Welcome to the NICE conference call discussing third quarter 2026 results, and thank you all for holding. All participants are at present in a 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 November 4, 2026. I would now like to turn this call over to Mr. Ryan Gilligan, Vice President of Investor Relations at NICE. Please go ahead.
Thank you, operator. With me on today's call are Scott Russell, Chief Executive Officer, and Beth Gaspich, Chief Financial Officer. 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 2025 annual report on Form 20-F, as filed with the Securities and Exchange Commission on February 26, 2026. During today's call, we will present a more detailed discussion of third quarter 2026 results and the company's guidance for the full year 2026.
A copy of today's press release and investor presentation can be found on NICE's Investor Relations website. Following our comments, there will be an opportunity for questions. Let me remind you that unless otherwise noted on this call, we'll be commenting on our adjusted results of operations, which differ in certain respects from generally accepted accounting principles, as reflected mainly in accounting for share-based compensation, amortization of acquired intangible assets, acquisition and divestiture-related expenses, gains on intercompany foreign currency transactions, amortization of deferred financing costs, amortization of discount on debt, the tax effect of the non-GAAP adjustments, and the tax rate impact resulting from the non-U.S. intercompany transaction. The differences between the non-GAAP adjusted results and the equivalent GAAP figures are detailed in today's press release. The information and some of our comments discussed on this call may contain forward-looking statements that are subject to risks, uncertainties, and assumptions.
I will now turn the call over to Scott.
Thank you, Ryan, and good morning, everyone. In the third quarter, we continued to showcase ourselves at the center of the evolving CXAI market. In Q3, total revenue was $791 million, and non-GAAP EPS was $2.84, both above the high end of our guidance ranges. We're pleased with this performance and our progress against our key growth areas, including CXAI, our partner ecosystem, and international markets. However, we recognize there is more to do to drive faster cloud growth. I'll spend some time this morning talking through the market and the opportunities we see ahead. I'll go into our strategic priorities, where we're focusing our efforts, and how we're leveraging our competitive advantages to seize these opportunities. Let me start with where we see the market heading, because it shapes everything we are building.
Customer experience is a growing market, with more consumers interacting with brands every day. Historically, the number of interactions a consumer could initiate was constrained by time. Personal AI agents fundamentally change that equation. As these agents begin interacting with brands on behalf of consumers, they have the potential to multiply demand for customer engagement at a scale we've never seen before. That makes the digital front door a priority for enterprises today. The enterprises that win will be those that embrace this change, making it easy for consumers and their personal AI agents to engage with their brands. That requires a CXAI platform capable of managing the growing volume and complexity of customer interactions while orchestrating every experience across voice, digital, human, and AI at enterprise scale. This is where NICE leads. We already have the enterprise infrastructure in place to support this next generation of customer experience.
NICE Cognigy today supports A2A and MCP alongside voice and digital channels, so enterprises can expose the same services, knowledge, and system connections to consumers and their personal AI agents. We're also proud to be collaborating with Meta and other industry partners in developing the Personal Agent Protocol, an open standard for how personal agents connect to businesses and their AI agents. By helping define how personal agents engage with brands, we're making sure that every enterprise can meet its customers wherever they choose to show up. Leading this transition starts with a clear view of where value will be created. As enterprises deploy more agents, models, and specialized capability, value shifts to orchestration.
We believe the winners will be those that offer a CXAI platform that runs the full customer experience, connecting every channel, system, model, and worker, both human and AI, with the data and context to orchestrate every interaction intelligently. That's what sets NICE apart. Traditional CCaaS providers and AI-only point solutions each address parts of the customer experience, but neither delivers the complete unified platform that we do. As AI takes on more autonomous work, trust and accountability matter even more. This is where NICE has another unique advantage. We're taking decades of CX experience and a proven track record of operating at enterprise scale to CX AI, where NICE Cognigy provides the governance to define what AI agents can decide, reliability at global scale, and a complete audit trail of every interaction, outcome, and action. The more accountability an enterprise establishes, the more autonomy it safely unlocks.
We're seeing this play out in the market. We're engaging with enterprises that previously selected AI-native point solutions, but are now looking for an end-to-end visibility and control that CXone provides. These competitive advantages give me strong conviction in our ability to capture the significant growth opportunity ahead. In Q3, cloud revenue grew 10.6% or 12.2% excluding an atypical customer credit, which Beth will discuss shortly. Importantly, our organic cloud growth rate, excluding that customer credit, improved slightly from Q2 to Q3. While that's an encouraging sign, I recognize that our cloud growth today is not where it needs to be. There are two primary dynamics at work. First, we've had strong AI bookings this year, but as we discussed last quarter, enterprises are taking a measured approach to AI adoption, particularly given their stringent requirements for security, governance, and scale in mission-critical workflows.
