NICE Ltd. (NICE) Q2 2023 Earnings Report, Transcript and Summary

Welcome to the NICE Conference Call discussing Second Quarter 2023 Results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded August 17, 2023. I would now like to turn this call over to Mr. Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.

Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer; and Beth Gaspich, Chief Financial Officer. Before we start, I'd 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 the company's actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in Item 3 of the company's 2022 annual report on Form 20-F as filed with the Securities and Exchange Commission on March 30, 2023. During today's call, we will present a more detailed discussion of second quarter 2023 results and the company's guidance for the third quarter and full year 2023. You can find our press release as well as PDFs of our financial results on NICE's Investor Relations website. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles as reflected mainly in accounting for share-based compensation, amortization of acquired intangible assets, acquisition-related expenses, amortization of discount on debt and loss from extinguishment of debt and the tax effect of the non-GAAP adjustments. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties and assumptions. I'll now turn the call over to Barak.

Thank you, Marty, and welcome, everyone. Our momentum continued into Q2 as evidenced by another strong quarter, highlighted by another double-digit growth across all key financial metrics. Total revenue increased 10% to $581 million driven by continued strong growth in the cloud, which grew 23% year-over-year outpacing the rest of the industry and at a much larger scale. In addition, our industry-leading superior profitability was once again reinforced in Q2, and it has become an unlimiting financial competitive advantage. Cloud gross margin continued to increase to 70.3%. Operating income increased 10% to $170 million, and our operating margin grew to 29.2%, up 20 basis points year-over-year. EPS came in at $2.13, representing an increase of 15%. Those strong results demonstrate the rapid progress we are making as we expand our total addressable market and leadership from core customer service to the broader CX category. This broader expansion encompasses digital engagement and conversational AI, where we are rapidly capturing market share. NICE is strategically positioned for complete coverage of all customer service interaction, digital and voice, agent-assisted and consumer-led. Furthermore, our state-of-the-art platform CXone combined with our clear leadership in all segments of the market, particularly large enterprises, allows us to greatly expand our TAM and market share while driving industry-best profitable growth. Let me start by describing how digital engagement drove the success of our business in Q2. We delivered a 70% increase in new digital bookings with much of the deals coming from large enterprises, and the share of new digital bookings doubled year-over-year. Many of those deals were displacements of legacy point solution vendors that are failing to deliver on the holistic digital approach required by large enterprises. In addition, we are winning many of these deals due to the native cloud architecture of CXone, the only platform in the market that seamlessly integrates digital and voice CX solutions. In Q2, we signed an 8-digit deal with one of the largest entertainment companies in the world. Not only did this large enterprise want to consolidate on to a cloud platform with a single vendor, but they also wanted to partner with a vendor that can take them into the future digitally as they are expanding their self-service and IVA capabilities on CXone, replacing legacy digital point solution providers. We signed a 7-digit deal with one of the largest hotel chains in the world, replacing the incumbent Gen 1 digital solution. With CXone's AI-driven knowledge management capabilities, this company can now provide more advanced digital self-service for its customers. We signed a 7-digit deal with a large global payment processor as they're consolidating on our CXone digital platform to future proof their digital needs. The emergence of AI coupled with gen AI is the most significant TAM expansion opportunity for NICE in all of our markets and in the CX space, in particular. The investments we made in building Enlighten over the last few years has embedded AI foundation of CXone with hundreds of CX-specific models is now emerging as a concrete material differentiation and revenue growth opportunity. And this is underscored by a record quarter of Enlighten bookings. Moreover, all of our $1 million plus ACV deals in the quarter included AI. We signed a 7-digit AI deal with a major communications company, which is looking to expand its capabilities around proactive conversational AI, and our advanced innovation was the only one that provides smart self-service. We signed a 7-digit deal with a large energy company, replacing the incumbency provider who could not meet their requirements as they are aiming to fully transform to AI-powered self-service. This customer is looking to greatly expand its digital interactions volume through trusted conversational AI and selected CXone for its AI precision and scalability. A very large consumer electronics company signed a 7-digit AI deal as they want to consolidate their self-service experience for sales and service, replacing their legacy bots with CXone AI. Enlighten AI in just all voice and digital interactions continuously identifies opportunities for automation and then fully executes interaction flows to self-service. We had many other large enterprise Enlighten deals, including one of the largest banks in the world and a Fortune 500 fintech company. From these deals and the ongoing momentum we are seeing with AI, we expect to generate significant future revenue resulting from the consumption-based pricing model of AI, which is tightly linked to the fast-growing volume of self-service interactions. Customer demand for Enlighten has been strong ever since we began delivering to the market. During our extremely successful Interactions customer conference back in June, we announced 3 new groundbreaking solutions leveraging the powerful combination of Enlighten and generative AI: Enlighten Copilot, turbocharging customer service employees; Enlighten Autopilot, the next-generation conversational AI; and Enlighten Actions, a whole new paradigm to manage CX. Subsequently, the Enlighten pipeline has rapidly accelerated. In fact, Enlighten bookings in Q2 were greater than the previous 5 quarters combined. We continue to win the clarification cycle in our markets across all segments and geographies, especially at the higher end of the market. Our high win rate is also leading to our unmatched profitable growth. The investments that we have made in building CXone as a native cloud platform with a suite of more than 45 applications have resulted in record adoption of incremental applications by our customers, leading to continuous growth in the average revenue per user throughout our entire customer base. Furthermore, the architecture of CXone with limitless scalability continues to fuel the expansion of our gross margin with every new deal. In Q2, we continue to win market share with large portfolio deals, reflecting the leading architecture, completeness and innovative end-to-end approach, including purpose-built analytics and AI of CXone. We signed an 8-digit deal with one of the largest car manufacturers in the world, replacing 2 large legacy incumbent on-premise vendors both with cloud solutions that could not provide a complete suite and seamless integration experience of CXone. We signed a 7-digit deal with a very large cruise ship operator, replacing the incumbent on-premise provider. We won the deal for our fully integrated suite of applications on a single cloud platform covering both digital and voice which is seamless and unified user experience. We signed a 7-digit deal with a very large retailer, which is a new Fortune 100 customer for NICE that has standardized on CXone. We replaced