Good day, welcome to the NICE conference call discussing third quarter 2018 results, and thank you for holding. All participants are at present in listen-only mode. Following management formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded for November 8th, 2018. I would now like to turn the call over to Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.
Thank you, operator. With me on the call today are Barak Eilam, Chief Executive Officer, Beth Gaspich, Chief Financial Officer, and Eran Liron, 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 3 of the company's 2017 annual report on Form 20-F, as filed with the Securities and Exchange Commission on March 30, 2018.
During today's call, we present a more detailed discussion of third quarter 2018 results and the company's guidance for full year 2018. 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 Accepted Accounting Principles. As reflected mainly in accounting for acquisition-related revenues and expenses, amortization of intangible assets, and accounting for stock-based compensation. The difference between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. Additionally, NICE adopted the new accounting standard ASC 606 in the first quarter of 2018 on a modified retrospective basis.
This means that the results for the reporting periods beginning on or after January 1, 2018, are presented under the new standard, while the prior period amounts before January 1, 2018, are not adjusted. All financial data for the third quarter of 2018, as well as the guidance for the full year 2018, are provided under ASC 605. We chose to do this to provide better transparency and comparability to 2017 financial data, which was reported under ASC 605. I'll now turn the call over to Barak.
Thank you, Marty, and welcome everyone. I'm glad to be on the call with you today and pleased to announce another strong quarter on the top line that led to accelerated double-digit growth rates in operating income and earnings per share. We reported revenue of $356 million, representing more than a 9% increase from Q3 of last year, with recurring revenue increasing to 72% of total revenue. Operating income was $91 million, which was an increase of 16% compared to Q3 of last year, and operating margin increased 150 basis points to 25.5% compared to the same period last year. These strong operating results led to an 18% increase in earnings per share to $1.12. Also in Q3, we saw a significant double-digit increase in the number of competitive replacements and a double-digit increase in the number of new customers.
We continue to execute very well on our strategic pillars of cloud, analytics, and artificial intelligence, which are now the foundation of our growth going forward and the engine driving NICE as a $2 billion revenue company. Our focus on these pillars, which have been augmented by rapid innovation and strategic acquisitions, has opened up new markets for us, driving our total addressable market from what we believe was previously $3 billion to $7 billion today and increasing to over $12 billion in the coming years. A little over a year ago, we introduced CXone. CXone is an open cloud platform and our vehicle to deliver our strategic pillars to the customer engagement market. A year later, we can now say with confidence that we are winning with CXone.
A few weeks ago, we introduced X-Sight, the industry's first financial crime and compliance platform as a service. Similar to CXone, X-Sight is a platform that delivers our strategic pillars to the financial crime and compliance market. The financial services community faces many challenges, including the digital revolution, data explosion, fintech disruption, and a dramatic increase in the cost of compliance. To stay competitive, they need to respond by introducing new products and by quickly iterating on these products. At the same time, they must maintain their high compliance standards. X-Sight, with its combination of advanced analytics and AI, automated data management, and robotics, all provided in the cloud, delivers on this.
X-Sight marks another milestone in our autonomous financial crime management strategy, which delivers tremendous benefits, including a significant reduction in compliance-related manpower, combined with a dramatic improvement in agility. X-Sight is also the most powerful collective intelligence platform for the financial crime and compliance market, bringing together our consortium that started with ActimizeWatch. X-Sight is an open cloud platform, serves as a hub, and allows financial services companies of all sizes to easily plug in functionality from NICE, third parties, and in-house development. X-Sight has already seen great response from customers at our largest ever client forum, which was held one month ago in New York. It is clearly evident that our cloud platform strategy with embedded analytics and AI embodies the present and future for NICE. With X-Sight and CXone, we now have two significant market-leading open cloud platform serving our two main markets.
CXone has gained tremendous market presence among our customers and high regard from industry analysts. In fact, CXone was ranked highest in three out of three recent market analyst reports. In one of the reports, CXone was named the leader for the fourth consecutive year in the Gartner MQ. CXone was also recognized as the leader for cloud contact centers by Forrester Research. Lastly, Ventana Research recognized NICE as having the most complete offering for enterprises looking to move their contact centers to the cloud. The progress we have made thus far in a short time in the cloud has been very instrumental to NICE, as cloud grew 9% sequentially from Q2 and represented 34% of our total revenue in Q3.
