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Nice Ltd (NASDAQ:NICE)
Q2 2020 Earnings Call
Aug 6, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the NICE conference call discussing second quarter 2020 results. Thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded, August 6, 2020.

I would now like to turn the call over to Mr. Marty Cohen, VP, Investor Relations at NICE. Please go ahead.

Marty Cohen -- Vice President, Investor Relations

Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer; Beth Gaspich, Chief Financial Officer; and Earon-Heilborn, Executive Vice President, Marketing and Corporate Development. Before we start, I would like to point out that some of the statements made on this call will constitute forward-looking statements. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, please be advised that the company's actual results could differ materially from these forward-looking statements. Additional information regarding the factors that could cause actual results or performance of the company to differ materially is contained in the section entitled Risk Factors in Item three of the company's 2019 annual report on Form 20-F as filed at the Securities and Exchange Commission on April 6, 2020. During today's call, we will present a more detailed discussion of second quarter 2020 results and the company's guidance.

Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we will be commenting on our adjusted results of operations, which differ in certain respects from generally adjusted accounting principles as reflected mainly in accounting for acquisition-related revenues and expenses, amortization of intangible assets and accounting for stock-based compensation. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. We would also like to remind you that we are hosting our virtual Investor Day on September 15, in conjunction with our interactions live user confidence. A special program for analysts and investors will the presentations from NICE's executives and product and technology sessions. If you haven't received the registration email, please email us at ir@nice.com.

I'll now turn the call over to Barak.

Barak Eilam -- Chief Executive Officer

Thank you, Marty, and welcome, everyone. We are pleased to report a strong quarter driven by further acceleration of our cloud growth. On our last call, we talked about our expectation that organizations will become more focused on extreme agility due to the need to respond in record time to the constantly changing circumstances. Today, three months later, as evidenced by our Q2 results, we see that it's happening at a rapid pace and that we are well positioned at the center of this effort. Furthermore, we can clearly see from the changing environment that; one, NICE is extremely mission-critical to our customers, now more than ever; two, our solutions are essential to enable a flexible work from home mode of operation; and three, cloud and digital transformations, which are in the core of our business, are now dramatically accelerating in the enterprise due to recent events. Our strong Q2 performance, underscored by an accelerated robust 30% growth in the cloud, demonstrates how well positioned we are, together with the strength of our cloud platforms. All key metrics were strong. Total revenue increased 4% and to $395 million. Operating income was $111 million, which was an increase of 10% compared to Q2 2019, and operating margin increased 163 basis points to 28.2% compared to Q2 last year. These strong operating results led to a 10% increase in earnings per share to $1.37. Additionally, operating cash flow increased to 131% to $60 million in Q2 compared to the same period last year. We are winning in the cloud because we have the most firmly established, proven and comprehensive platforms.

Our cloud platforms are capturing opportunities in all segments of the market from SMB to the largest enterprises. In SMB, we continue to see a vast momentum amount of new business signing nearly 200 new logos each and every quarter for CXone alone. At the higher end of the market, we continue to demonstrate our strength as having the only cloud-native platform in that market. We have a significant competitive advantage and a strong leadership position due to the substantial breadth and depth of our offering, which is absolutely critical in order to compete in this segment as well as our many years of experience and domain expertise with large enterprises. We are also winning in the cloud through the largest and fastest-growing ecosystem of Porto, both domestic and international. We continue to sign new key partners at a rapid pace. Just recently, we signed a partnership with Orange Business Services, which serves enterprises across six continents. They will bring CXone to the company's installed base of 90,000 contact center agents, many of which are in Europe as well as other international locations. We also signed a partnership with Converge One. Converge one can now bring CXone to the very large on-premise customer base. This is on top of the several new resell partnership we mentioned on previous calls as well as further partnerships, including with salesforce.com, Zendesk, RingCentral, Zoom and Microsoft.