the incumbent on-premise provider. And following a competitive process, NICE was selected due to the clear leadership of CXone and our ability to serve on current and future transformational needs of this customer. Other large cloud deals in the quarter included 8-digit deals with 2 major U.S. banks and a 7-digit deal with the West Coast State government. The momentum that we are seeing at the high end of the market combined with the adoption of our fast-growing portfolio by our very large customer base will continue to fuel our profitability going forward. In summary, the CX cloudification cycle is rapidly expanding into the large enterprise market with AI approaching faster than many probably had expected. These dynamics are clearly favorable for NICE as we've been smartly investing over the past 6 years, winning the market and strategically preparing for this moment. In addition, we have an industry-best capital structure that allows us to further expand our market leadership at this crucial pivot in the CX market. Moreover, our extremely profitable position allows us to continue to invest and innovate at a breakneck speed while delivering strong top and bottom line results. I'll now turn over the call 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 second quarter of 2023 and our outlook for the third quarter and full year 2023. Our financial results in the second quarter grew double digits on both the top and bottom lines as our total revenue came in at the high end of our guidance range and EPS exceeded the high end of our guidance range. Total revenue for the second quarter was a record $581 million, up 10% year-over-year driven by the strength of our cloud business, which now represents a record 66% of our total revenue compared to 59% last year. Cloud revenue increased 23% to a record of $382 million in the second quarter as we continue to see increasing adoption of our CXone platform by large enterprises. The year-over-year growth in our cloud revenue resulted from a healthy mix in 3 key areas: expansion of our vast installed base through upsells; cross-sell adoption of our rich portfolio of applications; and new customer additions. Services revenue, which represented 27% of total revenue, was $159 million, a decrease of 5% year-over-year. Product revenue, which represented 7% of total revenue in the quarter compared to 10% of total revenue last year, decreased 23% to $40 million. This shift in the mix of our revenue is expected and is part of our cloud-first strategy as our customers increasingly transition from on-premise to cloud. Our recurring revenue further increased to a record 86% of total revenue in the second quarter compared to 83% last year. Recurring revenue is comprised primarily of a combination of cloud and maintenance revenue. From a geographic breakdown, the Americas region, which represented 83% of total revenue, grew 9% year-over-year. The EMEA region, which represented 11% of our total revenue, increased 14% year-over-year and 13% in constant currency. The APAC region, which represented 6% of total revenue, increased 7% year-over-year and 9% in constant currency. The foreign exchange headwinds in APAC and tailwinds in EMEA offset each other such that the net currency exchange impact on total revenue was negligible. Moving to our business unit breakdown. Customer engagement revenues, which represented 83% of our total revenue in Q2, were $481 million, a 12% increase. CXone, the most advanced digital and AI market-leading customer experience interactions cloud platform, is the continuous primary growth driver in customer engagement. Our emergence as an AI and digital leader in this space was evident in the new bookings in the quarter with a 70% increase year-over-year in digital bookings and will be a clear revenue growth driver of our business looking forward. Revenues from financial crime and compliance, which represented 17% of our total revenue in Q2 and totaled $100 million, delivered as expected a decrease of 2% year-over-year. Similar to customer engagement, our strategy to cloudify the segment of the market is gaining momentum through adoption of our cloud platforms, X-Sight and Xceed. We are progressing well on the cloudification of the financial crime and compliance customer base with a significant revenue uplift from every customer that has been converted. We expect to see this growth further accumulate in the financial crime and compliance revenue stream in future periods. Now to profitability. Our gross profit grew 7% year-over-year to $416 million. Total gross margin in Q2 was 71.6% compared to 73.3% in Q2 last year. The decrease in total gross margin is attributed to the decrease in product gross margin as a result of a change in the product revenue mix. Cloud gross margin increased 20 basis points year-over-year to 70.3% in Q2. We expect our cloud gross margin to continue to expand over time as our financial crime and compliance, public safety and CXone international expansion gain scale. We continue to see further enterprise adoption of the CXone platform as well as increasing volume-based usage from both digital and AI. The ongoing growth in our cloud revenue combined with the expanding cloud gross margin will also lead to an expansion of our overall gross margin. In Q2, operating income increased by 10% year-over-year to $170 million. And our industry-leading operating margin increased 20 basis points to 29.2% compared to 29% last year. EBITDA increased by 10% year-over-year to $187 million in the second quarter. Our best-in-class EBITDA margin in the second quarter increased to 32.1%, increasing slightly compared to last year. Earnings per share for the second quarter totaled a record $2.13, a double-digit increase of 15% compared to Q2 last year. Our financial and other income was $11 million, resulting from interest income earned from our healthy cash and investment portfolio and the foreign exchange revaluation of our balance sheet. Cash flow from operations in Q2 increased fourfold to $65 million compared to the prior year as a result of our strong billings and collections. Over the past 4 quarters, we have generated more than $0.5 billion in cash flow from operations. The strength of our cash flows provide us with significant flexibility and capital allocation priorities of M&A and share buyback. Accordingly, we continue to execute on the accelerated $250 million share repurchase program to be completed by the end of this year. In Q2, we repurchased shares in the amount of $65 million and executed 53% of that plan as of the end of June. Total cash and investments at the end of June totaled $1.662 billion. Our debt net of a hedge instrument was $543 million, resulting in net cash and investments exceeding $1.1 billion. In closing, we are pleased with our strong Q2 and first half 2023 financial results. In the first half of this year, we continue to demonstrate the strength of our business with notable growth in our overall revenue, cloud revenue, profitability and cash flow generation. Our consistent approach to drive a healthy mix of both top and bottom line growth is evident, and we remain committed to this excellence looking ahead to the second half of this year. Now before I hand it over to the operator, I will conclude my remarks with guidance. For the third quarter of 2023, we expect total revenue to be in the range of $590 million to $600 million representing 7% year-over-year growth at the midpoint. We expect the third quarter 2023 fully diluted earnings per share to be in a range of $2.10 to $2.20, representing 12% year-over-year growth at the midpoint. We are raising our full year 2023 total revenue and EPS guidance. We now expect total revenue to be in the range of $2.353 billion to $2.373 billion, representing 8% growth at the midpoint compared to full year 2022. We now expect full year 2023 fully diluted earnings per share to be in a range of $8.40 to $8.60, representing 12% growth at the midpoint compared to full year 2022. This includes our expectation that operating income will continue to achieve double-digit growth. I will now turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from the line of Samad Samana with Jefferies.