We remain confident in our ability to monetize that demand as adoption scales. Second, we're seeing slower growth in certain cloud revenue streams outside our core CX AI platform, particularly standalone hosted workforce management, network connectivity, and financial crime and compliance. These businesses continue to grow, but at a slower pace than CXone and AI. Importantly, workforce management within the CXone platform continues to perform well, reinforcing its value as a part of our unified suite. We are not standing idly by in the face of these challenges. We have a clear plan to build on the core strengths of our business, investing in the areas where we have the greatest opportunity, and accelerate cloud growth. To do so, we're executing against the following key priorities. First, we're focused on accelerating enterprise AI adoption and monetization. The underlying demand is strong.
AI ARR grew 46% year-over-year and now represents 16% of cloud revenue. Within AI, NICE Cognigy continues to be the key growth driver, with revenue increasing nicely quarter over quarter. As a reminder, virtually all of our AI revenue comes from production deployments rather than pilots. Q3 was Cognigy's strongest quarter of the year for both deal volume and new customers added. AI backlog grew approximately 40% year-over-year, reflecting continued demand even as we lapped the closing of last year's Cognigy acquisition. The opportunity now is to convert more of that demand into revenue. As we discussed last quarter, we put several initiatives in place to help customers move faster from initial deployment to broader adoption. We're increasing scale through partner certifications and delivery capacity, accelerating speed through targeted forward-deployed engineering engagements, and making our products easier to adopt through product-led innovation coming out of NICE Labs.
We're already seeing tangible progress of our initiatives. Since the end of Q2, we have fully staffed our FDE team, and engagements are ramping significantly. Since launching in Q2, NICE Labs have delivered significant product innovation, including real-time voice-to-voice model integration, enabling natural full-duplex conversations, and the ability to use AI coding agents to build Cognigy agents in minutes. With Cognigy penetration still in its early stages across our install base, we see significant growth opportunity ahead. Second, we're doubling down on our unified CX AI platform, building on the strength of CXone, which was recently recognized as a leader in the 2026 Gartner Magic Quadrant for Contact Center as a Service. In Q3, customer interactions increased across all channels, with AI interactions growing faster than voice and digital.
CXone seat count continued to increase, with growth accelerating sequentially, reinforcing our view that human agents will remain critical to customer experience even as AI takes on more interactions. CCaaS win rates strengthened throughout the year, and CXone backlog grew 27% year-over-year, significantly outpacing the total cloud backlog growth of 15%. Our competitive strength is reflected in the commitments we secured this quarter, including from four of the world's largest enterprises, each with annual revenues of approximately $100 billion or more. We closed an eight-digit ACV deal for CXone with a leading global telecommunications provider, a new logo for NICE. One of the largest healthcare organizations in the U.S. signed a seven-digit ACV expansion of Cognigy. A global automotive manufacturer and financial services provider renewed CXone and added a seven-figure commitment to Cognigy. One of the world's largest technology companies signed a seven-digit ACV expansion of CXone.
These wins reflect a common theme. At this scale, customer experience is mission-critical, and enterprises need a single CXAI platform that is proven in production. These customer commitments, together with our recognition by Gartner and Forrester across CCaaS and conversational AI, reinforce the strength of our individual solutions and the competitive advantage of bringing them together on a unified CXAI platform. That is why we are continuing to deepen that advantage. We are making our platform more composable, allowing enterprises to adopt our capabilities individually or as a part of a unified offering. We are also expanding our AI capabilities for regulated industries and advancing our ability to manage and optimize a hybrid human and AI workforce. We are strengthening our go-to-market with dedicated motions to capture these opportunities. Third, we continue to lean into our strategic partner ecosystem. We are expanding our relationship with the world's leading GSIs.