We see the momentum in our cloud business continuing at a rapid pace. Therefore, we expect cloud revenue to climb to over 50% of our total revenue in the years to come. In the short term, we are increasing our estimated December 2018 exit revenue run rate for cloud to $550 million, up from our beginning of the year estimate of $500 million. Contributing to this momentum are the abundant number of cloud deals we continue to sign in the mid-market, as well as further penetration into the large enterprise with CXone. Examples of large enterprise CXone deals include a seven-digit ACV deal with a leading social media company, where we replace the on-premise incumbent provider. This company is looking to revolutionize their service and support model by standardizing on a unified cloud platform versus multiple point solutions.
In another seven-digit ACV deal, the financing operation of one of the largest auto manufacturers moved their entire customer service operation to CXone. We won this competitive deal due to the breadth of functionality offered by CXone, which is the only platform in the market bringing together omni-channel routing, WFO, and analytics in a single native cloud platform. We also signed a seven-digit ACV expansion deal with a government agency. This is an existing customer, where we originally replaced a long relationship with the on-premise incumbent provider. This deal demonstrates the success of our ongoing strategy to land and expand in large enterprise accounts. We signed a seven-digit ACV deal with another government agency, also replacing the on-premise incumbent provider. Both of these government agency deals reflect CXone position as the first and only cloud contact center solution to receive FedRAMP certification.
Obtaining this certification is an extremely rigorous process and demonstrates that CXone offers the most secure environment available to cloud contact centers. Essentials, our AML and fraud cloud solutions, and ActimizeWatch , our machine learning and AI-based cloud solutions, are also playing a key role in our cloud success. We signed many new Essentials deals in Q3, including several replacement deals. Moreover, many of the Essentials deals were executed through our strategic partnership with one of the largest core banking providers to the mid-market and under-penetrated market for our financial crime and compliance business. This partnership, formed in the fourth quarter of last year, made Essentials the standard financial crime and compliance solution for this core banking platform. We view this partnership as a great opportunity to further penetrate the mid-market with Essentials, as this core banking provider has thousands of customers.
Analytics and AI are areas where we continue to lead the market. This is reflected in a recent report from DMG, in which NICE was recognized as the global market share leader for speech analytics for the seventh year in a row. According to the report, our solutions account for the largest share of contact center seats using speech analytics, almost a million more seats than our nearest competitor. In an IDC analyst report, NICE Actimize was named a leader in anti-money laundering and KYC solutions. The report addressing AI and machine learning strength solidifies the impact of our investment in analytics technologies.
The report noted that NICE Actimize is suitable for institutions of all sizes that are seeking machine learning and AI capabilities out of the box to achieve automation while reducing overall risk. The continued demand for analytics and AI is reflected in the ongoing large number of big deals that we close every quarter, and Q3 was no exception. We signed an eight-digit cloud deal for a Nexidia analytics with one of the largest healthcare insurance providers. The deal was driven by the market-leading capabilities of our omni-channel analytics. We signed another eight-digit cloud analytics deal with a fast-growing online travel company with more than 10,000 seats. We signed a seven-digit deal with one of the world's largest global financial institutions. This financial institution's objective is to implement a global case management system across various regions.
Accordingly, the deal included ActOne, our AI investigation management system, ActOne Assist, our AI-infused robotic process automation, and other analytic solutions to help them achieve their goals. We also signed a seven-digit deal with a large telco for various analytics around compliance and performance management. We also signed another seven-digit deal that included our analytics-based Compliance Center solution. This deal, which was a massive replacement of one of our competitors, was for over 20,000 seats. Augmenting CXone with unique analytics-based routing technology was the driver behind the acquisition of Mattersight, which we closed in the latter part of the third quarter. Mattersight's predictive behavioral routing technology adds to CXone the ability to intelligently pair customers with the right agents best equipped to handle their personality style in real time.