So maybe first, Barak, one for you. Interactions was at a very interesting time. It was kind of the height of the AI commentary. I'm curious maybe what customer conversations following the conference have been like, particularly around some of the new products that you mentioned? And how we should think about maybe the pipeline that's built out of Interactions this year versus prior years, given the interest levels around AI?

Thanks for the question, Samad. So yes, we had a very exciting Interactions. Many of you attended it, and it was well attended beyond our expectations. We actually had many, many hundreds of people more than we expected, but I'm glad we could have accommodated everyone. And the content, of course, was great, both what we have provided, but many customers presented in the different breakout sessions. First, I'll say, and I mentioned it in my earlier remarks is it created a very significant positive momentum into our pipeline. A lot of opportunities we have now in the pipeline that are progressing nicely started at the event. And many that existed before the event either matured further or even allowed us actually to win some deals in the quarter itself and even more so in July and Q3. So that's about that. Specifically, there was a very big interest and a lot of conversation with respect to the introduction of the new models of Enlighten, Enlighten Copilot, Autopilot and Actions. And needless to say that earlier this year, there's a lot of, call it, hype about generative AI. Things are starting to sink-in and enterprises are starting to realize that the right way for them to adopt it, adopt generative AI is not taking something generic that is not necessarily 100% precise or well secured or well connected to their platform. And they need domain expertise and Enlighten in order to introduce it into their CX environment. And as a result, we indeed see the success as I mentioned on the call with Enlighten, record booking in Q2 -- Q2 booking of ENLIGHTEN equal or actually more than the previous 5 quarter together. And we see the momentum continues in the pipeline. So all in all, very successful Interaction, and we are very happy way more successful than previous event that they were successful by themselves as well.