In Q3, GSI-driven ACV grew nearly sevenfold year-over-year. Cognigy practitioner certifications, our highest tier, nearly quadrupled amongst our partners from Q2 to Q3, expanding our capacity to help customers adopt AI faster and demonstrating our partners' growing commitment to Cognigy. Finally, we continue to focus on driving growth in international markets where cloud adoption remains under-penetrated. Cloud migrations, our expanding partner ecosystem, and a growing demand for sovereign cloud deployments are creating multiple durable drivers of growth. AI is also becoming an increasingly important part of our international business, represented the majority of new bookings in the quarter. In Q3, international revenue grew 33% year-over-year. We have also expanded our reach with our first Cognigy wins in Japan, Singapore, and the Philippines, and our first combined CXone and Cognigy deal in China. With GSI engagement continuing to build, we see significant opportunity to extend that growth.
To support our priorities, we are making the business faster, more efficient, and even more customer-centric. By leveraging AI, we are simplifying our organization, reducing management layers, and strengthening our partner-led go-to-market and delivery capabilities. This includes reducing our global workforce by approximately 5%. These are never easy decisions, and we do not take this step lightly. We believe, along with the other steps that we are taking, that this will help us drive greater efficiency across our business while enabling continued investment in the key growth priorities. To close, we are operating in a rapidly evolving market with significant opportunity ahead, and I believe NICE has the platform, strategy, partners, and customer relationships to lead this next phase of CXAI. As I said at the start of the call, core CXAI, our partner ecosystem, and international markets are key growth areas that are delivering strong momentum.
At the same time, we recognize our cloud growth needs to improve, and we are taking decisive action. We are doubling down on the areas of greatest opportunity and advancing our operating model to execute with greater speed and efficiency. These actions, together with the momentum we are seeing across our CXAI platform, give me confidence in our ability to accelerate cloud growth and deliver sustainable long-term value for our shareholders. Before passing it to Beth, I want to comment briefly on our previously announced exploration of alternatives for our non-CX assets. We continue to work with advisors and do not have a further update at this time. With that, I will turn the call over to Beth.
Thank you, Scott. We delivered third-quarter financial results with both total revenue and earnings per share exceeding the high end of our guidance ranges. While we are pleased with our total revenue performance in the quarter, we continue to be focused on driving faster cloud revenue growth. Additionally, we are taking important steps to shorten the time from customer demand to revenue, streamline our operating model, improve efficiency, and position NICE for greater operating leverage. Turning to revenue. Total revenue for the third quarter was $791 million, up 8% year-over-year. The outperformance relative to the guidance was primarily driven by stronger-than-expected product revenue, mostly in our financial crime and compliance segment. Cloud revenue was $623 million, representing 79% of total revenue and increasing 10.6% year-over-year.
In the quarter, we provided a $10 million credit to resolve an atypical customer-related matter, $9 million of which was recorded against non-CXone cloud revenue, with the remainder recorded in services. Excluding it, total revenue would have been up 9% year-over-year, and cloud revenue would have been up 12.2%. The matter is fully resolved. There is no further exposure in future periods, and the customer relationship and their ARR is intact. Additionally, foreign exchange was a negligible impact on cloud revenue growth compared to a 40 basis point tailwind in Q2. Together, the customer credit and lower foreign exchange benefit explain the difference between our reported cloud growth and our expectations at the start of the quarter. Cognigy contributed approximately 170 basis points of inorganic cloud revenue growth in the quarter as we lapped the acquisition in early September.
Looking at the underlying drivers of our cloud business, CXAI ARR reached $392 million, increasing 46% year-over-year and representing 16% of cloud revenue. Excluding the customer credit, cloud net revenue retention was 106%, remaining stable sequentially, reflecting healthy retention and expansion across our customer base. NRR is even stronger among our largest enterprise customers, supported by deeper adoption and broader use of our CXAI platform. Turning to our premise-based revenue streams, services revenue was $129 million, representing approximately 16% of total revenue, and decreased 7% year-over-year, reflecting the continued migration of customers from on-premise deployments to cloud. Product revenue was $39 million, representing approximately 5% of total revenue, and increased 30% year-over-year, primarily driven by strong growth in financial crime and compliance.
Turning to our business segments, customer engagement revenue totaled $656 million, representing 83% of total revenue, and increased 7% year-over-year. Growth was driven primarily by the strength of our CXAI offerings. Financial crime and compliance revenue totaled $135 million, representing 17% of total revenue, and increased 13% year-over-year, reflecting the high value of our on-premise product and services offerings, and customers' continued commitment to renew and invest in our products, even as some FCC customers are taking longer to make the transition to cloud. Turning to our geographic performance, the Americas region, which represented 81% of total revenue, grew 3% year-over-year. Growth was driven by cloud revenue and higher product revenue, partially offset by the expected decline in services revenue and the aforementioned customer credit.