We are winning in the cloud through continued and clear leadership as recognized by many of the independent industry analysts. For example, NICE is the only vendor that was named the leader by Gartner across both the Magic Quadrant for contact center as a service and major quadrants for low-cost engagement management. In another industry report by DMG, nice was named the leader in Cloud WFO with a double-digit percentage lead over the nearest competitor. NICE Actimize was also named the leader in the IDC Marketscape 2020 Enterprise Fraud Management Report. We are the largest cloud provider in our markets, and we are twice the size of our next largest cloud competitor as well as demonstrating faster growth. As our cloud business, we hit very high retention rates, continues to flourish, we expect that we will end the year with an annual run rate of well over well above $800 million in cloud revenue. Moreover, during 2021, we expect to cross a significant milestone, an annual run rate of $1 billion in cloud revenue. CXone continues to drive our cloud business. It is unique in the customer engagement market and that it is the only fully integrated native cloud platform that incorporates omnichannel routing, workforce optimization and analytics. CXone also boasts an ecosystem of 160 independent software vendors Building solutions on CXone and fast-growing marketplace called CX Exchange on which those software vendors can sell their solutions.

The continued success of CXone is evident in the numbers. We are seeing an increase in the number and size of deals in all segments of the market, especially in the large enterprise. We continue to witness the displacement of incumbent on-premise providers. To date, 80% of CXone at home free trial customers have committed to a paid subscription, demonstrating the much-needed flexibility that we provide to organizations as they move to work from home. We saw a dramatic increase in the number of seven-figure deals starting this quarter compared to the second quarter of last year. We signed a seven-digit cloud ACV deal with a large consulting and services company in which we replaced the on-premise legacy incumbent. We also signed a seven-digit cloud ACV deal with a large financial services provider, also replacing the on-premise legacy incumbent vendor. We are seeing continued strength in our government verticals, boosted by our FedRAMP authorization, as we signed multiple deals, including a seven-digit ACV deal with a large state agency. We signed a seven-digit cloud deal with a well-known media streaming company as well as a seven-digit deal with a large financial services company, and they are transforming to a common cloud platform. In addition, we continue to see acceleration in our RPA business, signing multiple new logos as well as significant expansion deals with existing RPA customers. For example, we signed a large seven-digit expansion deal with a very big global home furnishing company that has standardized on our RPA solution. In financial client compliance, we are seeing an increase in the number of customers, leveraging the capabilities, tools and analytics of our excite cloud platforms. In addition, the number of partners building solutions on excite platform continues to grow. We now have more than 50 partners on the excite marketplace. We continue to see an increase in cloud growth in financial crime and compliance, up triple-digit percentage year-over-year as our excite cloud platform continues to gain traction. We signed several seven-digit cloud deals, including one with a large global bank, replacing the incumbent with our cloud AML and food offerings. We signed another seven digit cloud deal with a large domestic bank as they needed the flexibility of the cloud platform along with the ability to expand with nice as they grow. We signed an 8-digit deal with a large insurance company, expanding the relationship with nice for fraud and AML as well as a seven-digit deal with a very large Canadian Financial Services Institution.

Our public safety cloud platform also continues to price as NICE investigates gains more traction. Thousands of public safety organizations have yet to embrace the cloud, giving us tremendous opportunities to bring the end-to-end evidence management market into the cloud with the NICE investigate cloud platform. Just this past quarter, we continued to sign new and NICE investigate customers, including two large public safety organizations in the U.K. We also signed a large government state agency for nearly $60 million to enable their digital transformation over the next few years. And the current situation continues to unfold, we are in a unique position to further accelerate the pace of our innovation and widen the gap compared to our competitors. For example, we just recently announced a significant breakthrough with our launch of real-time interaction guidance powered by our proven AI technology called Enliten. With this new solution, AI behavioral models helped to predict agent behaviors that directly drive customer satisfaction. NICE enlighting technology is an integral part of the CXone platform, infusing AI into all customer engagement processes. In conclusion, it is clear that the changes taking place in the environment are no longer just temporary in the mind of business leaders and therefore, rethinking the need for agility is now a part of their long-term plans. We believe that we are clearly in the best competitive position to capture the opportunities ahead of us in this rapidly changing environment as a key strategic part of organizations current and future plans. The reasons: one, NICE is extremely mission-critical to our customers; two, our solutions are essential to enable a work from home model operation; and three, cloud and digital transformation, which are in the core of our business, are now dramatically accelerating in the enterprise due to recent events.

And finally, it has been our tradition that we meet with many of you in-person at our Annual Investor Day in conjunction with our Interactions User Conference. This year, given the circumstances we are bringing our conference to you with the industry's largest virtual event interactions lines, and we look forward to hosting all of you.

I will now turn the call over to Beth.

