Scott, that I think at NICE, we're uniquely positioned to be able to even consider that potential of a future pricing model given the data that we have. So we have a significant amount of interactions happening through our software that gives us the unique opportunity to really understand the use case and on a vertical-by-vertical basis for our customers as well. So being able to fulfill the promise of driving better customer satisfaction and lowering their costs and delivering that ROI, we are really well positioned to kind of lean towards into that in the future.

Great. Great. And I did want to hit on the Cognigy acquisition, which was recently announced. How -- just walk us through again the rationale. How does this fit in to the model?

So right now, if you're -- I think everybody understands and sees the value of being able to do contact -- agentless interactions between a consumer and their brand. And it's actually in the third generation now. There's been 2 generations of companies that have been built over time and the latest Gen AI generation. Cognigy bring -- we've been working with Cognigy and all the other conversational AI players for a number of years. Why? Because they need our data, they need our flows to be able to then fulfill the things that you then go and build on their platform. So whether it be Cognigy or [ Kore or Poly or Palo ] or there's many, many players that are out there. So there was 3 things that really Cognigy brought to the table that were really, really critical. The first is, as a core platform that didn't require technical skills, it is outstanding. Their customers are building the flows themselves. The vendor is not doing it. Cognigy is not doing, the SI is not doing it. They're able to self-build using prompt. The airline, Lufthansa, you might start with a flow around a flight upgrade or a changer or you want to -- you've done a change, you want to credit back, and you're canceling a flight. There's so many different scenarios. They're able to self-build them natively, easily, and they're able to do so from day 1. Most conversational players, AI players require a level of services work around the configuration of those and it require technical skills. So they've built an outstanding platform. The second thing is they've already proven to have enterprise scale. All of these other players get to a threshold. And remember, we deal with millions of concurrent conversations at the same time on our platform. If you want to move that into AI, it's got to work, it's got to scale, and that was a key criteria for us because we're not dealing with small and midsized companies only. So that discounted a lot of those players who aren't able to do that in this space, and they were able to prove that. And then last but not least is their agentic capabilities were way further progressed than we had even originally anticipated, which I guess is more in line with third-generation AI players, the Gen AI players. They've got a significant capability, which meant instead of us organically trying to build that out, which we were doing with our Mpower platform, we're able to leverage that from the get-go. I would just round it out by saying this, we do 20 billion interactions a year, and we're growing quickly. Those interactions are underpinned by 1,000 CX-specific foundational models, what a bank does, what an insurer does, what a telco does, what an airline does and not just then, what the different types of institutions. Right now, all the conversational AI players, all the big AI players have to figure out what those flows are. They don't have that 20 billion interaction data. We are going to preload that into the platform as quickly as we can, so you get an out-of-the-box capability. So we don't want to just compete, is our AI better than somebody else's. It's going to be better, and it's going to have the embedded data and logic and orchestration that we already have with our CCaaS strength. That is something that no other CCaaS player, nor any CRM, nor any hyperscaler, nor any other AI player has. So we clearly need to use that as a means as to why they would run on our platform versus potentially using something else.

Right, right. Okay. And it sounds like a pretty exciting opportunity ahead and accelerate...

Our installed base, they're an international. It's icing on the cake for us that where they're an international wasn't the reason for a European business. It was just great technology that fit us strategically. None of it is about 2025. It is all about -- our strategic partnerships are not about 2025. Our acquisition of Cognigy is not about '25. Our expansion internationally is not -- it's about building long-term sustainable cloud growth that ultimately delivers shareholder value. And so if you think about Cognigy as well just tactically, we're going to continue to drive that business where it will grow on customers that are not NICE. They do a lot of business with our competitors. We will continue to expand that, and it is a great growth driver, and that stacks up on its own right. Then you take that capability and you put it into our massive installed base with a native capability, then we've got the cross-sell opportunity. And then last but not least is when we're trying to win the on-prem to cloud shift and they're evaluating AI as well and we embedded the data, as I said before, it gives us a differentiated offer that we otherwise wouldn't do. We were navigating right as we are with OEM and third-party partnerships, which is what the others do as well. The challenge with that is as the market moves to have its interactions that are not only agent-based, but are AI-based, if it's not a native part of your stack, I think in the long term, you're not going to be a winner in this market, and we needed to be in front of it, not behind it. So the move was -- it's a significant one in the long-term growth of the company.

