Good day, and welcome to the NICE Conference Call discussing 3rd Quarter 2018 Results, and thank you for holding. All participants are at present in listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded for November 8, 2018. I would now like to turn the call over to Mr.
Marty Cohen, Vice President, Investor Relations at NICE. Please go ahead.
Thank you, operator. With me on the call today are Barak Elam, 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 20F as filed with the Securities and Exchange Commission on March 30, 2018.
During today's call, we present a more detailed discussion of Q3 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 accounted accepting 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 60 6 in the Q1 of 2018 on a modified retrospective basis.
This means that the results for the reporting periods beginning on or after January 1, 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 Q3 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 Brock.
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 $356,000,000 representing more than a 9% increase from Q3 of last year with recurring revenue increasing to 72% of total revenue. Operating income was $91,000,000 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 for our nice to be plan or nice as a $2,000,000,000 revenue company. Our focus on these pillars, which has 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 $3,000,000,000 to $7,000,000,000 today and increasing to over $12,000,000,000 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 1st 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 client 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 AktimizWatch. 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 1 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 Excite and CXone, we now have 2 significant market leading open cloud platform serving our 2 main markets.
CXone has gained tremendous market presence among our customers and high regard from industry analysts. In fact, CXone was ranked highest in 3 out of 3 recent market analyst reports. In one of the reports, CXone was named the leader for the 4th consecutive year in the Gartner MQ. CXone was also recognized as de 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 and 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 $550,000,000 up from our beginning of the year estimate of $500,000,000 Contributing to this momentum are the abandoned 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 enterprises CXone deals include a 7 digit ACV deal with a leading social media company where we replaced the on premise incumbent provider. This company is looking to revolutionize their service and support models by standardizing on a unified cloud platform versus multiple point solutions.
In another 7 digit ACV deal, the financing operation of 1 of the largest auto manufacturers move 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 7 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 lend and expand in large enterprise accounts.
We signed a 7 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 1st 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 Aktimiz Watch, our machine learning and AI based cloud solutions are also playing a key role in our cloud success. We signed many new essential deals in Q3, including several replacement deals.
Moreover, many of the essential deals were executed through our strategic partnership with 1 of the largest core banking providers to the mid market and underpenetrated market for our Financial Crime and Compliance business. This partnership formed in the Q4 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 7th year in a row.
According to the report, our solutions account for the largest serve contact center seats using speech analytics, almost a 1000000 more seats than our nearest competitor. In an IDC analyst report, NICE Akzimize was named the 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 closed every quarter and Q3 was no exception.
We signed an 8 digit cloud deal for Nexidia Analytics with 1 of the largest healthcare insurance providers. The deal was driven by the market leading capabilities of our omni channel analytics. We signed another 8 digit cloud deal, cloud analytics deal with a fast going online travel company with more than 10,000 seats. We signed a 7 digit deal with 1 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 analytics solutions to help them achieve their goals. We also signed a 7 digit deal with a large telco for various analytics around compliance and performance management. We also signed another 7 digit deal that included our analytics based compliance center solution. This deal, which was a massive replacement of 1 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, their 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 2 unique competitive differentiated platforms, CXone and X Sight covering 2 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 Q3 as well as our outlook for the full year 2018. Revenue for the Q3 was $356,000,000 which represented an increase of 9% from $327,000,000 in the same period of last year. Customer engagement revenues for the 3rd quarter were $287,000,000 an increase of 9% compared to $265,000,000 last year, and Financial Crime and Compliance revenues were $69,000,000 an increase of 11% compared to $62,000,000 last year. Product revenues accounted for 17% of total revenue in the 3rd quarter.
Cloud revenues accounted for 34% of total revenue compared to 30% in the Q3 last year, and services accounted for the remaining 49% of total revenue in the 3rd 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 point $5,000,000 in the 3rd quarter, an increase of 12% compared to Q3 2017. Revenues in EMEA and APAC were $50,300,000 $24,600,000 respectively, for the Q3 2018 similar to last year. Gross profit in the 3rd quarter increased 8% to $252,000,000 compared to $233,000,000 last year.