Beth Gaspich -- Chief Financial Officer

Thank you, Barak, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the second quarter of 2020 as well as our outlook for the third quarter. Total revenue for the second quarter reached $395 million, an increase of 4% from $381 million in the same period of last year. Our total revenue growth was driven again by our strong cloud performance. Cloud revenue increased 30% in the quarter and reached $186 million. Sequential growth in cloud revenue between the first and second quarter of 2020 nearly doubled compared to the same period in 2019, demonstrating the acceleration we are seeing in our cloud business. Cloud revenues continue to grow as a percentage of our total revenue, accounting for 47% of total revenue. Product revenues accounted for 10% of total revenue in the second quarter, and service revenues accounted for the remaining 43% of total revenue in the second quarter. Moving to our business breakdown. Customer engagement revenues for the second quarter were $323 million, a 3% increase over the same quarter in 2019 and represented 82% of our total revenues. Financial Crime and Compliance revenues for the second quarter were $72 million, an increase of 6% and represented 18% of total revenues. Looking at geographies, Americas revenues were $317 million in the second quarter compared to $307 million for the same period last year.

Revenues in EMEA were $45 million in the second quarter compared to $48 million last year, and APAC revenues in the second quarter were $33 million compared to $26 million in the same period last year. And now to profitability. Gross profit in the second quarter reached $281 million compared to $271 million in the second quarter of 2019 and gross margin reached 71%, similar to last year. The strong performance of our cloud business is also evident in the cloud gross margin as it expanded by 430 basis points and reached 65.7% compared to 61.4% in the same quarter last year. We've continued to expand our cloud operations internationally, while simultaneously expanding our cloud margins due to our substantial operating leverage. Operating income increased 10% to $111 million, and operating margin was 28.2%, an increase of 160 basis points. Earnings per share for the second quarter grew 10% to $1.37 compared to $1.25 in the second quarter of last year. Cash flow from operations in the second quarter was $60 million, an increase of over 230% compared to $18 million in Q2 2019. The the increase is primarily attributed to strong collections. Total cash and investments at the end of the quarter reached $1,103,000,000. At the end of the quarter, total debt was $470 million, net of issuance costs and the equity component associated with our convertible debt. Turning over to guidance. Given the continued uncertainty in the current environment, it is challenging to predict our license related revenue. And consistent with our direction from last quarter, we are not providing guidance for the full year 2020.

Instead, we will continue to provide only quarterly guidance at this time. While our license related revenue is harder to predict, our cloud business remains consistently strong as reflected in our cloud growth in the first half of this year. We continue to see excellent demand for our cloud solutions and expect continued strong growth for the remainder of the year with an expected end of the year annual run rate of more than $800 million in cloud revenue. As we see rapidly increasing cloud revenue and as we have highlighted in previous quarters, we expose both our revenue and our profitability to continue to be more evenly distributed among the quarters. Our guidance is as follows. For the third quarter of 2020, we expect total revenue to be in the range of $403 million to $413 million. We expect the third quarter of 2020 fully diluted earnings per share to be in an expected range of $1.33 to $1.43.

I will now turn the call over to the operator for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question your first question comes from the line of Shaul Eyal from Oppenheimer. Please go ahead.

Shaul Eyal -- Oppenheimer -- Analyst

Thank you. Shaul Eyal from Oppenheimer. Good day, everybody. Congrats on the ongoing consistent execution. Barak, the cloud performance is really standing out this quarter in light of the pandemic and all things considered, 27% last quarter, 30% net acceleration this quarter. I think you're also implying for about 20% growth as we start thinking about fiscal 2021, if I got that right, give or take. I know that you mentioned some of the drivers behind it in your prepared remarks, but can you provide us with slightly more color. Are these cloud wins driven by displacements, greenfield opportunities. Is there any specific vertical, which is bank more cloud absolutely than others? And maybe what's typically the average contract size of a cloud-related engagement? And I have a follow-up.

Barak Eilam -- Chief Executive Officer

Sure. Thanks, Shaul. So I'll try to give a bit more color. And indeed, we see an acceleration in the cloud business that to begin with was very strong, and we're also important to notice that to mention that this is a growth of a pretty big cloud revenue that we have, a pretty big base as we said, significantly bigger than the next compared to we have in the market. We see three main drivers related to the kind of the current situation to driving our cloud business. I would say that one is more of the let's say, to the first one. So the first one is all our solutions. And for sure, our cloud solutions, we see, and as a result of the current situation are mission critical. And that provides us with very strong strength to the business. And we as a result of that, experiencing a very high retention rate and expansion opportunity just from the fact that we are the cloud incumbent with many of our customers. The second thing, the second driver is more, call it, the short and midterm. As the organizations are either moving to work from home or now trying to enable an even further more flexibility being able to toggle between work from home and work from everywhere.