Great. And then maybe a follow-up for you, Beth. Just looking at the cloud revenue number, growth slowed a little bit. And in terms of dollars added sequentially, it was a bit more modest than you've seen from 1Q to 2Q in the last couple of years. I just wanted to maybe understand how we should think about cloud growth. And if there's anything in the quarter that may be muted that normal seasonality and just how we should think about the rest of the year for cloud revenue specifically.

Yes. Thank you for the question, Samad. We came in with a 23% cloud revenue for the quarter. It was completely aligned with our expectations, and we're very pleased with that result. In fact, if you look at kind of the competitive environment and some of the other competitors in our space, our growth rate in our cloud is far exceeding what you're seeing from some of the other players. So we're very pleased with that growth. With respect to kind of the change from quarter-to-quarter, first, if you look on the last couple of years, you'll see that, that change between the first quarter and the second in terms of the shift in the growth is pretty typical. And I think looking ahead, one of the things we know is Barak talked about both today and many of the past quarters, we are gaining more and more traction in the large enterprise, which we define as 750 or more agents in the contact centers. So we're taking on more and more market share with large enterprise. And of course, as it is typical in the software industry, it's typically that you'll see it takes a bit longer as you go into these very large organizations to see that revenue materialize into the revenue stream. So all in all, we continue to be very pleased with our performance, both in the first half and are looking forward to the second half of the year as well.

Our next question comes from the line of Tyler Radke with Citi.

Barak, you talked about how some of your conversations with respect to AI seem to be kind of happening faster than you expected. And I'm sure just the technology rollout has been faster than we all thought 90 days ago. Just as it relates to the core business and how your traditional sales cycles for CXone are progressing, is the conversation around AI having any -- causing any delays in kind of core CXone? Can you just kind of talk about the puts and takes of the excitement around AI?

Sure. I actually think it helped us in the win rate of winning CXone, and we see it happening. As I mentioned, 100% of our 7-digit and higher deals in the quarter, CXone deals included AI. So some of them were driven by AI; in some, it was an add-on to the process. So that's one thing. It also allows us to much expand the scope and help in getting both the funds and the support when it comes to adopting CXone. It's no longer just the legacy, let's replace an Avaya, Genesys or something like that or Five9 voice only, but rather much bolder both digital engagement and taking over both the agent-assisted and the consumer-led conversations or interactions. As a result of that, the scope is much bigger, and it helps us to compete vis-a-vis those competitors that do not have something equivalent to Enlighten. So you can look at it both as a standalone business or driver for our growth, but also something that fuel the core driver of our business, which is the cloudification cycle of the CX market still with a very long runway to it.

Okay. Great. And just a follow-up, Beth. So on the full year for cloud revenue, I think last quarter, you talked about 22% to 25%. It sounds like maybe you are seeing some sales cycles elongate at the large enterprise, which you're certainly not the only ones there. How should we think about full year cloud revenue growth? Is it -- would you steer us towards the lower end of that 22% to 25%? Any way to kind of frame the glide path on the decelerating -- deceleration in the second half would be helpful?

Yes. Thanks for the question, Tyler. We came into this year talking about a range of 22% to 25% expectation in our cloud revenue growth, and we remain committed, and that's the range we continue to expect. Of course, we're just coming out of the first half of this year. And we remain, as I said, optimistic about the pipeline and the business momentum we are seeing. So at this point, we continue to stand behind the range. And obviously, as we come out of Q3, we'll provide additional color at that point.

Our next question comes from the line of Siti Panigrahi with Mizuho Securities.

It's good to see some of the deals you highlighted with AI and digital. But could you give some color around like your AI attach rates, how does it look like for the new logos, new customer? And then the deal signing, what kind of mix you are seeing in terms of expansion versus new customer?

So I'll start at the bottom line -- and thanks for the question. The bottom line is that we see it all over. We see it both with new logos. We see it both -- an expansion of AI within the very large customer base that we have. And we also see customers that just talking to us about AI regardless of the infrastructure that we have and our AI can be vendor-agnostic. So we compete on all of those categories with a great differentiation. And it's, as I said, I believe our biggest TAM expansion opportunity. And it's not just theoretical. These investments we have made in the past several years are now materializing into real business and a significant opportunity. The other thing that we like about it is that regardless of how it starts, the expansion -- the natural expansion opportunity is significant. Most of those deals, we price them on a consumption base. And that consumption base is linearly attached to the -- how many interaction are ingested by Enlighten. And as a result of that, something that's small at a certain size, if you think about us forward, it will continue to grow naturally as more and more interaction, digital interaction, voice interactions, agent-assisted, complete self-service, all that are going to Enlighten and with every interaction that go through that, first, there is more revenue. Second, it becomes better and stronger. So this is exactly what we wanted to see. And the results in Q2 on that regard are phenomenal, and it's more than just early indication. It's a real and a significant business. And we -- the pipeline indicates that moving forward, we will continue to do the same.

