Morningstar | Narrow-Moat Nice Raises Recurring Revenue and Cloud Target; $108 FVE Maintained
Nice Ltd. reported its third quarter of fiscal 2018, with both revenue and earnings in line with our expectations. We are maintaining our $108 per share fair value estimate and narrow moat rating. Nice’s cloud revenue grew about 21% year over year, with the firm raising its $500 million in recurring cloud revenue target to $550 million. Our estimates track closely to this revised target. With Nice’s CXOne product as the firm’s flagship offering, the firm is continuing to transition from on-premises product revenue to recurring and cloud-based revenue. For the quarter, cloud revenue encompassed about 33% of the firm’s total revenue, the highest share of the business ever, and we believe it could account for about 50% of revenue midcycle. Thus, we model robust operating margin expansion as revenue becomes recurring. However, we want to note that shares continue to trade near our fair value estimate, as we believe robust growth assumptions have already been priced into this name. Thus, we would await a wider margin of safety.We want to reiterate that we continue to see Nice as a transition story. We believe customers will benefit from combining workforce engagement management (WEM) and contact center infrastructure (CCI) solutions, two functions historically serviced by separate vendors. WEM products allow a firm to forecast call center volumes and improve workforce efficiency, while CCI tools manage the call routing.
A focus of the quarter was Nice’s X-Sight product, which the firm billed as an autonomous financial crime management Platform-as-a-Service. We believe X-Sight takes the CXOne playbook for customer engagement to the firm’s financial crime and compliance segment. The product seeks to address the increasing cost of compliance for financial institutions through automation. While we do not expect a material impact to the firm's financials in the near term, X-Sight helps underscore our thesis around the shift to cloud revenue for Nice.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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