Yes. So I mean, it seems like you mentioned earlier kind of still sort of undecided desire on how deep you want to go in kind of the back and mid-office. And like what are -- I guess, what are you sort of weighing on that expansion?

I think there's some nuances around the mid and back office. So there's a lot of companies that are really enamored about agentic AI and the role it plays to replace what humans do in the mid and the back office and in the front for that matter. We look at it a little bit more of a nuanced way. So we look at it, well, who are performing tasks that fulfills a consumer need. I'll give you a very simple example. If you're a financial provider for taxation, you have a season or a window where one of the core things is to schedule appointments with your tax adviser. And it's not just a case of who's available, the needs of us, me as a consumer, where my revenue is, all of these things determines the type of tax adviser and who to get. When that call comes in or that chat comes into the agent or to the AI agent, routing and understanding and interacting with the mid-office, i.e., the tax advisers themselves is a timely heavy activity that happens. We can automate that, and it's not just leveraging our AI capabilities, it actually leverages our workforce management, which we are the best. So managing that workforce in the needs of a consumer in the mid and back office is a huge opportunity for us to automate. Now that is a great opportunity. If you want me to be the company that is going to build to update a CRM record for a sales opportunity for a purchase that just happened, frankly, there's going to be a ton of others that are going to be going and trying to build those. But can I initiate it from my Copilot or from my autopilot and initiate that agent? Of course. So I think that's where we're going to be leveraging what others build, but we're going to be unique in what we create ourselves, and it's very geared towards customer experience. It is not going to be to do any task in the mid and the back because it obviously needs to fulfill the consumer at the other end of the line.

I got you. Okay. I did want to hit on international. Obviously, you have a big international background, not just your accent, but...

Yes, I had not lost my Australian accent despite 25 years.

But I mean, to me, the international opportunity for NICE has always been arguably kind of an untapped area just given how low it is relative to others in the space. So what are some of the things you're doing to accelerate that? How big do you think that, that could be over time as a percentage of the business?

So there's a few factors. First of all, I need to give credit to the team that we've been investing in our international capabilities, so sovereign cloud capability, which we're still investing in U.K., Australia, the wins at DWP at Services Australia, they don't just happen. You need inherent investments that we had done previously. Same in Africa, same in UAE, same in Korea, same in Europe. So we've got -- we've already done significant -- that gives us growth to capitalize on that, but we've got more to come. So we're now positioned to be able to grow, whereas before it was more about the building blocks to be able to then seize upon it. You can clearly expect, given the CCaaS move, the on-prem move in the international markets is, in some places, significantly further behind, in some places, moderately, i.e., they haven't moved as much to the cloud as what has happened in the U.S. So that, combined with our international capability that Cognigy brings as well because they're very strong in Europe, we feel we're well positioned based on the investments that we've made, the knowledge that we've got and also the sales and marketing and partnerships that we've built across the region. So I definitely agree. I would just caution one thing. I'm not going to go to 50 countries. We're going to be really sharp on the country. So the major markets in Western Europe, in Asia, such as India and Japan, there are certain markets that have got real sizable growth and opportunity that we can capitalize on, and it is clearly a growth engine that we maybe didn't have in years gone by.

Yes. And just kind of back to the, I guess, the non-AI drivers of the business kind of being the CCaaS systems moving to the cloud. I think the latest stat is -- I mean, it's still well under half of the market...

Yes. I mean we approximate about 60% to go.

60% to go, right? So how do you think about just the pace in which that moves over? Like on one hand, we've heard from a lot of companies around the data readiness, like having your data in the cloud helps accelerate AI and take advantage of AI. But on the other hand, some enterprises have started to put the brakes a little bit on AI just as they evaluate business process at all. So do you think the AI conversation is like helping or hurting that cloud migration?