That's a great color, Barak. And a follow-up to Beth. It's impressive to see how you expand operating margin despite gross margin going down. So could you help us understand a little bit on the gross margin dynamics like going forward? And how should we think about this margin expansion and where -- is the operating leverage mostly going to come from sales and marketing?

Yes. Thank you for the question. As you look at our cloud gross margin and if you look at how we've expanded it over the last several years, we've expanded our cloud gross margin by over 600 basis points over a few years. And it shows that we have a really strong muscle in scaling our cloud business. Currently, we have a lot of our newer business segments that are kind of in the less mature stages of their cloud business. That includes our financial crime and compliance business, public safety and some of the international expansion we have done with CXone. So as those businesses continue to drive scale, we're confident that they are also going to be further accretive into the cloud gross margin. And of course, that's on top of the great expansion that we see in the core of our CXone business, both from strong attach rates that we have of the really deep set of applications across the CXone platform and also, of course, the accretive nature that we see from our digital and AI applications on the cloud gross margin. So a combination of all of those factors, we're confident and we actually shared at our recent Investor Day that we continue to see our cloud gross margin. And in fact, share that we're confident we'll see a 75% cloud gross margin in the future, and that will continue to drive the operating margin expansion as well.

Our next question comes from the line of Rishi Jaluria with RBC Capital Markets.

This is Rich Poland on for Rishi Jaluria. So I guess, first one is just as we think about some of these new AI capabilities between Copilot, Autopilot and Actions, is there any one that stands out as kind of being maybe a more immediate revenue driver versus a long term? And then, I guess, just a second aspect of that question. Do we have any like sense for the adoption curve of the consumption element? And just kind of how long does it take the customer to start to ramp up some of those volumes and if we have any early proof points just kind of around that?

Sure. Let me address the first one, great questions. So in terms of the pipeline, we see test out differently. Customers when they speak to us about AI and they hear about Enlighten, and they want to learn more, they want to see all of it because they see the value of how Copilot augments their existing users. They see the Autopilot allow them to really go into self-service in the right way. And Actions is a completely new paradigm on how managing CX, and it changes dramatically the way they think and see CX. In terms of what we've seen, customers are starting with -- many are starting with Copilot because they want to take the technology first to existing processes with the agent. It's also putting it with the agents versus first with the customer. And this is kind of the safest way to go, but it also allows them to move quickly from Copilot to Autopilot because if something works extremely well with the agent and you can automate it very -- relatively easy, you can migrate it into the Autopilot. So that's what we see more often than not starting with the Copilot moving into Autopilots. That's about that. And the adoption -- as we continue, of course, we'll update about the specific adoption that we see for the 3 solutions of Enlighten. In terms of the adoption curve and the usage, I think it's still early days to say. We do see customers that deployed Enlighten and are deploying Enlighten starting to ingest a lot of information to that. There is an understanding of our customers and general understanding that generative AI is good up to a certain point. And the reason why they go to Enlighten versus using something generic is that eventually an enterprise needs something different. They needed to be precise at 100% with no hallucinations. And for that, you need a lot of data. You needed to be extremely secured. They cannot take something proprietary into the public domain. They need to be connected to all the back-end system, and CXone is the best platform for that when it comes to CX. And of course, they needed to be aligned with the brand. It's nothing -- we don't want generic answers to their consumers or to the agent. So you add all of that together and the amount of data going through that, I believe that we'll see a significant expansion. But it's still, I think, too early to say what is the exact rate of expansion.

That's very helpful. And then just one for Beth. You talked a little bit about the accretion from digital and AI. Can you maybe, I guess, step back a little bit and tell us kind of what you're seeing on the gross margin front from some of those solutions? And how you think about that versus, let's say, like the core CCaaS business?

Yes. Thank you. So what we're seeing, again, as Barak said, it's early days on the consumption side, but certainly with core of our AI offerings, these were -- Enlighten is a solution that was manically developed is native here at NICE. And so we have very attractive margins. And we can see that it is -- the customers see those use cases playing out in the organization. It drives adoption throughout those organizations. And as that happens, we're seeing that, as I mentioned, being accretive further to the margins. So that is something that we're already starting to see out. And of course, both in terms of our revenue streams and our margins, we see both digital and AI continuing to be nice growth drivers in both respects.

Our next question comes from the line of James Fish with Piper Sandler.

Wanted to build off Samad's first question. Was there a pickup in more desire for term deals on the financial crime side this quarter that didn't translate to cloud revenue? And Beth, I think every investor asked this to at least us. Is there any way to understand how much of that financial crimes business is now cloud?