We've already began the integration, which will allow us to further elevate and differentiate CXone as the most complete and innovative platform in the market. The strong momentum in the first half continued into Q3 as reflected in our results. Now, with two unique, competitive, differentiated platforms, CXone and X-Sight, covering two markets, we are poised to carry the momentum forward as these platforms provide us a long runway for continued growth and profitability. I will now turn the call over to Beth, who will review our financial results.
Thank you, Barak, and good day, everyone. I am pleased to provide you with an analysis of our financial results and business performance for the third quarter, as well as our outlook for the full year 2018. Revenue for the third quarter was $356 million, which represented an increase of 9% from $327 million in the same period of last year. Customer engagement revenues for the third quarter were $287 million, an increase of 9% compared to $265 million last year, and financial crime and compliance revenues were $69 million, an increase of 11% compared to $62 million last year. Product revenues accounted for 17% of total revenue in the third quarter. Cloud revenues accounted for 34% of total revenue, compared to 30% in the third quarter last year, and services accounted for the remaining 49% of total revenue in the third quarter.
Recurring revenue for Q3 2018 continued to increase and reached 72% of total revenue, compared to 69% in the same quarter of last year. On a regional breakdown, revenues in the Americas were $281.5 million in the third quarter, an increase of 12% compared to Q3 2017. Revenues in EMEA and APAC were $50.3 million and $24.6 million respectively for the third quarter 2018, similar to last year. Gross profit in the third quarter increased 8% to $252 million, compared to $233 million last year. Gross margin in Q3 was 70.7%. Operating income in the third quarter grew 16% to $91 million, compared to $78 million last year. Operating margin increased 150 basis points to 25.5%, compared to 24% last year. Earnings per share for the third quarter increased to $1.12, compared to $0.95 last year, representing growth of 18%. Third quarter cash flow from operations was $87 million.
Total cash and financial investments were $656 million at the end of September 2018, and total debt was $454 million net of issuance cost and the equity component associated with our convertible debt. Before I provide guidance, I would like to remind you that the guidance for the full year of 2018 is under the accounting standard ASC 605. For the full year 2018, we are increasing total revenue to be in an expected range of $1,450 million-$1,466 million, and we are increasing fully diluted earnings per share to be in an expected range of $4.53-$4.69. The guidance includes the acquisition of Mattersight. The company expects Mattersight to contribute an annual revenue run rate in a range of $32 million-$38 million. I will now turn the call over to the operator for questions. Operator?
Thank you. Just to advise, ladies and gentlemen, it's star one on your telephone to ask a question. If you want to withdraw it, simply key star two. All questions will be answered in the order received, and you will be advised when to ask your question whilst all other lines remain on listen only. Your first question is coming from the line of Shaul Eyal of Oppenheimer. Please go ahead. You're now live in the call.
Consistent execution and solid sets of results and guidance. Barak, Actimize seems to have had a very solid showing this quarter. I think we all understand the underlying trends of this segment. Can you provide us also with an additional update? Do you think you can channel this business to additional verticals aside from banking and insurance?
Sure. Thanks for the question. As I gave an update on the call, and I think you see it in Q3 results, Actimize grew double digit this quarter. Actually, we see already similar trends in the upcoming quarters as well. We said that we'll see it coming, and I can show a few that both pipeline as well as execution and the sales themselves and booking, giving us a good indication for that. One of the key reasons is everything that led to X-Sight. We have a very large customer base in Actimize, a very loyal customer base, as well as the unpenetrated mid-market.
As I mentioned on my previous comment, they're all challenged this day by combination of the tremendous increase in cost of compliance in the past few years, the digital disruption, including crypto and some other new assets and products in this domain, and of course, the data explosion. We have launched in the last year and a half, multiple products, eventually leading them into or channeling them into a single platform, which is X-Sight, which are all coming to address the four big needs of those, both the install base and the mid-market. All of them are looking to address those challenges by infusing AI analytics. They're looking to do it on one platform. Yes, they have multiple point solutions, but eventually, in the scale and the data explosion of today and the pace, they need to have a platform. They need it in the cloud.