Gross margin in Q3 was 70 point 7%. Operating income in the 3rd quarter grew 16% to $91,000,000 compared to $78,000,000 last year. Operating margin increased 150 basis points to 25.5% compared to 24% last year. Earnings per share for the 3rd quarter increased to $1.12 compared to $0.95 last year, representing growth of 18%. 3rd quarter cash flow from operations was $87,000,000 Total cash and financial investments were $656,000,000 at the end of September 2018, and total debt was $454,000,000 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 1,450,000,000 dollars to $1,466,000,000 and we are increasing fully diluted earnings per share to be in an expected range of $4.53 to $4.69 The guidance includes the acquisition of Mattersight. The company expects Mattersight to contribute an annual revenue run rate in a range of $32,000,000 to $38,000,000 I will now turn the call over to the operator for questions. Operator?
Thank you. Your first question is coming from the line of Eyal Shaul 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. So as I gave an update on the call and I think you see it in Q3 results, Aktima is good double digit this quarter and 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 reason is everything that led to X Sight.
We have a very large customer base and Aktimize very loyal customer base as well as the unpenetrated mid market. As I mentioned on my previous comments, 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. And we have launched in the last year and a half multiple products eventually leading them into channeling them into a single platform, which is X Sight, which are all coming to address the 4 big needs of those, both the installed base and the mid market. All of them are looking to address those challenges by infusing AI and 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 have it, they need to have a platform. They need it in the cloud. They're all starting their journey to the cloud. And lastly, we talked about the consortium, the collective intelligence concept that started with Optimize Watch. 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 that led to the double digit.
So far 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 markets 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. But right now, I think there is great opportunity in our core markets where we are doing well and those markets are going very nicely.
Understood. Thank you for that color. And maybe as my follow-up, Barak or Beth, as cloud continues to grow on both 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, but could we be getting up towards 30%? And again, there might be some small tuck in acquisitions, might temporarily be restraining you from getting there.
But 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 and with a lot of focus around our services margins in particular, we have that same focus on our cloud growth. And over time, we'll also see a continued gradual expansion in the cloud as well. In particular, we 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 Fauciuti of Jefferies. Please go ahead. You're live in the call.
Business, since you've come out with it, has looks like it's been really strong and it sounds like it has too. But you mentioned today a couple of deals that you were existing customers where you displaced incumbent implementations. And 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. But 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. So the answer is both. I'll address some of the examples that I gave. So I think that we are winning or we are replacing in 2 occasions, 2 main occasions. 1 is customers, and 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 example, like I mentioned, this customer, a very large deployment, more than 20,000 seats. This was a displacement of WFO provider where we have added WFO analytics and the customer were looking to displacement with a better offering from us. So that's one type of displacement that we see. The other type of displacement that we see is that with CXone, we are indeed displacing the incumbent routing on premise legacy providers.
And in those cases, we have a lot of those WFO and then they either 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 over 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 their 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, great. That's helpful, Barak. And if I could, Beth, ask a question because I'm looking and we've talked about this a little bit. It's You could see the momentum here. At the same time, because there's different mixes of models and 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 like 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, COGS was still really strong. So is it 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. And 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 and 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 1 year ago to about 34% this year. And 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. And so what we are looking on is really the strong sequential growth we had in our cloud business, which was 9% in the Q3 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 pushing 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 Eves. You're now live in the call. Please go ahead.
Okay, great. Yes, so congrats again guys. Just seems like humming 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, Brock? I mean, if you go back over the last year, 6, 9 months in terms of just accelerating sales cycles, deals getting larger, customers maybe that are first were tough nut to crack and now they're 6, 7 figure deals.
So maybe you can just talk about that anecdotally in terms of just sales cycles and just conversations how they've changed?
