EUR 850.00 For Business Accounts Only

Morningstar | Nice’s Cloud and Subscription Strategy Coming to Fruition Heading Into 2019; Maintaining FVE. See Updated Analyst Note from 14 Feb 2019

Narrow-moat Nice delivered a strong coda to a commendable 2018, with the fourth quarter top and bottom lines coming in at the high end of guidance. Growth continued to be led by the cloud segment, with both new and existing customers embracing the firm’s X-Sight platform for Financial Crime and CXone for Customer Engagement. We continue to view the firm as structurally advantaged even amid a competitive landscape that is in a state of flux, as the traditional contact center technological pillars of contact center infrastructure (CCI), customer relationship management (CRM), and workforce engagement management (WEM) continue to converge. Shares are trading roughly in line with our unchanged $118 fair value estimate, and we believe prospective investors should wait for a wider margin of safety.

Fourth-quarter non-GAAP revenue under the ASC 605 accounting standard came in at $420 million, representing year-over-year growth of 61%. The firm will report both results and guidance exclusively under ASC 606 going forward, removing a layer of complexity that only served to obfuscate the firm’s results in 2018. The firm performed admirably on the margin front, with full-year 2018 GAAP gross and operating margins widening 80 and 240 basis points, respectively, to 65.6% and 13.7%. This demonstrates the operating leverage inherent in the firm’s business model, particularly as recurring revenue continues to grow, reaching 70% of total sales this year versus 65% last year.

For 2019, management guided to a non-GAAP sales midpoint of $1.57 billion, which implies 8% growth. CEO Barak Eilam also laid out rough operating targets for the next five years. Nice hopes to appreciably exceed $2 billion in revenue, have the preponderance of sales be in the cloud, and exceed 30% non-GAAP operating margins over this time frame. From our vantage point, these goals are ambitious but achievable given the firm’s competitive positioning and secular trends from which it benefits.

Management provided some color on the competitive dynamics within its Customer Engagement segment. It indicated that as enterprises look to transition from traditional on-premises CCI technology to contact-center-as-a-service (CCaaS), it is able to entice companies to switch to CXone due to various commercial and technical incentives, such as CXone’s end-to-end capabilities incorporating WEM. These displacements come at the expense of legacy vendors such as Avaya, even as these vendors rapidly incorporate various WEM analytics functionality into their CCI and CCaaS platforms.

The firm had several key wins during the quarter in this regard, for example a seven-figure deal with a state government agency where they replaced the incumbent. Even though Nice’s ability to generate economic rents is predicated on switching costs, we view the firm’s ability to displace incumbents as impressive, albeit aided by secular shifts to the cloud that are driving faster technology refresh cycles.

Management also indicated that the extensibility of the CXone platform is being put to good use by both new and existing customers. Both APIs and the solutions of technology partners (120 and counting, according to management) are being utilized primarily for integration purposes, as the rapid convergence of contact center technologies continues. The increased customization should give rise to a deeper level of embeddedness within the customer’s IT environment, which, when combined with the intrinsic data accumulation benefits of the cloud solutions, should increase customer touchpoints and ultimate stickiness of the firm’s offerings.