Our solutions are essential to enable that. A lot of organizations that experienced that move in a painful way with their on-premise legacy solutions back in March are now coming to us to displace their other vendors which are on-premise one, and move to our solutions, which are essential in order to enable a very flexible work from home mode of operation. And a long-term or a bit further into the future, our core of our business and the core of the strategy that we have is banking on the transformation of organizations, both to the cloud and to digital. And we see very large enterprises that we thought will drive those transformation only two players down the road, are starting to move those much move those forward and do it much faster than originally thought as a result of the aftermath you would like of COVID-19. So these are the key drivers. As I mentioned on the examples that I gave, it's actually across many different verticals. Even verticals that consider to be less fast to react, like government and states are moving very fast into these transformations, as I've mentioned. With respect to the size of deals, they are growing in a rapid pace due to two facts: first, that we are going fastly upmarket and finding much bigger deals than in the originally in the SMB; and second, since we are the only provider that provides such a breadth of offering with a complete platform with CXone, for example, we see that we gain much more in terms of our ACV because of the desire of customers to standardize on a much richer portfolio than just a point solution.

Shaul Eyal -- Oppenheimer -- Analyst

Got it. Got it. And maybe for Beth, as we start thinking about second half of 2020, what's the current thinking about hiring?

Beth Gaspich -- Chief Financial Officer

Yes. So we've continued to hire both in the first half of this year, and we expect that hiring to continue on to the second half of this year. Barak track specifically today around innovation and the importance of that and our leadership position in the market more generally. And even looking at Q2, you can see the impact of that as we are continuing to invest heavily in our R&D efforts, and we'll continue to focus our hard there.

Shaul Eyal -- Oppenheimer -- Analyst

Got it, thank you. Congrats again.

Beth Gaspich -- Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Samad Samana of Jefferies. Please go ahead.

Samad Samana -- Jefferies -- Analyst

Hi. Good morning. Thanks for taking my questions. Barak, good to have you back on the call as well, and congrats on a great quarter. So maybe just following up on the last question around deals and the increased traction up market. Any change in either who you're displacing or who inside of the organization when you're selling a deal is making the decision? We've heard that increasingly your C-level and board level decisions, given the disruption that's happened from working from homes. So I'm just curious if you're seeing anything in that regard. And then I have a couple of follow-ups.

Barak Eilam -- Chief Executive Officer

Yes. Thanks for that. I wouldn't say that there is a dramatic change due to the current situation, but we do see that a lot of organizations that experience what does it take to have their BCP plans executed back in March and now having the steel level initiative to make sure that they do move into what we call this agility. So it's still level driven. And there are special budgets starting to get allocated to that effort. Some are taking it relatively tactically by platinum fats and some are moving much broader. And so I would say that we do gain more and more visibility to more sea level, although even before our solution used to be sold to pretty senior people. The other thing I see in the market is that the whole notion of customer service, for example, and customer engagement as a result of what happened beat in March, there is a realization that it is a very critical part of every BCP plan of organization. The need to be able to stay in touch with your customers, the consumers and citizens that have high demand of communication while you're executing on your BCP plans. So it elevates the criticality, if you would like, of customer service and the customer service role in the BCP plans of organizations.

Samad Samana -- Jefferies -- Analyst

Great. Very helpful. And then maybe just on the free trials that were brought up on the earnings call last quarter? And then as you just think maybe of how has conversion activity been there? And now that you've seen that, that's something that's driving new customers, how should we think about maybe extending that just on a go-forward basis, the free trials?

Barak Eilam -- Chief Executive Officer

So to date, we have seen 80% of all CXone at home trial that we had converted to long term commitment, pay commitment by customers. And that's what we've seen so far. Due to the high demand, we decided to extend it in several markets. But it also enabled us to somewhat tweak and change our go-to-market in the way that we are enabling those type of trials in a very fast deployment and activation it gave us a certain realization that we can do things even much faster. So we're very happy with both the conversion as well as the realizations of how we can run the business moving forward.

Samad Samana -- Jefferies -- Analyst

Great. And then maybe, Beth, one for you on the financials. I know that International is a priority as far as investments go. I guess any change in the near-term investment philosophy of where maybe expense dollars are hiring or being allocated between U.S. and International?