International continued to be an important growth driver during the quarter, representing 19% of total revenue, growing 33% year-over-year, driven by 45% growth in EMEA. International cloud revenue increased an impressive 50% year-over-year on a constant currency basis, reflecting strong cloud momentum and the continued success of our global go-to-market and partner ecosystem. Importantly, several of the large enterprise wins we've secured internationally remain in the early stages of their revenue ramp, with some already live and scaling, and others still progressing toward deployment. Turning to profitability, gross margin for the quarter was 66.5%, and excluding the customer credit, total gross margin would have been at 67%. Operating income was $214 million, resulting in a strong operating margin of 27%.
We now expect to finish the year slightly above the high end of our 25%-26% operating margin range, while continuing to invest in AI innovation, go-to-market initiatives, and our partner ecosystem. Earnings per share for the third quarter were $2.84, coming in above the high end of our guidance range as a result of outperformance in both total revenue and operating margin. Turning to cash flow, operating cash flow for the quarter was $98 million, and free cash flow totaled $69 million. Free cash flow in the quarter was impacted by a combination of cash items, including acquisition and divestiture-related expenses, advisory-related fees, timing-related impact on collections, and an office closure. We remain focused on improving cash generation through the transformation actions we are taking and greater operational efficiency.
We ended the quarter with $351 million in cash and short-term investments and no debt on our balance sheet. Turning to capital allocation, we repurchased $72 million of our shares during the third quarter. Shares outstanding at the end of September were approximately 57.5 million shares, a decline of 6% year-over-year. Year to date, we have executed $383 million of share repurchases, representing 6% of our market capitalization, an increase of approximately 18% on a year-to-date basis, reflecting our continued commitment to returning capital to shareholders. Before turning to our outlook, I want to provide some financial context on the operational plan Scott discussed. As we look beyond 2026, we are taking additional steps to accelerate execution across the company, drive a faster operating rhythm that shortens the time from customer demand to value, and to deliver incremental operating leverage.
As part of this initiative, we are reducing our global workforce by approximately 5%. As we expand our use of AI technologies and make adjustments in slower-growing areas of our business, these efficiencies will be concentrated primarily in product development, as well as go-to-market, customer support, and services. We are streamlining these functions to support a more customer-centric approach while increasingly leveraging GSIs and other partners to deploy our platform. As a result, we expect to record restructuring charges of approximately $15 million-$20 million, primarily in Q4 2026, which will be excluded from our non-GAAP results. As Scott mentioned, these actions will drive greater efficiency across our business, supporting additional investment in key strategic growth areas. These actions also give us greater confidence in our ability to achieve our 2028 operating margin target. Our updated 2026 outlook includes the expected near-term impact of these savings. Turning to guidance.
For the full year 2026, we are reiterating our total revenue guidance and raising our EPS guidance. Full year 2026 revenue is expected to be in the range of $3.17 billion-$3.19 billion. This represents growth of 8% at the midpoint. We are updating our full year 2026 cloud revenue growth to be approximately 12%, excluding the impact of the customer credit discussed earlier. Let me elaborate on the factors impacting our outlook, and importantly, distinguish those dynamics from the underlying healthy performance of our core CXone platform. First, our growing mix of large enterprise customers is resulting in more gradual AI revenue ramps and lower demand for network connectivity services. Second, standalone workforce management cloud revenue is still growing, but at a slower pace as demand increasingly shifts toward broader CXone platform deployments, where workforce management continues to perform well.
Our focus is on cross-selling the broader CXone platform to these customers, where we see greater long-term growth opportunity. Third, financial crime and compliance cloud migrations are progressing more slowly than anticipated, with some customers electing to renew their on-premise deployments with Actimize, as evidenced by our strong product growth this year. Lastly, so far in Q4, we've seen less of a typical seasonal uplift in cloud revenue than we experienced last year. Despite these challenges, the underlying fundamentals of our core CXone platform remain healthy. CXone revenue growth, excluding network connectivity, has outpaced our overall cloud revenue growth each quarter this year. Additionally, CXone backlog is growing in the mid to high 20% range, well ahead of our overall cloud backlog growth of 15%. These trends reinforce the healthy underlying demand we continue to see for our core CXAI platform.