Sure. Thanks for the question. And you're absolutely right. There is a very quick and dramatic change in dynamics in the cloud conversation. If I look back where I can even say the last 2 years, and I can compare it to let's say 2 years ago, the days of convincing customers why moving to the cloud is good, which was added a lot of length to sales cycles in general.
I believe that those days are over in almost all segments of the market. And 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. So that's one thing. The second thing, as they move into the cloud, what they are looking for, of course, is not just to say that they move to the cloud, they are looking to realize the benefits and the conversation is much more about the completeness of the offering to the cloud, the flexibility that allows them commercially and also operationally. And of course, most customers are pretty much shocked and don't believe the how fast you can actually turn up environments versus their experience in the legacy on premise environment.
So 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, very quickly to the cloud, so sales cycles over there are relatively short. We see in the enterprise market, I would say that we see 2 type of enterprises. We see enterprises that moving to the cloud gradually, meaning that they choose a certain division or department.
I gave example of one of those customers, there were a few. And on our side, what we do is land and expand. They take 1 division, 1 department, 1 operation, they move it to the cloud and what we see is a lot of follow on expansions and there are some that taking it in a much more strategic way. I think we've mentioned one of those customers a quarter or 2 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 over to the cloud in one shot. And I think that more and more, we'll see the second option of customers strategically moving their entire operation to the cloud and this is also what we see in the pipeline.
Yes, very insightful. Thanks.
Thank you.
Your next question is coming from the line of Tavy Rosner of Barclays.
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 mainly an interim platform, mainly an interim platform, if you could just give some color on the offer there?
Sure. So just to clarify, Sixone 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 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 and a bit more than a year ago we've done it with CXone and we're very happy with the success. So we have taken in this year a lot of effort to be at that position also with the financial crime and compliance market.
And while the market is different, the key drivers or the key pillars of cloud, Omnichannel sorry, 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 to 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. So what I 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 concerns that customer might have will be on premise, but augmenting those 2 together and providing financial services with a safe journey to the cloud, that's exactly what X Sight will do. And I mentioned we had a client forum, the largest ever in New York few weeks ago. And 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 Dan Bergstrom of RBC Capital Markets. Please go ahead.
Hi, thanks for taking my questions. Say with Interxion Paris next week and a little better results from the Americas, Just thinking through traction in the cloud in 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. So 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 where 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 benefit 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. And 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. And of course, part of our strategy, of course, is to take it to other markets.
So I will say that I believe that the U. S. Market is in our respective market is probably few years ahead in penetration of cloud, but we are starting to see the dynamics internationally that are very similar to what we've seen in the U. S, I would say about 3 years ago. So it's a great potential there.
Great. And then you highlighted a couple of 8 figure cloud deals. Could you drill down into those a bit? What were the customers looking for? What won them for you?
So I gave some colors on these deals. As you can see, first of all, I think you see that they are coming from a different verticals, some are financial services, some are telco, governmental. I mentioned the social media company, travel company. So 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.
And 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 bring it all of it into one platform addressing or serving all sizes of markets. And the last one I said that the biggest trend of course is the adoption of enterprises. If in the past, let's say 2 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, Brock. 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. Brock, I guess my question sort of relates to a lot of the competitive displacements that you pointed to your scripts and the 7 figure and 8 figure deals, which seems really exciting. When I sort of take your comments and then sort of map it to implied Q4 guidance, it seems like the business is guidance cost for a little bit of a deceleration. So I'm just trying to square those two things together.
Is it does it reflect sort of a model transition and that we should see accelerating cloud growth while maybe 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. So 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 back end loaded. We saw it last year, we see it this year as well. And also we believe next year will be much less back end loaded.