They are all starting their journey to the cloud. Lastly, we talked about the consortium, the collective intelligence concept that started with ActimizeWatch. We sold a lot of those components, in past quarters and also in this quarter to customers, and we're starting to see the acceleration led to the double digit. Far or for now, we are focusing the efforts because we have great market over there and a sizable market on what we call financial services. But even the definition of financial services for us, as you know from the past, grew quite dramatically, both because we go down market and side market to areas, and customers that are dealing with financial services related domains, including alternative money, gaming, and so on and so forth. We have an opportunity to go, as you're suggesting, to other verticals, and we will continue to explore them.
Right now, I think there is great opportunity in our core markets, where we are doing well, and those markets are growing very nicely.
Understood. Thank you for that color. Maybe as my follow-up, Barak or Beth, as cloud continues to grow on both a relative and absolute basis, really nice trajectory, we keep seeing the margins direction. I want to ask if it's fair to assume longer term and without putting a specific time frame on long-term margins. Could we be getting up towards 30%? Again, there might be some small tuck-in acquisitions that might temporarily be restraining you from getting there. The overall margin direction, is 30% feasible?
Thanks for the question, Shaul. As we look at the longer-term trajectory, we do believe that 30% is feasible. As we've demonstrated over quite some time, we've really been able to show the leverage in our model. With a lot of focus around our services margins in particular, we have that same focus on our cloud growth. Over time, we'll also see a continued gradual expansion in the cloud as well. In particular, continue to see expansion in our cloud revenue, combined with a higher attach rate on our software that's going to help continue to boost the overall margins in the company.
Thank you so much. Good luck.
Thank you.
Thank you. Your next question comes from the line of John DiFucci of Jefferies. Please go ahead. You're live in the call.
Business, since you've come out with it, looks like it's been really strong, and it sounds like it has too. You mentioned today a couple of deals that were existing customers where you displaced incumbent implementations. I'm just curious because it doesn't sound like CXone is going out and displacing a whole lot of your stuff, of the inContact with your workforce optimization sort of implementations. On those that you did displace in some of your existing customers, was your workforce optimization in those incumbent sort of implementations, or is CXone still all just pure new business?
John, thanks for the question. The answer is both. I'll address some of the examples that I gave. I think that we are winning or we are displacing in two main occasions. One is customers, in even standalone WFO, that would like to either expand to a full offering, a more competitive offering with more complete offering, including analytics, and we have infused a lot of analytics and AI into WFO, so we saw this displacement. As an example, like I mentioned, this customer, a very large deployment, more than 20,000 seats. This was a displacement of a WFO provider, where we have added WFO analytics, and the customer were looking to displacement with a better offering from us. That's one type of displacement that we see.
The other type of displacement that we see is that with the CXone, we are indeed displacing the incumbent routing on-premise legacy providers. In those cases, we have a lot of those customers that either do not have WFO or have WFO from other providers. In some cases, they have either all or some pieces of our own WFO, and then they either decide to keep it on-premise and connect to CXone and eventually move to the full CXone, or they decide right out of the gate to move to CXone, which actually is good for us. It's a much more integrated and sticky platform, as well as actually it increases the recurring revenues from these customers, because as you know, we move to the cloud, there are many additional aspects of revenues that we get from the customer.
Okay. Okay, great. That's helpful, Barak. If I could, Beth, ask a question, because I'm looking, and we've talked about this a little bit. You could see the momentum here. At the same time, because there's different mixes of models, CXone is billed monthly in arrears versus some of your other cloud business in your traditional license-plus maintenance is billed, and you see it on the balance sheet. It's billed annually, and so you see the maintenance there. When I look at the numbers this quarter, and I look at what we were modeling, the deferred revenue was a little bit below what we were looking for, but the numbers look really strong, especially for cloud. Even if I back out what I think Mattersight could have contributed this quarter, cloud was still really strong.
I guess this all kind of makes sense in my head, so I'm just trying to just make sure that you say it makes sense in my head. Does that just indicate really strong CXone this quarter? Is that what the indication is here with those financial metrics?
Thanks for the question, John. You're right, we've talked about this on several occasions, and I think it really is important to clarify that we don't look at deferred revenue as an indicator of the future growth. You are seeing the strength in our cloud revenue this quarter. For our business, we're really seeing now the shift as we've transitioned our business to becoming more and more of a cloud company. Our cloud revenue increased from 30% of total revenue one year ago to about 34% this year. As you highlighted, the CXone and the cloud business, the predominant bulk of that actually bypasses deferred revenue, so it is being billed monthly in arrears. What we are looking on is really the strong sequential growth we had in our cloud business, which was 9% in the third quarter over Q2.