Full year fully diluted earnings per share are now expected to be in the range of $11.12-$11.32. We are updating our full year 2026 free cash flow margin outlook to be in a range of approximately 10%-12% on a reported basis, or approximately 12%-14%, excluding non-recurring items related to acquisition, divestiture, and restructuring. This revised outlook reflects the additional non-recurring items listed above, increased investments in our partner ecosystem, and higher-than-expected cash tax payments. As we look ahead, our priorities remain clear: execute against the opportunity in CXAI, continue investing in our areas of greatest growth potential, and operate with increasing efficiency and discipline. We believe the actions we outline today strengthen our foundation for long-term growth and value creation. With that, I'll turn the call back to the operator for questions. Operator?
At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We kindly ask that you limit your questions to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Arjun Bhatia with William Blair & Company. Your line is open.
Perfect. Thank you very much for taking my questions. Scott, I wanted to maybe start with the personal agents. I know you talked about this a little bit in your opening remarks, but I am curious how you just think the rise of Muse and Instinct and whatever else is to come in the future, how that impacts the CX space. It seems like we are sort of due for a volume explosion of customers reaching out to brands, maybe vice versa also. But how does that impact NICE, and how do you help your customers sort of manage that increase in volume and interactions that is likely to come here?
Thanks for the question, Arjun, and you are right. I think the impact is a seismic one. The best way I can describe it is when you put it in a simple context, today, companies of all sizes, I just described it, they are deploying autonomous AI agents to do work for them. They are doing the work in the CX space, but they are doing work in all sorts of parts of the enterprise. So why wouldn't customers do the same thing? The reality is they will. Customers will use agents to perform work for them, just like enterprises will. Yes, we are in the very early stages, but we are already seeing it begin to take shape. Interactions on our platform are continuing to grow across all interactions, all channels, with AI interactions growing fastest. But what is really encouraging for me is a couple of things.
First, enterprises see this shift coming, and they are coming to NICE. They are coming to us for guidance on how to prepare. They want to make sure that their digital front door is ready to engage with these personal agents. They don't want to get caught short, because ultimately, behind that agent is their customer. That is why our work with Meta and others on the Personal Agent Protocol, how to define these agents and how they are going to work with businesses, is important. I think there was a Gartner survey that was done recently that they surveyed 5,000 consumers, and more than half said that they would use an AI assistant to handle customer service interactions on their behalf.
While it is early, I firmly believe personal AI agents will become an important new channel for customer experience, and enterprises need to handle the demand, the volume, the scale, the security, the auditability, the interaction complexity, the interoperability with the human when the agent cannot get the job done, to give great customer experience. It is an exciting outlook for us because that reinforces the need for a CXAI platform.
Wonderful. That is helpful, Tyler. Thank you. Beth, I had one for you. Just on some of the headwinds in cloud revenue growth that you called out that are coming from non-core CX areas, can you just help us quantify how big of an impact that is having on cloud growth? Then, as we are looking over the next couple quarters and into 2027, are these headwinds, do you expect them to persist, or is there any way to alleviate some of the pressures that you are seeing on the non-core side?
Yeah. Thank you for the question. Let me start by talking about the headwinds related to the non-core CX areas. I would start by highlighting that on the Q2 call, I actually referenced that we were seeing some slowness in terms of some of the anticipation coming into the year around the cloud migrations we expected versus what we have experienced. What we have experienced, and you see in the product revenue, is great strength that we have delivered, and it evidences our customer base, particularly in FCC, recognizing the strength of that business, continuing to buy our on-premise products. It is a really healthy trend, yet different than what was our anticipation.
As we step into next year, I think that we will continue to see a bit of a mix in terms of the customers, really around a timing difference of when they will continue to purchase our on-premise products, which has been very strong, as you see in the revenue, relative to the cloud migrations. When you think about the other challenges that we have highlighted today on the call, a number of them, I think the standalone hosted workforce engagement, as well as the pace of AI adoption, which I called out last quarter as well. Certainly, I will take the hosted workforce engagement first. I think we do see that we have continued growth there, and really what we are seeing is working well is WEM that is embedded within the CXone platform, and that is going quite well.
But we do expect to see that the standalone hosted offerings will continue to wind down over time. When we talk about the AI adoption, while the ramp was a bit slower than we originally anticipated, that is really where we have the greatest opportunity looking forward. We are still in very early stages of ramping with several very large enterprise customers. We also have customers that are still in the backlog in AI that have not yet gone into revenue, and we highlighted that Q3 was really the strongest quarter we have seen in terms of Cognigy bookings this year. So all of that is coming in the future in terms of the AI ramp.
