A NICE Day in Vegas

We attended Day 1 of Interactions 2019, NICE’s annual customer conference, in Las Vegas. With over 3,000 attendees, the event was the company’s largest yet. While Interactions is focused solely on NICE’s customer experience solutions, the company’s financial crime and compliance solutions were also showcased during the Investor and Analyst Day session held in conjunction with the conference. NICE CEO Barak Eilam’s keynote highlighted a growing divide between those companies that excel at delivering extraordinary customer experiences and those that don’t. Being on the right side of the chasm ensures strong customer loyalty, creating an insurmountable moat that competitors cannot breach. Of course, NICE provides the platform enabling enterprises to deliver these superior customer experiences. The theme of the conference, ‘Personal. Connections. Elevated.’ coincided with the introduction of new advanced analytics, artificial intelligence (AI) and automation capabilities embedded within NICE inContact CXone and available via a growing partner ecosystem. More specifically, new integrated chatbots to assist contact center agents with common tasks, predictive behavior routing to connect customers with the agents best suited to their personality and communication preferences, and AI-powered forecasting for workforce management to ensure interactions with customers and employees alike are more personalized were all featured. As Interactions 2019 was our first in depth look at the company, our thoughts reflect our initial impressions and perspective on what investors may find compelling. In short, NICE appears to be an interesting story given its evolution into a leading platform provider, longer-term tailwinds as contact centers increasingly adopt cloud-based solutions, and emerging growth opportunities in Robotics Process Automation (RPA).

Five years ago, NICE was a far more convoluted story considering disparate applications in areas like workforce optimization, financial crime and compliance, cyber and intelligence solutions geared towards public safety and a physical security business focused on video surveillance technologies. The divestitures of its Physical Security and Cyber and Intelligence business units in 2015 enabled the company to focus solely on enterprise software. In 2016, the foundation for an end-to-end open cloud platform for the contact center was put in place following the acquisitions of inContact, Nexidia and Voiceprint International. The integration of the acquired assets with its legacy solutions culminated in the introduction of NICE inContact CXone in 2017, providing an open, cloud native customer experience platform encompassing everything from contact center infrastructure to workforce optimization to voice of the customer and the associated analytics. Per management, the shift to a platform strategy has dramatically altered the company’s approach to product development and partnerships, expanded its total addressable market from the Fortune 1000 to include all market segments, and accelerated the transition from a largely on-premise deployment model to the cloud.

Over the next five years, management expects disruption of contact center infrastructure to accelerate as enterprises increasingly gravitate towards cloud-based solutions. As that portion of the market is largely served by legacy on-premise vendors today, the opportunity for NICE and others in the contact center as a service (CCaaS) space is significant. Management noted that adoption of the cloud by larger enterprises has actually occurred at a faster pace than anticipated at the time of the inContact acquisition. Today, the question is no longer if enterprises will move to the cloud but at what pace. Conversely, NICE’s workforce optimization solutions have traditionally catered to larger organizations. However, management has leveraged learnings from inContact to drive high attach rates for workforce optimization down market and believes this represents a significant opportunity. Similarly, Nice Actimize, the company’s financial crime and compliance platform, has ample opportunity to move down market to financial institutions with $20 billion to $40 billion in assets and perhaps even lower. Other trends anticipated by management include a more proactive approach to customer engagement, omnipresent analytics and artificial intelligence, employment of the human-robotic duo and requirements for effortless (or frictionless) engagement. Of course, NICE has embedded functionality within CXone to address these future requirements, while also providing an open platform for customers and partners to further leverage the insights and automation available via advanced analytics, AI and bots.

While the on-premise to subscription transition is certainly an appealing aspect of NICE’s story, we are equally intrigued by the company’s growth opportunity in Robotic Process Automation (RPA). Investors should think of RPA as Excel macros on steroids. RPA allows a repetitive manual task or tasks to be easily automated using either an attended (i.e. working in conjunction with a human) or unattended bot. For instance, a contact center agent opening a new account for a customer might need to capture and record data across numerous applications. An attended bot could be deployed on the agent’s desktop to ensure the agent asks for any missing data, to automatically (and accurately) enter data in the appropriate systems and to generate a confirmation email once the agent completes the call. Automating these types of tasks not only reduces call handling times, but also provides a less tedious experience for the agent. From a financial perspective, we consider the opportunity significant for NICE as the amount spent on contact center technology pales in comparison to the overall amount spent on handling customer service calls, much of which pertains to the workforce. According to IBM, businesses spend over $1 trillion per year to support approximately 270 billion customer support calls. As estimates for the addressable market opportunity in contact center software tend to be in the tens of billions, the adoption of RPA has the potential to dramatically shift a portion of the amount spent on human capital to technology providers like NICE. In a similar vein, financial institutions utilize technology to support their anti-money laundering, compliance and fraud operations, but a considerably larger amount is spent to staff the associated teams. As the need to aggregate and enter data across numerous systems is similarly prevalent in those settings, NICE’s RPA offerings should also benefit from increasing attach rates in its financial crimes and compliance business unit.

In terms of the numbers, management believes the company’s addressable market opportunity in customer experience is poised to increase from $7 billion today to $12 billion in the next five years, while the addressable market for financial crime and compliance solutions more than doubles from $2 billion to over $4 billion. Against that backdrop, management anticipates exceeding $2.0 billion in revenue over the next five years, at which point the majority of revenue should arise from the cloud and the company should boast a non-GAAP operating margin in excess of 30%. For context, NICE closed out 2018 with nearly $1.5 billion in revenue, of which approximately 32% was in the cloud, and posted a non-GAAP operating margin of 25.9%. The long-term outlook should place NICE within striking distance of the rule of 40, which may help close the gap versus higher valued SaaS peers. At present, NICE garners EV/Sales and EV/EBITDA multiples just under 5x and 15x, respectively, based on consensus estimates for FY ‘20.