Okay, great. Thank you very much.
Thank you, John. Operator, for some reason, we don't hear the first part of the questions.
Apologies, ladies and gentlemen. There is a slight delay in putting through your next callers through to the call. I'll try and slow down the introduction and advise you once you're free to talk. Your next question comes from the line of Daniel Ives. You're now live in the call. Please go ahead.
Okay, great. Yeah, congrats again, guys. Just seems like coming on cloud and kind of like to John's question, but just more anecdotal. How have sales cycles just changed on cloud and your conversations with customers, Barak? I mean, even if you go back over the last year, six, nine months in terms of just accelerating sales cycles, deals getting larger, customers maybe that at first were tough nut to crack, and now they're six, seven-figure deals. Maybe you could just talk about that anecdotally in terms of just sales cycles and just conversations, how they've changed.
Sure. Thanks for the question. You're absolutely right. There is a very quick and dramatic change in dynamics in the cloud conversation. If I look backward, I can even say the last two years, I can compare it to, let's say, two years ago. The days of convincing customers why moving to the cloud is good, which added a lot of length to sales cycles in general, I believe that those days are over in almost all segments of the market. The question of if to move to the cloud is no longer a question, by the way, in both our markets, not just in the customer engagement market. That's one thing. The second thing, as they move into the cloud, what they're looking for, of course, is not just to say that they move to the cloud. They're looking to realize the benefits.
The conversation is much more about the completeness of the offering to the cloud, the flexibility that allows them commercially and also operationally. Of course, most customers are pretty much shocked and don't believe how fast you can actually turn up environments versus their experience in the legacy on-premise environment. Those are the kind of the key things. As a result of that, we see multiple models of sales. We see smaller customers moving very quickly to the cloud. Sales cycles over there are relatively short. We see in the enterprise market, I would say that we see two type of enterprises. We see enterprises that moving to the cloud gradually, meaning that they choose a certain division or department. I give example of one of those customers, there were a few. On our side, what we do is land and expand.
They take one division, one department, one operation, they move it to the cloud. What we see is a lot of follow-on expansions. There are some that taking it in a much more strategic way. I think we've mentioned one of those customers a quarter or two ago, is a very big, one of the top five customers in the U.S., that, after a lengthy process, decided to go all in, if you would like, on cloud, and move all of it to the cloud in one shot. I think that more and more, we'll see the second option of customers strategically moving their entire operation to the cloud. This is also what we see in the pipeline.
Yeah, very insightful. Thanks.
Thank you.
Thank you. Your next question is coming from the line of Tavy Rosner of Barclays. Please go ahead.
Hi, this is Chris Reimer on for Tavy. Thank you for taking my question. I was wondering if you could give some more color on the X-Sight platform. Do you expect the same traction with that as you've seen with the CXone solution? Or is it mainly an interim platform? If you could just give some color on the offer there.
Sure. Just to clarify, CXone is our platform for the customer engagement market, and we operate also in the financial crime and compliance market, which was always a sweet play for us, but we have transitioned into a platform play with the introduction of X-Sight. There are similarities in the approach. We have gained a lot of expertise on how to launch a platform into the market. A bit more than a year ago, we've done it with CXone, and we are very happy with the success. We have taken in this year a lot of effort to be at that position also with the financial crime and compliance market. While the market is different, the key drivers or the key pillars of cloud, artificial intelligence and analytics, are also the one that are behind X-Sight.
The opportunity with X-Sight, as I've mentioned before, is both to the very large customer base that we have, and this is to go to our existing customer base, rationalize the products that they have under a single platform, but also give us great opportunity, a much faster opportunity and much convenient opportunity to cross-sell and upsell our entire very rich portfolio that NICE Actimize have. It also allows those customers to start their cloud journey. Going back to the previous question, this market, we do see a cloud transition, but we don't see them going with all the products to the cloud. What they would like to see is a platform that can coexist.