Then finally, I think the last comment that I would make there is, as I reflected in my remarks as well, it is important to highlight that when you look at the core of where we are focused as a company, which is our CXAI platform, each and every quarter this year, our overall cloud growth for the CXAI platform was growing greater than our overall cloud revenue growth.
Yeah, and maybe if I can just add one comment in addition to what Beth described. I remain confident that we will accelerate cloud growth in 2027 and in 2028. We are operating in a growing market, as I mentioned before. Our CXAI platform is performing strongly. We have got a differentiation. So whilst these dynamics have been created a little bit of uncertainty about the slope and the trajectory, the acceleration is clear. I guess the last thing that I would say is, the market has reinforced our leadership position with CXAI, just when you look at the cloud backlog growth. If you look at CXone backlog growth, it grew 27% year-over-year in Q3. So we know that we have got the asset, the products, and the durability to be able to win in the area that is the most important to our company.
Your next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.
Great. Thank you so much for the question. Just as you streamlined the organization, can you put a finer point on how you are balancing the opportunity to improve margins with the need to invest in the AI innovation? Clearly, there is more going on in the go-to-market around FDEs and customer deployment capabilities. Should we think about the RIF as primarily a source of incremental margin expansion, or as a way to fund investment in the higher growth areas of the business? Any context for how we should think about the trajectory into 2027? Thank you.
Yeah. Thank you for the question. First, I would say that the workforce change that we announced today is predominantly focused around having greater customer centricity, and also having a leaner organization to be able to drive the operating rhythm faster, to make approvals faster, just generally to increase our speed internally. When you think about the margins, what I would highlight is we have been very pleased with our operating margin performance this year. I announced earlier that we expect to actually come in above the range for the full year in terms of the expectation for operating margin. In the third quarter, we delivered a 27% operating margin on a non-GAAP basis. I think you are already seeing that we are managing the cost profile well. However, at the same time, we will continue to look to invest in the business.
I think what you have seen, the combination of what we are already doing in terms of how we are managing the business from a cost structure, as well as the opportunity from this reduction in ongoing efficiencies will drive, give us really strong confidence that we are well on track to deliver to the operating margin that we discussed of 27% in 2028. You can see that we are already on track for that. As we go into the fourth quarter earnings announcement next quarter, we will give you a little more color specifically on what the balance is between the reinvestment relative to the workforce change that we made and announced earlier today. But certainly, we expect margins to continue to be on track and better looking ahead.
Great follow-up. If we clearly hear the remarks on cloud growth expected to accelerate in FY 2027 and FY 2028, as we just think about the linearity into next year, should we expect cloud growth to improve progressively as these AI deployments ramp, or is there an acceleration that is more dependent on specific enterprise implementations going live? I believe there was a reference for Q4 seeing less than the typical seasonal uplift in cloud revenue. Just how should we think about that Q4 run rate impacting the FY 2027 trajectory?
Yeah. Thank you. Let me take them in two parts. First, I want to talk about the linearity for 2027. As we've highlighted today, we have seen some challenges in the business in some of these slower-growing areas. We're in the process, obviously, of closing out the year-end as well as our annual budget process, so we're not really prepared to speak to any kind of linearity in terms of expectations for cloud growth next year. Of course, we'll address that as we come into the next quarter. With respect to Q4 specifically, I think a few things that I would call out there is first, as the implied cloud revenue growth in the fourth quarter occurs, of course, this is a first quarter where we no longer have that inorganic contribution from Cognigy.
As you've seen throughout the course of this year, I think we've been pretty much right as expected in terms of the contribution we received, the inorganic contribution from Cognigy. But of course, we're now lapping that one-year anniversary, which happened towards the end of September. So we are now going to be all organic in the fourth quarter. I think the other important highlights that I would make is really the, more importantly, is the tough comp that we had coming out of last year. Last year, we had a nice tailwind on foreign exchange. That was about a 50 basis point tailwind in our fourth quarter of 2025 that we were able to include in our growth there, as well as we had some pretty strong seasonality and an uptick in seasonality.
Both of those things were what we saw and experienced in the fourth quarter of 2025. As of today, we do not see that same seasonal uptick yet currently in what we've seen quarter to date. We are not factoring that into our fourth quarter as well. It's a combination of those factors as we kind of refine the fourth quarter expectation.
Your next question comes from the line of Samad Samana with Jefferies. Your line is open.