Yes. Thank you for the question, James. I highlighted earlier on the call that we are seeing momentum in our financial crime and compliance business segment with both our Xceed and X-Sight cloud platforms that are addressing all of the financial institutions, both midsized and large. And we are seeing really even greater momentum than we had originally anticipated with success in the cloud. So what you're seeing in the results of the financial crime and compliance business is exactly that this year. The current year revenue is expanding in terms of the contribution from the cloud. And of course, that is compared to a baseline one year ago that had a much larger contribution of product and premise-based revenue. So we're seeing that transition, and we expect to continue to see that happen throughout the course of this year as that business continues to drive success in the cloud. So this is a very transitional year for that FCC business. And of course, as we start to see more of the concentration of the revenue in the business to the cloud and you get to more of an apples-to-apples type comparison then you will start to see that success coming through as the cloud revenue accumulates. And we see the growth once again being recognized when you're on kind of an apples-to-apples comparison. So it is a transitional time. And we are excited about not only what we're seeing in the FCC business but also early days of Evidencentral in our public safety business as well. With respect to the amount of contribution, it is continuing to increase. And as we've said in years past, overall, customer engagement still constitutes 83% of our total revenue today. So by and large, it is still the key growth driver, but we'll always consider potentially breaking out the cloud revenue contributions from non-CX revenue in the future.

Maybe I'll just add one more thing to that. And this is that when we look now on the conversion of existing financial crime and compliance customers to the cloud, originally, we expected them to be in the magnitude of 2x to 2.5x more revenue in the cloud on an annual basis versus on-prem. We actually see that we managed to cross-sell a lot of capabilities right out of the gate in those conversion rates. And the last 20 deals analysis we've done was north of 3.5x. That's one thing. And the second in the financial crime and compliance, customers are actually even forcing us in a positive way to commit for the long run and many of them signing those cloud deals with 5 to 7 years commitment. So it's going to be an extremely healthy cloud business as it continues to evolve in its conversion to the cloud.

That's really helpful color from both of you. Maybe Barak, just to follow up. What are you seeing competitively in the CCaaS and WEM space, particularly any change around pricing and acceptance for more of that interactions-based pricing? And any color commentary for how you're thinking about the second half pipeline for some of these 7, 8-figure sized deals, particularly in your financial services vertical that you guys are historically very strong with?

Thank you. So what we see in the competitive landscape is somewhat similar to things I've hinted or talked about in previous conversations. For years, we've been preparing ourselves and going in the market from the bottom up in order to get to the point where the enterprises, the large enterprises are going to cloudify their CX environment. And this is exactly the point that it's starting to happen in a more meaningful way. In this situation, a lot of the small players are having hard time to either compete or to deliver. And we see ourselves both winning those deals. And in some cases, we see them when we are not winning the deal, those deals come back to the table 6 months or 8 months later after the customer realized that they selected someone that cannot scale or not provide the level of complexity at scale that the other competitors provide. We also see some of our competitors struggling to take or taking decisions based on their debt liabilities; and as a result of that, not doing necessarily the right thing for the long term of their success or the market success. And we, of course, enjoy that situation. And last but not least, I think we're enjoying very much the fact that, as both Beth and I said before, we have built CXone as a native cloud platform. We invested a lot in that north of many, many thousands of many years that are invested in the platform with a lot of applications. And now we have expanded into digital and AI, the great convergence -- doing the great convergence, if you would like, of this market. And as a result of that, the competitive landscape for the potential TAM is much bigger because we are taking a share out of the legacy digital engagement space and the new AI space. So in that regard, CCaaS, the definition of CCaaS is much broader right now. And it allows us to compete better vis-a-vis the competitive landscape.

Our next question comes from the line of Patrick Walravens with JMP Securities.

Great. Barak, do you expect over time to see pressure on your seat count as people adopt your AI solutions?

We don't see it yet. The -- only 20-some percent of the CX market is in the cloud. So for us, unlike some other companies that used to be the incumbent in the routing or the on-premise ACD paradigm for us, every time we win a new cloud ACD or CCaaS, it's a brand-new upside. It's not a conversion of an historical revenue. So if I look in the next few years, the runway is very significant. With respect to general agent or seat count, if you would like, within the customer base, we don't see it shrinking as customers are adopting self-service solutions. Maybe not yet, maybe not ever just because the demand, the general demand for service is growing so fast with more digital channels being introduced by both consumers and enterprises. So a lot of the self-service effort is actually being used in order to avoid new agents to be added to the labor market and do that through self-service. So I don't expect it to happen anytime soon. And if and when it will happen several years down the road, I believe that our business is going to be so robust on the self-service business that it's actually going to be accretive to us because when we go and we migrate an agent, a label [TAM] into technology, the potential revenue opportunity for us is way more than just the technology that supports an agent.