Some of the solution will be consumed in the cloud and some, because of either latency of feasibility of stopping fraud on time, as well as some other concern that customer might have, will be on premise. Augmenting those two together and providing financial services with a safe journey to the cloud, that's exactly what X-Sight will do. I mentioned we had a client forum, the largest ever in New York a few weeks ago. I can tell you that the response and the reaction, it's a very senior forum, most compliance officers in the market and fraud officer are attending this forum, was just phenomenal.
Okay. Thank you very much.
Thank you.
Thank you. Your next question comes from Daniel Bergstrom of RBC Capital Markets. Please go ahead.
Hi. Thanks for taking my questions. Say, with Interactions Paris next week and a little better results from the Americas, just thinking through traction in the cloud and different markets here. I guess I was curious, is Americas leading the adoption of the cloud, or are all geographies kind of adopting at the same pace?
Sure. Thanks for the question. No doubt that we started our cloud journey in Americas. Needless to say, the acquisitions of both Nexidia in the past as well as inContact, were companies that operated mainly, almost exclusively in the U.S. or in North America, but as part of NICE, and that's one of the great benefits NICE gave to those additions, is the international presence that we have. I can share with you that we see great traction to CXone in new territories outside of the U.S., both in Europe as well as in Asia Pacific. Our plan, of course, is to grow and expand into these markets. We are investing in all of those territories to make sure that we, of course, build a very similar go-to-market with the relevant localization. Of course, part of our strategy is to take it to other markets.
I believe that the U.S. market, in our respective market, is probably a few years ahead in penetration of cloud, but we're starting to see the dynamics internationally that are very similar to what we've seen in the U.S., I would say about three years ago. It's a great potential there.
Great. You highlighted a couple of eight-figure cloud deals. Could you drill down into those a bit? What were the customers looking for? What won them for you?
I gave some colors on these deals. First of all, I think you see that they are coming from different verticals. Some were financial services, some were telco, governmental. I mentioned a social media company, a travel company. The first good news is that this adoption is across almost all verticals that we operate in, which is great. I believe that the commonality to all of those customers, those that adopted the cloud solutions with these big deals, is that instead of going after point solutions and continuing to be, or the journey that they had with their on-premise solution, which is buying different pieces and connecting them together, they see the rationale behind adopting a platform versus point solutions and doing it in the cloud and consume it in the cloud.
I think that's one of the main reasons we are winning, and this is the completeness of CXone. That was the whole logic behind bringing the pieces together strategically, specifically in the customer engagement market, omni-channel routing, WFO analytics, and artificial intelligence components, bringing all of it into one platform, addressing or serving all sizes of markets. The last one I said that's the biggest trend, of course, is the adoption of enterprises. If in the past, let's say two years ago, this was mainly a mid-market play, you can understand from the sizes of those deals that I've mentioned, that the adoption now is in all segments of the market, and we see great success at the enterprise market.
Thanks, Barak.
Thank you.
Thank you. Your next question comes from the line of Sanjit Singh of Morgan Stanley. Please go ahead.
Hi. Thank you for taking the questions and congrats on another set of strong results. Barak, I guess my question sort of relates to a lot of the competitive displacements that you pointed to your scripts and the seven-figure and eight-figure deals, which would seem really exciting. When I sort of take your comments and then sort of map it to implied Q4 guidance, it seems like the business guidance calls for a little bit of a deceleration. I'm just trying to square those two things together. Does it reflect sort of a model transition in that we should see accelerating cloud growth while maybe on the product side weakens a bit? I'm just trying to get a sense of the underlying pace of growth, given a lot of the traction that you've seen this quarter.
Absolutely. Actually, you're spot on, and that's exactly what we say both last year. We saw it last year, we said it all along this year, is that we are a company that is transitioning to the cloud, going in the cloud while maintaining its on-premise business during the transition. As a result of that, our years, unlike in the past, are going to be much, much less backend loaded. We saw it last year, we see it this year as well, and also we believe next year will be much less backend loaded. That's the reason for what you see. We should obviously look annually on the numbers, which of course are both on top line and bottom line are very strong.
