Galiano Mihai
Investment Thesis:
The market is underestimating the exciting prospects of NICE’s cloud business. The business has a strong balance sheet position, a long history of serving the market and is positioned to benefit from the AI wave. 11x EV / 2027 Adj. EBIT estimates, I believe This investment offers a good risk/reward profile.
Business model
Nice Limited (Nasdaq: Good) is one of the leading providers of enterprise software solutions that enable organizations to manage and improve the customer experience, ensure compliance, fight financial crime, and protect people and assets. Under its current structure, the company has three reportable segments and three business units. The reportable segments are Cloud, Product and Services, while the business units are Customer Engagement, Financial Crime and Compliance, and Public Safety and Justice.
The state-of-the-art cloud solutions segment includes cloud-based solutions such as Revenue. CXone (customer experience platform), X-Sight (a cloud platform for financial crime detection and compliance) and Evidencentral (a cloud-based public safety and justice platform). This is the fastest growing segment and is what this article will focus on. According to company disclosures, it serves 10/10 top US healthcare insurance companies, 5/5 top US telcos, 9/10 top global financial services firms and 6/10 top Fortune 10 companies. The industry-leading CXone platform is a contact center as a service (CCaaS) in the cloud and scalable format.
The second segment, called Product, consists primarily of professional services and consulting fees related to implementing and improving NICE’s solutions.
The third and final segment is product revenue, which consists of on-premise software licenses (old school) and hardware sales.
NICE Ltd Investor Presentation
Growth supercharger
The first and most obvious commercial use of Large Language Models (LLMs) and Generative Artificial Intelligence is to streamline and efficiently resolve customer service interactions. Especially the low-hanging fruit of simple customer queries that eat up the time of humans who are capable of solving complex requests. Evidence of productivity improvements is scarce, but Klarna’s groundbreaking announcement has raised the bar. Recently, Klarna announced that it handled 2/3 (about 2.3 million) customer service chats within the first month of operation. It is estimated that it has employed the equivalent of 700 full-time customer service agents and reduced resolution times from 11 to less than 2 minutes. If that wasn’t enough, it also achieved satisfaction rates on par with human agents and reduced repeat queries by 25%. According to its parent company, this customer service performance is expected to improve Klarna’s profits by $40 million in 2024.
Klarna’s statistics have shocked the enterprise world, and many organizations are planning for customer service automation. NICE will benefit from this wave as it offers a comprehensive set of solutions that help organizations deliver customer services across multiple channels. The CXone platform supports users with seven capabilities:
- Omni-Channel Routing: Depending on the desired request, customer interactions are routed to the most appropriate and competent agent.
- Self-service: Virtual assistants powered by AI. These are purpose built by the customers.
- Workforce Engagement: Forecasting and Scheduling for Contact Center Workforce Optimization and Utilization.
- Analytics and Reporting: Insights into customer interactions, agent performance and KPIs for better decision making.
- AI and Automation: Real-time suggestions to agents during conversations.
- Integration APIs: CRM, ESP and third party data sharing.
- Compliance and Security: Adherence to regulatory standards such as PCI-DSS, GDPR and HIPAA to protect customer data.
In the recent Q4 2023 results, NICE reported 20% YoY cloud revenue growth and a 300% increase in the number of AI deals in 2023. Gross margin for cloud revenue is approximately 66% (71% non-GAAP), indicating similar characteristics to software but with more upside to follow. Management is guiding for 15% revenue growth and 19% Adj. Midpoint of EPS growth for full year 2024. Guidance assumes a conservative decline in cloud growth to 18% for the full year, excluding the Livevox acquisition. Management is likely underestimating cloud growth potential for 2024 as the segment grows by 30%, 31%, 27% and 22% for 2020, 2021, 2022 and 2023, respectively. If anything, this segment is gaining steam with all the internal interest in AI.
Management expects cloud TAM to grow at an annual rate of 18 percent from about $8 billion in 2023 to $22 billion in 2028, company filings said. Moved to CCaaS. A Gartner study predicts that by 2025, 80% of customer service organizations will use generative AI technology in some way to increase agent productivity.
NICE has a hand in CCaaS.
Assuming the market is growing at an annual rate of 18%, I think NICE’s cloud division will grow faster than the market, with over 35 years of experience in the customer experience industry. will have competitive advantages. The CXone platform has been crowned an industry leader for CCaaS by Forrester Research, Ventana Research, Opus Research and the Garner Magic Quadrant. The company has a data advantage over its competitors because it has long-term records covering many years of solving customer queries. 85 of the Fortune 500 companies transact with NICE Ltd, and management invests 12-14% of revenue in R&D to innovate their existing product offerings.
NICE has developed long-standing customer partnerships and solved the reliability puzzle for data, security, and case resolution. Leading IT services players such as Cognizant, Infosys and Microsoft have partnered with NICE to offer frontier CCaaS solutions to their customers. Large organizations prefer to partner with large vendors like NICE to handle their interactions with valued customers rather than relying on smaller vendors. An example of what can go wrong with automated handling of customer queries is the case of Air Canada, where a passenger was promised a non-existent discount. This case comes under AI hallucination, where AI chatbots can provide false information.
appraisal:
Author’s estimates
Based on the reasoning I commented on earlier, I assume cloud revenue will continue to drive services and product revenue. This will take the company’s annual revenue growth to around 14-15% till 2027. As the cloud business expands, the company’s core profile will continue to push margins higher while consistently improving operating leverage and higher gross margins in businesses such as software. From these assumptions 11x my 2027 Adj. has an attractive prognosis. EBIT estimates.
Risks:
Artificial intelligence is an expensive pursuit, and plans for its application are somewhat arbitrary in the current environment. This exposes NICE to an economic slowdown that may delay discretionary spending. On the other hand, Klarna demonstrated that the cost savings from implementing AI can be significant.
CCaaS is an attractive and profitable industry that could attract new competitors. For example, recently, RingCentral announced a new CCaaS offering that will compete against NICE. It is important to monitor the competitive landscape as the technology is being deployed on a larger scale.
Result:
NICE’s 35-year history in the customer experience industry puts it in pole position to capitalize on the benefits of data gained in sustainable relationships with its customers. The rising tide of AI and generative AI will play a catalytic role in supercharging growth for the cloud segment. 11x EV to my 2027 Adj. The EBIT projection is a good multiple for a business with an excellent competitive position, a net cash balance sheet, and benefits from AI.