I would say it's a really dynamic space. It depends on the industry. So in public sector, which some of these big wins, they are clearly evaluating our AI capability, but not buying it upfront. They just want to get the CCaaS right. They want to get the data right. They want to be able to make sure that they are able to move, but that roadmap matters. On the flip side, some of our -- the industries, some other industries are much more interested in starting with the AI, proving out the automation and potentially not even buying that they're buying, they're moving to CCaaS, but in a refined way rather than trying to -- because they don't want to have to move what they ultimately don't need in the future. So you see a bit of both. It does depend on the industry. What I would say is all companies have an AI road map -- plan. They want to know the plan. And if we haven't got an answer to it, they will find a solution from someone else. So the fact that we now have a core platform that has that is a really important message. Our direct competitors do not. They are relying on somebody else to perform that AI road map. So that, for me, is a really important distinction. So whether they buy -- do it upfront, whether they do it later, as long as they're making their transition to a CX, AI, CX platform that enables, we'll actually handle all routes. And again, 12 months ago, 18 months ago, our primary route to market was win the CCaaS move compared to our competition. I can easily go to them and say, just start with Cognigy, just get going, up and running, leave your on-prem here for a little bit longer. If you're not quite sure, let us build it out and we'll move you progressively onto our unified platform rather than forcing that jump ball decision straight away because clearly, they can't invest in all of these things. There's not even a financial concern, it's also their ability to manage the change. Remember, number one, they are not prepared to dilute the quality of service they're delivering to their customers. So as exciting as the AI transition is, it's always got to be within that context, which is why, by the way, generic AI, that OpenAI and others can offer will never hit the scale to what they need because it will never have the context richness that is needed in the CX models that we can obviously provide.

Right, right. I did want to ask you just about competition broadly. One of your more modern competitors recently announced a pretty big funding round for both ServiceNow and Salesforce. So curious your thoughts on that. I think you're smiling over there...

I'm smiling because I see -- look, I guess what I would say is, I can certainly understand why ServiceNow and Salesforce are wanting to partner with us and are wanting to look at their already existing investors and they might want to look at because the reality is, they see this industry, this market is very attractive, and it is. There is a huge opportunity around AI and the capabilities and to be able to automate and they want to be relevant. So I can certainly understand from their perspective, but it's not an exclusivity because at the same time, they were doing that, we were signing up agreements. We're doing a lot of R&D together to build out. We are obviously the market leader in terms of size and revenue of -- in the CCaaS space. The one that I guess I'm more -- that surprised me is my competitor in the CCaaS side because what they're really doing is they're foregoing their future opportunity in the AI. They're basically saying that is going to my partner. Now I don't see how you can be a CCaaS leader in the next 2 to 5 years if you're not having an inherent native capability in your platform that delivers self-service, augmented service, proactive -- you've got to have that AI capability. Otherwise, what you're really doing is you're commoditizing into a voice capability and letting all of the innovation happen around you. So from a strategic standpoint, it makes no sense to me. From a financial standpoint, I understand why it happened. So my view is it's actually positive for us. But it is a dynamic market where we need to prove the unified platform is ultimately going to be a better choice, which drives long-term shareholder value because we're going to drive long-term accelerated cloud growth.

Got it. Well, maybe in the last under a minute here, just anything you wanted to close with for the audience or maybe misconceptions that -- about the business or stock that you want to....

I think there's a couple of things. I certainly understand the history and what I inherited and what I walked into in terms of concerns around the cloud growth. All I can tell you is this, every move we're making right now is strategically to drive long-term cloud growth, accelerating cloud growth. We've got work to do. The market opportunity is immense. AI is disrupting, but it is a positive disruption for us if we've got the assets to seize upon it. Cognigy is one of many, but we are enabling that and our financial strength gives us that ability to do so together with the partnerships, together with the international expansion. So our levers of growth are way broader than what they were before. Our strategic technology capabilities are way more enhanced than what they were before, which means as the market pivots to AI, we can seize upon it, which maybe we weren't as well placed before. And please look at that in the longer term because this is -- all these moves are around sustainable, long-term accelerating cloud growth, and I look forward to sharing more in Capital Markets Day about what you can expect from NICE in the midterm.

Great. Scott, Beth, thank you very much for the time. Appreciate it.

Thanks, everybody.