That's very helpful. Going back to some of these competitive displacements. In the sort of contact center portion, when you displace an incumbent in the sort of contact infrastructure on side, are customers turning off on these systems? Are they running these systems in parallel for a period of time? Are you guys sort of the expansion play as a customer, maybe expand to a different region, they may expand the cloud. Any sort of color there on how, when a customer goes to CXone on the contact center side, what sort of trends you're seeing there?
Sure. I would say that in most cases, eventually, the cloud solution, of course, no one would like to pay twice, right? The cloud is displacing an existing on-premise solution. The most customers, and there is a transition period, you're right, as they start to ramp up the cloud. There is a ramp-up period of the cloud, and they gain confidence. Usually, they have to keep paying maintenance for a bit. It can take a few months, it can take two quarters, even a year if the customer has a big deployment and they would like to ramp up slowly into the cloud. In those cases, the on-premise provider, the competitive provider, the legacy routing solutions will keep enjoying the maintenance maybe for another year, but eventually, it will fade out. In most cases, this is the case.
Maybe outsourcers are somewhat different when they onboard new customers on cloud, and they don't displace the old one. By and large, it is displacing those legacy on-premise routing providers.
Appreciate it, Barak. Thank you.
Thank you.
Thank you. Your next question comes from the line of Rishi Jaluria of D.A. Davidson. Please go ahead.
Hi, guys.
Just to advise that your line is very quiet.
Rishi, we can hardly hear you.
Oh, can you hear me now?
Yes, we hear you now.
Okay. This is Hannah on for Rishi. Thanks for taking my question. I was wondering if you could talk about your momentum with robotic process automation in the quarter, and if you've seen an acceleration in that.
Sure. I forgot to mention it in my opening remarks. We continue to see good momentum in this market. A lot of new logos that we are landing, and the momentum continues in this exciting market. It's a hot market. A lot of new logos added this quarter, similarly to what we saw in the first two quarters of the year.
Thanks. Could you talk about how we should think about cloud gross margins going forward, maybe how Mattersight is contributing?
Sure. As I highlighted earlier, if you look back on the time since we acquired the inContact business, over that time, we've seen a gradual improvement in our cloud gross margins, and that's what we continue to expect over the longer-term trajectory as well. We are continuing to focus on a lot of the efficiencies we've had in our business in terms of ability to more efficiently provide certain services that relate to the cloud operations by hiring lower-cost talent, while at the same time continuing to grow the top line in our cloud. We're confident that we'll continue to see, over the longer term, expansion in the cloud gross margin.
Thank you. That was very helpful.
Thank you.
Thank you. Your next question is coming from Jacek Rycko of Citi. Please go ahead.
Hi, thanks. This is Jacek Rycko in for Walter Pritchard. My question, I wanted to talk a little bit about the 20% cloud growth rate. What would the levels of growth in the cloud had been, had it not been for Mattersight? What is the contribution of Mattersight? Maybe a related question on the guidance for run rate of $32 million-$38 million. When we look at the numbers from Mattersight, the last reported LTM, it was somewhere around $50 million. We just wanted to see if there was a bridge to that $32 million-$38 million run rate guidance. Thanks.
Sure. No problem. A few words on the Mattersight acquisition. As I mentioned my previous remarks, we acquired Mattersight for their PBR technology, which is very strategic for our CXone platform. As I've mentioned, we are at work to actually go and integrating the technology into CXone. For the rest of the Mattersight business, the reason for the guidance that we gave is that they reported as a company at the end of 2017, that was expected, the loss of some of their top customers. Actually, they lost them to NICE and Nexidia last year, and they expected the revenue to wind down for the second half of 2018. This was expected, as well as some unprofitable customers that we have decided to discontinue. The result of that, this is the run rate that we expect moving forward already from the closing of the acquisition.
Thanks very much.
Thank you.
Thank you. Your next question is from the line of Paul Coster of JPMorgan. Please go ahead.
Yeah, hi. This is Mark Strauss on for Paul. Thanks for taking our questions. Barak, I'm just hoping you can kind of touch on the competitive environment. We've heard some cloud-hosted contact center as a service company is going to talk about getting into some new applications, but you guys are clearly executing well. Just curious if when you bid on these deals, are you seeing any new competitors, any changes in that environment?