Our next question comes from the line of Matt Stotler with William Blair.

I just want to start off with I'd love to get an update on what you're seeing with the conversion of the on-prem installed base and customer engagement to CXone, what that pace looks like and how that's being impacted by some of your recent announcements around AI and the strength you're seeing in digital.

Thanks for the question, Matt. So I think we provided in the past several updates on that. I'll give a bit more color, but if I'm not wrong, Beth at the recent Analyst Day actually provided great examples of what happen when those customers convert. But if you look at our customer base, our historical what we call WEM customer base that was predominantly at the higher end of the market, very few of those customers migrated to the cloud. And that's a great opportunity for us because when they do migrate to the cloud, if they migrate just for like-for-like, meaning WEM to WEM in the cloud, we see about 2.5 to even 3x conversion in terms of the revenue. But many of those actually adopt a much broader portfolio from us. And in many cases, we win the entire OCR. In these cases, the conversion goes all the way up to 6x, and sometimes we have example up to 9x on the maintenance. So we're still in the early days of this conversion. If you look at our cloud business altogether, most of it was a pure upside for NICE, not a result of any conversion. And only now we're starting to convert the base, including win -- continue to win brand-new business for the company.

Got it. That's helpful. And then a follow-up maybe on what you're seeing internationally specifically in Europe. I know over the -- at some point in the quarter, you had an announcement that CXone is now an EU sovereign cloud platform. And obviously, you're seeing faster than corporate average growth in that geography. So I'd love to just get an update on the adoption trends you're seeing specific to EMEA and any key investment priorities there to drive further adoption?

Thanks for that. So international is not new for us. We've been always operating in international markets, prime international markets. But with CXone introduction several years back, we realized that at some point, we are going to franchise and expand from the U.S. to other territories. And we've done this investment in a variety of geographies and started to do it one at a time. So first of all, most of the investment is behind us. We invested both in terms of the infrastructure and in terms of the go-to-market and building the right partnerships. Beth talked about it before with respect to our gross margin that a lot of that investment is behind us. And now we're going to leverage on that investment. As a result, we are going to see expansion of the gross margin. We are seeing great success in those territories. And that's one of the reasons that led us to decide to have actually a cloud environment that is an EU sovereign in order to further support the EU and the pipeline in a variety of international territories all the way from Asia Pacific, Europe, Latin America is very promising.

Our next question comes from the line of Chris Reimer with Barclays.

Most of my questions have been answered -- asked already, but maybe just 2 quick housekeeping ones for Beth. Looking at the product gross margin, it's coming in a little lower than historically. Is this the new level as this segment kind of drops out? And regarding financial income, is this an appropriate level considering where rates are right now and your cash balance?

Yes. Thank you for the questions, Chris. First, with respect to the product gross margin, you will see, of course, that our product gross margin will vary from quarter-to-quarter based on the mix of the products that we're selling during the quarter. A lot of our products have now -- we see the customers buying that in the cloud. And so the mix of what you saw in this quarter is probably a bit more typical of what you would typically see. However, it is a bit more deflated than what you would expect looking ahead. This quarter, in addition to the product mix, we also had some -- a bit of onetime kind of nonrecurring cost in the quarter as well. So if you look back on the last couple of quarters in terms of product gross margin, that's probably more typical of what you would expect to see. Again, I'll caveat that by saying it is dependent on the product mix, but that's probably much more likely as a typical product gross margin in our business. With respect to the financial income that we demonstrated this quarter, of course, we have a healthy cash and investment portfolio. A couple of things to highlight. I would say here what was quite healthy during the quarter, it was a bit inflated. First, we have a revaluation of our non-U.S. denominated receivables and balance sheet accounts at the end of each quarter. So this quarter, we did receive a benefit that's being demonstrated in that financial income that makes it a little bit higher than we would typically expect by more than -- somewhere in the range of about $1.5 million. So you would have to kind of assume that, that will not be likely to recur. And of course, sometimes that can go in the opposite direction for us. And so we always, of course, keep that in mind as well as we look forward. And then additionally, of course, as you look at the portfolio that we have, our investment policy generally looks for us to hold our positions until maturity. And so the bulk of our positions were invested at a time where the interest rates were much, much lower. So that also needs to be considered as you're looking at the overall financial income. So those are the 2 key areas to keep in mind.

Our next question comes from the line of Tim Horan with Oppenheimer & Co.

Can you just touch on the 2 or 3 maybe key technologies you used in AI to roll out these new products? And can you just talk about how much better the AI products are now maybe versus where they were a year ago? And if you can give something quantitative in terms of maybe success rates with digital interactivity or something like that would be great. I know it's early days, but any color?