Hi. Good morning, and thank you for taking my questions. I guess first, to maybe kind of continue the conversation around the cloud revenue guidance. It's whipsawed around for most of 2026. I guess, help us understand, did you take a more conservative approach to 4Q? Have you further de-risked the guidance? I mean, it's still a fairly strong sequential uptick required to hit the full year guide that's implied in the fourth quarter. Maybe help us unpack just, did you take some variables down to the studs? I have a follow-up question as well.
Yeah. Thank you for the question. Look, I think first, I'd like to actually use this as an opportunity to talk about what we've seen throughout the course of this year. First, I would highlight that if you look at our year-to-date cloud growth overall, we've had a 12.6% growth. So, solid performance, and very much pleased with that performance. We'd like to have obviously seen it higher, but 12.6%, I think we feel is quite solid. If you break that out now and look at the organic piece of that, as I said, I think the Cognigy contribution to that has been pretty much aligned with our expectation this year. So if you remove that, the organic growth has been at 10.2% on a year-to-date basis. So both the cloud growth, both organically and inorganically, we've seen has remained solid in the teens.
I think as we look at the fourth quarter, I provided the reasons really that we're taking into consideration not seeing that seasonal uplift that we saw last year, as well as not having that foreign exchange tailwind that we experienced last year. That is not to anticipate it.
Scott, maybe as a follow-up, like a big-picture question. Appreciate that there's a lot of transition going on inside of the business, but I guess help me reconcile the explosive growth that we're seeing at whether some of these AI-native startups and/or the labs versus the experience where maybe enterprises are deploying AI a bit more slowly with you guys. Is that because of the nature of the function itself? Is that something to do with wanting to try new toys maybe versus with existing vendors? Just help me reconcile those two elements that are happening at the same time, because I think that's also I think we would have expected more of an acceleration in AI adoption more broadly, and even some of the bookings data slowed down a little bit this quarter. Any color would be helpful. Thank you so much.
Yeah. No problem, Samad. I guess there's a couple of things. It's been a really interesting dynamic throughout the year on how customers are acquiring and purchasing AI. I think you can see the evolution of the market. In the first half, we saw a huge influx of proofs of concept, pilots, customers trialing, and they're in discovery mode. They're trying to figure out what's the capability, how easy it is to deploy agents, what operational complexity that it brings. What's been interesting is a lot of those deployments are quite standalone in nature. They handle simple use cases, and you can do that, and we've seen that in Cognigy. It's been very strong to be able to deploy that. What we're now seeing increasingly, and it's partly, Samad, because we continue to operate at the top end of the market.
We continue to deal with the world's largest organizations. They are much more worried about scale. Can those agents handle thousands concurrently? Can it do the authentication? Can it have the security? Does it have the audit trails? Does it have the operational rigor to be able to do handoffs with their contact centers that are operating at huge scales, tens of thousands of people? So, when you put it in that context and you're trying to then deploy it in a multifaceted, multi-channel, and you're trying to get consistency across your customer experience, we see it more and more coming to the platform.
I think what you'll see, and this isn't just a comment about NICE, but is what you'll see where companies will look to use their existing assets of like CXone, that now has an embedded AI capability that is able to handle that mission criticality, and that they will then look to that as their primary platform of choice. We're already seeing it. To give you an example, we had a multinational hospitality company that came back. They had an AI point solution, and now they've come back and said, All right, we've tested the concept. We know it works. We know what we can do. Now they've come back to NICE and they've said, We need greater control and ability of the AI agent performance in the context of its broader contact center. We're going to see that more and more.
Last but not least, I do need just to call this out. I can't comment on any of these AI players, but what I will say is this. Our AI revenue is production only. It doesn't include services, it doesn't include the deployments, it doesn't include pilots, it doesn't include POCs. So when you think about the AI revenue that we are sharing, it is only when it is operating in production for these customers, not all the work that leads up to it. I think you'll find that's a pretty big distinction.
Your next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.
Great. Thanks. This is Chad Tiviba here for Siti. I just wanted to ask about the heavier investments that you've made this year in sales and marketing and R&D to enable the forward cloud revenue growth acceleration. Wondering if you could give us an update on those investment pillars and what you're seeing today that provide confidence in the acceleration. Secondly, just a clarification around the headcount reduction. Is it fair to assume that those are confined to the non-core areas? Thanks.