Sure. The reports that we have seen recently from the analysts actually represent the competitive dynamics that we see in the market. There is a clear formation of leadership, and there are a lot of challengers in this market. It is a very exciting market at the moment, fast-growing market. The barrier of entry is high. And it is high because there is a realization, some of it was driven by our strategic moves, I would say. That as you move your contact center to the cloud, you want to do it on a native cloud solution versus a hosted one that was offered in the past by some of the legacy provider. That's number one. The second thing, you want to move with a complete offering versus just a routing or a basic routing or just a WFO.
We see customer that's making sure that they are picking the completeness of the offering. Of course, analytics is a big thing in that, as you move to that, consuming your analytics under the same platform. Lastly, of course, having it as a platform, an open one. All of those things, while we see, of course, a highly competitive market, I believe, we see in different bids, a lot of those challengers that you talked about, for sure, the hosted provider, contact center hosted provider, in very early stage of those bids, they are getting out of the bid or being disqualified, because this is not what customers are looking today. We're very happy with the move that we've done with CXone to allow us to be in this leadership position.
We are actually continuing, of course, to invest in development, in R&D, and innovation to make sure that we open further the gap here.
Okay, thanks. Then just a quick follow-up for Beth. Appreciate the run rate that you're providing for Mattersight. Can you just remind us what you have said about profitability of that acquisition and maybe more specifically when you expect that deal to be accretive to EPS?
Sure. What we said last quarter is that we would provide more guidance once we closed. Obviously, we closed during the third quarter. What we specifically said is that during the course of 2018, we expected Mattersight to be non-dilutive to EPS. Looking forward to 2019, we would expect it to be accretive.
Right. Okay. Thanks very much.
Thank you.
Thank you. Your next question is coming from the line of Gabriela Borges from Goldman Sachs. Please go ahead.
Great. Thank you for taking my question. Good morning. I wanted to revisit the topic of discussion on seasonality in the cloud business. Just trying to better understand the deceleration from high 20% range to the 20% range this quarter. I remember this time last year, there was particularly strong seasonality in 3Q. The question is anything different with seasonality in the cloud business this year? Are there the timing of large deals that's impacting that 20% year-over-year growth rate? Thank you.
Thank you for the question, Gabriela. You have a good recollection on last year. If we look back into the third quarter of 2017, it was a bit of an anomaly. In terms of the cloud revenue, we actually had some major catch-ups in terms of revenue that we were able to benefit from during the third quarter, but it set a really high bar for us in terms of growth for the current year. Last year was inflated. If you looked on a sequential growth rate at that point, it was around 15%. We're quite pleased with the 9% sequential growth we had quarter-over-quarter from Q2 to Q3 of this year. Further, we have quite a lot of confidence.
You can see a lot of the CXone deals and business that we're talking about, and that gave us the confidence looking forward to go ahead and actually increase the exit run rate we had for 2018. Earlier this year, Barak shared that our goal was to exit the run rate of our cloud business with a $500 million ACV, and we've now increased that to $550 million, given our visibility into the fourth quarter and our strong pipeline in the cloud business.
Great. I appreciate the color. The follow-up is on CXone with respect to the go-to-market initiatives that you're making there. We've noticed some of the great advertising around that. What I want to ask is, what's the early feedback been to some of the marketing efforts? Is there more to come on that, or do you feel like you're already investing at the right run rate to be able to sustainably grow that business on the go-to-market? Thank you.
Thanks for the question. Yes, we are investing, of course, in our go-to-market in CXone. Some of it is in the sales, some of it is in, of course, lead generation, digital activities. I believe some of you saw some of our recent activities with the recent campaigns that we're doing. Some of it is in the media, which is expected, I believe, from a market leader, and we see great feedback as a result of that. All in all, we are very happy with the current go-to-market. We'll of course, continue to expand it as the business grow and as we see in the right areas and dynamics, we have a lot to cover. All in all, the go-to-market, we believe, is at a very good fit to the market opportunities that we have in front of us.
Sounds good. Thank you.
Thank you. There are no further questions, I'd like to hand back now to Barak.
Thank you all for joining us, have a great day. Thank you.
Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.