Sure. We use -- first and foremost, it's important to understand that one of the most important thing with AI, no disrespect to the algorithms of a specific product, is the data that you have in order to train and build your AI. And that's the real key differentiator. Algorithms can, of course, improve it, but having the data, having the relevant data, having a clean data is really what make an AI solution a superior one. We have billions and tens of billions of historical interactions, both current and historical completely labeled, completely clean, verticalized for specific use cases. And that's what makes Enlighten so relevant and so unique in the CX space. And actually, I don't remember if we demonstrated that during Interaction. If not, we'll be happy to do it in the upcoming or the next analyst visit that we have at the next Investor Day is to show you what happen when you run certain scenarios through Enlighten versus any kind of generic AI solution, and the difference is night and day. And our customers, many of them, already try to deploy generic AI in their environment. And this is exactly the point that they encounter, the issue of precision but precision in context, and that's the reason why they are selecting Enlighten. So this is what we're doing. Of course, we are augmenting technologies, different generic generative AI technologies and using them as a layer, if you would like, within Enlighten in order to make it more accessible in terms of what I call consumable responses of the AI. So the mix of the two together is the winning combination.

And any color on how much better -- how much of an improvement you've seen in the product? Or is it hard to say?

We see -- the past 12 months, we've seen a dramatic improvement. And needless to say, the more deployment we have with customers, the more use cases we have. So I think we're seeing what is typical from a new domain or technology that the early days of initial deployments and it's actually more the initial deployment, the improvement is exponential. And we have customers using Enlighten in variety of scenarios and got to level of precisions that are beyond their expectations and are extremely seekable to what they did.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

You mentioned predominantly consumption. But just wanted to get a sense of does that -- does the pricing increase if there's -- as completion rates increase? Just how dynamic is that pricing? And do you feel like it's still dynamic from your part and that you guys are still figuring it out just as it ramps maybe as the first question?

I apologize. We missed the first part of the question, but if I think I got it, the question was about the pricing, the consumption-based pricing of Enlighten and how stable it is and what we kind of see in terms of dynamics? Is that -- that was the question?

Yes. Just is it are you guys still trying to figure out the pricing? And do you feel like there's opportunities as completion rates increase to kind of increase the pricing that you're seeing on a consumption basis?

So we have a pricing out with customers, and it is right now received very well by enterprises and customers. And the reason that I believe it is accepted by customers right now is because of the tremendous ROI it has. I'll remind us again that a cost of a service representative in a typical CX environment is roughly $50,000 to $60,000 a year, and this is just the labor, not the technology. All the technology that's supporting that agents usually are roughly $5,000 to $6,000. So 90% of the cost in CX still goes -- or the investment still goes into labor. So when we replace or augment certain tasks or make those agents much more efficient or completely take them out of the equation, we tap into this significant labor [count]. Hence, that's the way we look at it. And we can get 25% of those savings, it's a tremendous uplift for our revenue moving forward. So right now, it is accepted by customers, and we see the potential. I believe there will be certain dynamics up and down. But we are in early days, and the land grab situation here is the most important thing.

Got it. And just as a follow-up question. Are people kind of taking the time or elongating the time to implementation to really train systems with kind of their own data or train kind of Enlighten with their own data? Or are they kind of leveraging your vertical specific expertise kind of out of the box initially?

Yes. So what's beautiful about Enlighten that it has hundreds of CX-specific models right out of the box because of the -- what I've mentioned before, there are many, many billions of interactions we train Enlighten with. The second thing is that we as a company, we're not just a generic AI company. We are experts. We have domain expertise in customer service, and eventually enterprises are looking to partner with someone that has the solution but also have the domain expertise. So right out of the box, Enlighten provide significant value to customers. Needless to say that as the solution work in a certain customer environment, it continues to constantly further fine-tune it and improvement. And it also helps our general models that help other customers as well. But the value is from day 1 from the deployment.

Our final question this morning comes from the line of Mike Funk with Bank of America.

Great. This is Matt on for Mike Funk. Appreciate the question. So we've seen some peers call out varying degrees of strength and weakness in prior quarters within verticals like consumer, health care, financial services. Can you provide any incremental color on trends within the quarter and future expectations and whether or not certain verticals are more or less excited by potential?

We actually see strength across all verticals of our business. I think that you can see it in our growth. We grew 23% in the quarter at a much larger scale than our competition. I think you've seen it in our business in the past and today. Our business is well diversified. We operate across multiple verticals, and we have a tremendous win rate over the competition. So we continue to see the strength in the business, and we believe we are winning market share. I'm familiar with some of those comments from the competition. And we are okay for them making those comments, and we'll continue to win the market.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Eilam for any final comments.

Thank you all for joining us today. Thank you very much for the questions and the partnership, and we look forward to speaking to you again soon. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.