Beth Gaspich -- Chief Financial Officer

Yes. Thank you for the question. Specifically, International is a focus for us, especially as we're continuing to expand our cloud business internationally. And certainly, as we have looked over the past several quarters, we are promoting and investing in those areas to help promote that rapid expansion there. So we continue to expect that International growth and specifically around the cloud platforms.

Samad Samana -- Jefferies -- Analyst

Great, thank you for taking my questions and congrats, again, I'll hop out of the queue.

Beth Gaspich -- Chief Financial Officer

Thank you. Thanks.

Operator

Thank you. Your next question is from Sanjit Singh of Morgan Stanley. Please go ahead.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the question and congrats on the exceptional cloud growth, 30% is definitely very, very impressive. On that front, on the sort of composition of the cloud, I was wondering if I could get some more context around it. To what extent has the cloud growth been sort of accelerated by seasonal seat counts or uptick in seat counts? Can that normalize going into the second half? And then more broadly, as you look at the large enterprise segment, I wanted to get a sense of is your customer acquisition cost coming down, meaning that is it easier to bring on new deals? Are sales cycles shortening so that the efficiency of acquiring new cloud ARR is improving? Any sort of comments on kind of the unit economics of the cloud business?

Barak Eilam -- Chief Executive Officer

Sure. So let's talk to the first one about the comment about the seasonality or any additional color. So first of all, we do have seasonality in our cloud business. And I'll remind you that in every year, we have the seasonality depending on the vertical, etc, and we'll have to see how the rest of the year plays out in terms of seasonality. But no doubt that the current situation caused certain verticals to have higher volume, while other had lower volumes. But I would attribute the majority of the growth just to the fact that we have more customers, more seats, more deals, faster activation, and if we add all of that together, this is what brought us to the 30% growth, which, of course, we're very happy with. And we also provided some color about our expectations for the rest of the year with the run rate, we believe that at the end of December, we will be much higher than the $800 million, as we say, and crossing the $1 billion mark sometime next year. About the customer acquisition cost.

The answer is yes. As you go up market and you sign larger and larger deals, at least in the way that we operate, we believe that our unit economics improve, improve even dramatically. We also believe that the fact that the cloud in the customer engagement market, in financial common compliance and also in public safety, is starting to become much more of a mainstream. Sales cycles are getting shorter, there is much less, if at all, need to educate customers, why cloud or going through certain trials and things like that. And by definition that a short on the sales cycle and as a result of that, reducing the cost of acquisition of customers.

Sanjit Singh -- Morgan Stanley -- Analyst

That's great to hear. And just one follow-up on the traction with the large enterprise. If I remember maybe from earnings call maybe a year or so ago, you guys were penetrating the large enterprise, but kind of at a I don't want to say departmental level, but just sort of a large enterprise customer maybe expanding at a particular region or a particular geography. Can you give us a sense of what's different in July or now versus last year in terms of the size of the deployments that customers are looking to get on board with? Is it a much more larger standardization type deployment versus a sort of trial on a specific region? Any sort of color on how the sizes of the large enterprise deals have changed today versus maybe four or five quarters ago?

Barak Eilam -- Chief Executive Officer

I would say, generally speaking, that the difference from a year ago, and it does relate a thing to certain realization. And clarity organization got due to their experience with addressing the COVID-19 is that if a year ago, we sold large enterprises stepping toward cloud I would say now they're rushing toward cloud. And the reason is that the understanding that they need to completely change the approach that they have in their infrastructure. Research their technology stack and see the benefit more than the benefit, just being how cloud is essential in order for them to respond to highly dynamic environment. So that's the change that we see. And as you said, last year, we talked a bit about large enterprises, deploying it in a department or something like that. Today, there is much more appetite to advance much faster in both digital and cloud transformation, and things with that to happen two or three years down the road, I'll push forward to now, and we see an appetite to go all in, if you would like, on both cloud and digital.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you, Barak. Thank you, Beth.

Barak Eilam -- Chief Executive Officer

Thank You.

Operator

Your next question comes from the line of Walter Pritchard of Citi. Please go ahead.

Walter Pritchard -- Citi -- Analyst

Hi, thanks. I'm Wondered if you could talk a little bit about RPA. You highlighted it more in the script. I assume you're not ready to start breaking out that business. But maybe help us understand what's the source of what it seems what it sounds like an acceleration is in that business? And any order of magnitude you can give us on the size of that in terms of your revenue?