That's the reason for what you see and then 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. And then going back to some of these competitive displacements. In the sort of contact center portion, when you want to place when you displacement incumbent in the sort of contact infrastructure on-site, Are customers turning off on these systems or are they running these systems in parallel for a period of time or are you guys sort of the expansion play as a customer maybe expanded 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. So I would say that in most cases, eventually the cloud solution, of course, no one would like to pay twice, right? So the cloud is displacing an existing on premise solution. And the most customers and there is a transition period, you're right, as they start to ramp up the cloud. So 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 a few 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. But in most cases, this is the case, maybe outsourcers are somewhat different when they take they onboard new customers and cloud and they don't displace the old one, but by and large, it is displacing those legacy on premise routing providers.
Appreciate it, Bharat. Thank you.
Thank you.
Thank you. Your next question comes from the line of Rishi Gheleoria of B. A. Davidson. Please go ahead.
Guys.
Just to advise that your
line is open. Sorry, we can hardly hear you.
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 skipped I forgot to mention it in my opening remarks. We continue to see good momentum in this market, a lot of new logos that are we are lending 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 1st 2 quarters of the year.
Thanks. And then 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 from by hiring lower cost talent, while at the same time continuing to grow the top line in our cloud. So 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.
Your next question is coming from Jaket Raico of Citi.
Hi, thanks. This is Jacek Rykko in for Walter Pritchard. My question, I wanted to talk a little bit at the 20% cloud growth rate. What would the levels of growth in the cloud had been had not been for Mother's side? What is the contribution of Mother's side?
And maybe a related question on the guidance for run rate of $32,000,000 to $38,000,000 When we look at the numbers from mother side, the last reported LTM, it was somewhere around $50,000,000 So we just wanted to see if there was a bridge to that $32,000,000 to $38,000,000 run rate guidance. Thanks.
Sure. No problem. So fewer than the Matters Cyt acquisition, as I mentioned in my previous remarks, we acquired Matters Cyt for the PBR technology, which is very strategic for CXone platform. And 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 Nexidia last year and they expected the revenue to wind down for the second half 2018. So this was expected, as well as some unprofitable customers that we have decided to discontinue. And as a 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 Koster of JPMorgan. Please go ahead.
Yes, hi. 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. So 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. So just curious if you're when you bid on these deals, are you seeing any new competitors, any changes in that environment?
Sure. I think that the reports that we've 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's a very exciting market at the moment, fast growing market. But the barrier of entry is high.
And it's 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 1. The second thing, you want to move with a complete offering versus just a routing or basic routing or just a WFO. So we see customer that's making sure that they are taking the completeness of the offering. And of course, analytics is a big thing in that as you move to that consuming your analytics under the same platform. And last, of course, having it as a platform and open one.
All of those things, while we see, of course, a highly competitive market, I believe we've seen different bids, a lot of those challengers that you talked about, for sure, the hosted provider, the 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. And we're very happy with the move that we've done with CXone to allow us to be in this leadership position and we're actually continuing of course to invest in development, in R and D, in innovation to make sure that we open the gap open further the gap here.
Okay, thanks. And 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're expected or 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 in the Q3. And what we specifically said is that during the course of 2018, we expected Mattersight to be non dilutive to EPS. And looking forward to 2019, we would expect it to be accretive.
Okay. Thank you 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.
And I remember this time last year there was particularly strong seasonality in 3Q. So the question is, is anything different with seasonality in the cloud business this year? And are there a lot the timing of large deals that's impacting the 20% year over year growth rate? Thank you.
Thank you for the question, Gabriela. And you have a good recollection on last year. So if we look back into the Q3 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 Q3, but it set a really high bar for us in terms of growth for the current year. So last year was inflated.
If you looked on the 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. And 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 to 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 500,000,000 ACV and we've now increased that to $550,000,000 given our visibility into the Q4 and our strong pipeline in the cloud business.
Great. I appreciate the color. And 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. So what I want to ask is what's the early feedback been to some of the marketing efforts?
And do you think that there'll be 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. So 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. But all in all, we're 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.
But all in all, the go to market we believe is it's 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. So I'd like to hand back now to Barak.
Thank you all for joining us and have a great day. Thank you.
Thank you. So ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.