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Morningstar | Analytics Continue to Drive Strong Cloud Revenue for NICE; Raising FVE to $141

Narrow-moat Nice’s first-quarter revenue hit the high end of management’s guidance ($370 million-$380 million) at $377 million on strong growth in product and cloud revenue. Analytics continues to drive the majority of new business with multiple seven-figure deals closed in the quarter. One of the only areas to give us pause was cloud gross margins, which remain stagnant despite sequential revenue growth of 7% on average each of the last eight quarters. We are raising our fair value estimate to $141 per ADR from $130, due to higher growth expectations and margin expansion. As  shares trade at $143, we see the stock as fairly valued.

Cloud revenue increased 31% year over year to $136 million, driven by continued strength in analytics. We believe the growth in cloud and recurring revenue, which accounted for 36% of total revenue compared with 31% during the same quarter last year, should lead to more predictability in revenue. Product revenue came in at $70 million for the quarter, an increase of 14% year over year; it was down 17% in 2018 but rebounded in the first quarter on strong execution.

GAAP operating margins increased to 14%, up from 10% in first quarter of 2018, as increases in sales and marketing expenses were more than offset by operating leverage from research and development and general and administrative expenses. Cloud GAAP gross margins came in at 49%, up sequentially from 47% last quarter. While management pointed to some short-term headwinds from the 2018 Mattersight acquisition, the inability of cloud gross margins to scale with revenue growth remains a concern. Since the end of 2016, Nice has produced one quarter with cloud gross margins above 50%, despite cloud revenue growing nearly 73% over the same time frame.

Second-quarter revenue guidance range is $373 million to $383 million, indicating flat sequential growth. For the full year, management left revenue guidance the same but raised its non-GAAP EPS target by $0.03 to $5.11 to $5.31.

Due to the strong quarter, we are raising our 2019 revenue $12 million to $1.59 billion.

Nice also announced the acquisition of cloud customer service platform provider Brand Embassy. Brand Embassy had previously been a DEVone partner and is being brought in house by Nice to be integrated into the CXone platform. Brand Embassy provides omnichannel solutions for live human and AI-assisted chats, which Nice will refer to as “smart digital conversations.” Terms of the deal were not disclosed, but we see this deal as a good fit for Nice’s product offering as more call center interactions transition to chat.