Barak Eilam -- Chief Executive Officer

Yes. I think we're starting thanks for the question. I think that's what we're starting to see is, let's call it, RPA 2.0. And in the past two years, what we saw in RPA is a fast adoption of what we call unattended robots by many, many enterprises, that show the value and actually still many of the low-hanging fruits that they can address with unattended robots. And indeed, many, many enterprises deployed here and there different robots and most deployments were relatively small, both in terms of footprint and in terms of the dollar value. What we see right now is the realization that in order to take RPA in a much more strategic level in the enterprise, two things are important. It's no over enough just to automate micro tasks, as I call it. And if you really want to gain the full benefit in the ROI of robotics, they need to take it more strategically in the sense that they need to augment it with the manpower that woke in different back offices, and this is our approach of the attended RPA, meaning to put robots together with the manpower human beans and combining the two efforts together. And the second thing is injecting or refusing a lot of AI capabilities and machine learning in order to enable more sophisticated automation scenarios.

So this is what we see. As a result of that what we see is that larger expansion with both existing customers as well as new customers that are taking it more strategically than just buying a few bots. I still believe that we are in the early innings, and this market is still its infancy, and I call this kind of RPA 2.0, I think we'll have a few more generations. And there is a very long and healthy run rate. And we're in a great position because we also have the domain expertise. We've done in the contact center market. We optimized this market for many, many years. And now we're bringing both the technology, the unique RPA technology that we have, together with domain expertise of how do you optimize processes to a market that is broader just in the contact center market for us?

Walter Pritchard -- Citi -- Analyst

And quick follow-up for Beth on sales capacity as we think about cloud, how should we think about your growth in sales capacity around cloud as we head into 2021? Are you looking to add reps at the sort of pace you were adding them either adding them now or adding them six months ago? Or do you expect that to slow down or speed up, specifically around cloud?

Beth Gaspich -- Chief Financial Officer

Sure. Thanks for the question, Walter. Generally, as we look at our sales organization, looking forward for the rest of the year and moving into 2021, we generally expect to continue at a similar pace to what we've had in the past.

Walter Pritchard -- Citi -- Analyst

Great, thank you.

Beth Gaspich -- Chief Financial Officer

Sure.

Operator

Our next question is from the line of Daniel Ives of Wedbush. Please go ahead.

Daniel Ives -- Wedbush -- Analyst

Yeah, thanks. So Barak, when you're thinking about, within the next year, just given the cloud growth that you're seeing, do you think the bigger opportunity is new logos, replacements or continued penetration existing customers, just going to the broader cloud strategy?

Barak Eilam -- Chief Executive Officer

Thanks for the question. Well, the answer for us is both, and I'll further explain. I think that the well, the beauty of our cloud transformation as a company is that it's not just taking our own on-premise customer base and transfer it or move it to the cloud in the course of few years, as we've seen in the last few years, but also into the future, the benefit for us is that we are doing both. Since we took cloud in a much broader aspect than just what we used to do as a company in the on-premise. Most of the cloud business we've seen so far was taking markets and domain, where we did not operate in as an on-premise provider. So that has been most of our cloud growth so far.

At the same time, and while this will continue, I believe, in a dramatic way, don't forget that in most of our markets, the penetration of cloud is still roughly at somewhere in the 15%. So there is still a very long way to go and a tremendous opportunity. But on top of that, there's an opportunity for us also to convert our own on-premise product into the cloud. So that's the tool combines to a great opportunity for us moving forward. And we also see existing customers of ours already moved to the cloud, given the fact that our platforms are not just point solutions, but they are very wide in terms of the offering that we have, a lot of those customers are now adopting more and more of our offerings, meaning expansion opportunities, especially in the areas of analytics and AI and also as they transform into digital.

Daniel Ives -- Wedbush -- Analyst

Great, thanks.

Operator

Your next question is from the line of Rishi Jaluria D.A. Davidson. Please go ahead.

Rishi Jaluria -- D.A. Davidson -- Analyst

Hey guys, this is Rishi Jaluria from D.A. Davidson. And really nice to see the continued acceleration on the cloud side. I wanted to start by asking about the recent acquisition of Guardian Analytics. I was wondering if you could give us a little bit more color on the strategy for this, how it fits in with the FCC side of the business and maybe how it can accelerate cloud on that side? And then I've got a follow-up.

Barak Eilam -- Chief Executive Officer

Yes. Thanks for the question. So we did announce the acquisition not so long ago, and we're still in the stage of the regulatory approval. And we believe that we can still close the deal before the end of the year, depending, of course, on the regulatory approvals. From a strategic perspective, as we announced the deal, what we saw with Gartner is a very unique AI technology that will enable us to further accelerate and augment our fraud capabilities in our financial crime and compliance business as well as taking it to other aspects of our financial acquiring compliance in the AML part, CDD, KYC and a few other places. So the technology stack and the IP that Gartner has will help us to boost build solutions. And as this market overall is also starting to migrate to the cloud. I referred in my earlier remarks that this quarter, the financial climate and compliance business and specifically excite, grew double triple I'm sorry, triple-digit percentage-wise on the cloud, that can also help us to accelerate that part as well because it is when you deal with AI, it is much more favorable to inject AI to cloud solutions because of the accessibility to data.

Rishi Jaluria -- D.A. Davidson -- Analyst

All right. Great. That's helpful. And then Beth, for you. Wanted to touch a little bit on cloud gross margins. You saw some really nice cloud gross margin expansion, I think, 430 basis points year-over-year. What led to that margin expansion there? Was that a revenue mix shift and infrastructure efficiency, benefits of scale and anything else? And maybe is this indicative of kind of the direction of product gross margins going forward? Or how should we be thinking about that line?

Beth Gaspich -- Chief Financial Officer

Thanks for the question, Rishi. And as you highlighted, we had very strong cloud gross margin during the quarter. It was actually an all-time high of just under 66%. And it is a trend we expect to continue to see. It's really reflective of the strength in our cloud business. Barak has talked a lot about our move more into the large enterprise. And as we shift even further into the large enterprise, what we see with that is we have a higher attach rate of the software that we're selling on our platforms. And that comes at a higher-margin relative to the network or telephony component that we've highlighted in the past. So as a percent of the mix, we're selling more software, and that, again, is expanding as well as our average contract value of our sales and our ACC that we're signing. So it is a trend that we can expect to continue to see in our cloud business.

Rishi Jaluria -- D.A. Davidson -- Analyst

Wonderful, thank you so much.

Operator

Your next question comes from the line of Tavy Rosner of Barclays. Please go ahead.

Tavy Rosner -- Barclays -- Analyst

Hi. Thank you for taking my questions. I had one on operating expense. I guess, when you look at the current situation with most of your employees not traveling, taking flights. I guess some of them working from home. You guys hosting conferences, virtually, are there any structural savings that you can keep even post pandemic that would that you can sustain and that that would improve your structural margins?

Beth Gaspich -- Chief Financial Officer

Yes. Thanks for the question, Tavy. You're correct that given the recent events this year, we have been able to see some reduction in cost savings. And certainly, as you go through times like this, it does give you the opportunity to kind of further dig into all of your expenses. It's always been extremely important and nice that we're very prudent when it comes to cost management. And so absolutely, we will be able to retain some of those savings as we go on beyond kind of the current situation and looking forward into the future. So we will be able to retain some of the benefit in some of the changes we've made internally here at NICE.

Tavy Rosner -- Barclays -- Analyst

Great, thank you and congrats on the strong results.

Beth Gaspich -- Chief Financial Officer

Thank you.

Barak Eilam -- Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Pat Rolland of JMC. Please go ahead.

Pat Rolland -- JMC -- Analyst

Oh, great. Thank you. Congratulations. Beth, I just want to make sure I understand. So for the cloud run rate, when we say $800 million by the end of this year, that means Q4 will be north of $200 million, right?

Beth Gaspich -- Chief Financial Officer

Hi, Pat, thank you for the question. Generally, when we talk about the $800 million run rate in our cloud business, for revenue, we are talking about the run rate to exit with. However, we're confident in saying that we expect it to be well above the $800 million mark.

Pat Rolland -- JMC -- Analyst

Yes. Because I'm going to say you're the Street is already there. So the well got it with well above. Now when you look at what you said for next year, that's sort of more interesting. So there if you're saying north of $1 billion, we're talking about Q4 being north of $250 million, right? And that is sort of well above where I am. But I just want to make sure we're interpreting that, right?

Beth Gaspich -- Chief Financial Officer

So we specifically highlighted, again, the $800 million mark, as we exit this year. So I think in terms of the growth that we're talking about on cloud, that's what we're seeing. As I said, we expect to be above that. But that kind of milestone that we expect to see this year. And as you highlighted, we are really excited and highly confident in being able to surpass the $1 billion milestone of cloud run rate and our revenue next year.

Pat Rolland -- JMC -- Analyst

Wonderful. Okay. And then Barak, it's been two years now since Mattersight. And I think when you bought it, it was a $50 million business. I know you had to make a ton of changes. And now it's part of your analytics solution. How is it working out?

Barak Eilam -- Chief Executive Officer

We're very happy with the acquisition of Mattersight. The reason why we acquired Mattersight was less about the revenue, which was a mix of some overlap to our existing business. But we acquired Mattersight because of their PBR, Predictive Behavioral Routing their technology. And the intent, and this is exactly how we executed on that was to embed that technology into CXone in order to give us a very unique capability to our platform. And that's exactly what we've done. We invested in the past couple of years, mainly on that front, which is taking the technology. And embedded into CXone. And today, indeed, when we go out there to the market, it gives us a tremendous competitive advantage as we go ahead and continue to take the market to CXone.

Pat Rolland -- JMC -- Analyst

Right. Thank you, both very much.

Barak Eilam -- Chief Executive Officer

Thank you.

Beth Gaspich -- Chief Financial Officer

Thank you.

Operator

And your next question is from the line of Ryan Koontz of Rosenblatt Securities. Please go ahead.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Hi, congrats and thanks for the questions. On the the CXone go-to-market partners as you move up market there in the cloud and take on bigger enterprise deals as you talked about, how are you positioned to handle the demand for professional services for some of these deals? Do you work with the global SIS? Or how much of that do you bring in-house versus outsourced? then I have a follow-up question as well.

Barak Eilam -- Chief Executive Officer

Sure. So the answer is, I guess, all the above. We, of course, some customers would like to get those professional services and contact services and med services from us, but we have today a lot of experience with some great partners, and there are great opportunities for our partners as they go and further evolve their services. So if we have a partner that can do the work, well, of course, we'll be very happy to hand it over to a partner. And it's not very different from what we see in the mid-market. And I think that the main difference of today versus a couple of years ago is that, as I said before and also on some previous calls, is that we go and sign a lot of new partners. Some of them are bars and some of them are sized. And especially as we go to the international market, where we have less presence in terms of professional services, they are critical in our ability to expand. So we're very happy with this expansion and from our perspective, the customer prefer to have that work done by a partner and will be very more than happy to engage the partner to do the world.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Great. And just a follow-on on the international comment there. As you move into these new markets, how are you positioned to handle some of the local infrastructure there as far as GDPR and the local domiciling?

Barak Eilam -- Chief Executive Officer

Sure. So first of all, NICE, even before that, before the cloud, we had a lot of presence internationally. So it helps us a lot to now take the cloud over that history that we have in many different territories, including legal entities and other aspects that you talked about, and we have that experience. As we started international expansion efforts about several years back, we already put into our plan and executed many different aspects of localization. You mentioned GDPR, other localization aspects. So we are well into the execution on those in every country or geography we operate in. We are fully comply with the local regulation and local infrastructure and privacy and so on and so forth. Don't forget that also, a few years back, we also signed many customers that are may be based in the U.S. but have international presence with different franchises and bunches. So that's work was done already several years back. And what we're expanding right now is mainly our go-to-market capabilities in those international markets.

Ryan Koontz -- Rosenblatt Securities -- Analyst

Excellent, thanks so much for the answers.

Barak Eilam -- Chief Executive Officer

Thank you.

Operator

Thank you for your questions. I would now like to turn the call over to Barak for closing remarks..

Barak Eilam -- Chief Executive Officer

Thank you for joining us today. And as I said before, we look forward to seeing all of you at our Virtual Event Interaction lives in September. Thank you, and have a great day.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Marty Cohen -- Vice President, Investor Relations

Barak Eilam -- Chief Executive Officer

Beth Gaspich -- Chief Financial Officer

Shaul Eyal -- Oppenheimer -- Analyst

Samad Samana -- Jefferies -- Analyst

Sanjit Singh -- Morgan Stanley -- Analyst

Walter Pritchard -- Citi -- Analyst

Daniel Ives -- Wedbush -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Tavy Rosner -- Barclays -- Analyst

Pat Rolland -- JMC -- Analyst

Ryan Koontz -- Rosenblatt Securities -- Analyst

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