Okay, so I'll answer the first part and then I'll hand to Beth for any additional context on the financial numbers. The investments that we've made, they're already bearing fruit. As I've mentioned in my opening comments, the best example is we've made a pretty significant shift in our go-to-market around use of forward-deployed engineers, use of NICE Labs, and the rollout of our partner ecosystem, and the certifications, the expansion of partner capability. So, those investments have now allowed us to have an increased capacity that allows customers to be able to deploy and adopt in a much more faster, agile, and not resource-constrained way. So we're not seeing the fruits of that labor yet, but I'm very confident.
One of the reasons why I'm indicating I've got cloud growth acceleration confidence is because when you think about the backlog and the great bookings performance that we've had over the past 12 months plus, we've now got to be able to turn that into the revenue and the revenue acceleration. This is about converting rather than trying to win it in the first place. The second comment that I would make is, the go-to-market needs to be agile. One of the things we've learnt, and it's back to Samad's question a bit as well, the go-to-market needs to adapt to different buying behaviors. I was with a customer, a major customer of ours two days ago, and we were just talking about their demand of what they expected from an AI agent three months ago versus today.
They are already with Cognigy, they are already leveraging our platform, but now they have got a much higher standard of requirement in terms of the deployment requirements than maybe what they did when they were in discovery phase. Our go-to-market needs to cater for different organizational maturity, those in highly regulated industries versus others, those that have got high customer service. And now with the advent of personal AI agents, the customer's decision about how they are going to deal with that has huge implications on the way that we prioritize which flows will happen with the AI agents and what will be handled by their contact center. All of this means that our go-to-market needs the agility. I think when it comes to the workforce side, I think we made the comment that, yes, clearly, we looked at the slower growing areas and used that to get operational efficiency.
This also includes areas where, for example, in research and development, our team are leveraging AI tools to increase productivity materially, together with, as Beth rightly mentioned, simplicity in our organization, removing layers of management and span of control to give us much more agility in operating across all of our business.
Your next question comes from the line of Rishi Jaluria with RBC. Your line is open.
Oh, wonderful. Thanks. This is Rishi Jaluria, by the way. Maybe two questions. First, in light of the cloud guide coming down again, and look, I understand kind of the moving pieces here, I want to rewind the clock back to the analyst day, I think a year ago, if my timelines are correct, when you talked about accelerating cloud growth being driven by Cognigy, being driven by AI, and kind of the core. Can you maybe walk us through what is your level of confidence in that re-acceleration? What are kind of the building blocks to get there? How should we be thinking about timeline? And then I have got a quick follow-up.
Yeah, sure. Thanks, Rishi. I remember the analyst day very well, and I sit here today with the same confidence about acceleration. We are in a great market. I think it is very clear, we are not satisfied with where we are at on the cloud growth today. We are not satisfied. There is no doubt that we can do more, we can do better. The good news is, the things that we invested in, if you remember that day, I talked about AI acceleration with Cognigy. It is on track. AI, Cognigy is delivering what we are expecting, performing really well. I talked about international markets. You have seen the growth of international markets sequentially for us and being a durable growth driver. I talked about the partner ecosystem. Now it is a force enabler and a multiplier for us.
I talked about the core CX platform and migrate and putting it onto the core and winning out the CCaaS with the CCaaS CX AI platform, growing cloud backlog at 27%, really strong. The things that we focused, the things that are delivering durable growth, the things that are where the market has demand, I feel with the same level of conviction. What I would say is, clearly, as the year has progressed, with all of the things that we have talked about on today's call, some of the challenges that we talked about, the AI adoption curve, the slope and the trajectory of that re-acceleration, we are obviously revisiting and we are looking at, and we will provide a further update in our 2027, but I want to reiterate, confidence on 2027 and 2028 cloud acceleration, because we have got the capability in the market to do that.
Yep. Okay, got it. That is helpful. Then maybe just going back to the topic of personal agents. Look, I think we have all seen the kind of viral growth of Muse, Instinct, now Dots. I am sure there is more to come and the proliferation will only grow from here. Maybe can you just help us understand mechanically, how would that impact your business in terms of revenue, in terms of kind of mix, in terms of model? Just want to maybe fully clarify that. There has been a lot of investor debate about exactly mechanically how that would play out. So, if in fact that kind of thesis plays out, we will see more personal agents, especially leveraging voice as a channel. Maybe just help us understand both within the core and Cognigy mechanically how that would work out. Thanks.
Yeah, it is a great question, and it is a topic that is top of mind for every one of our customers. Just back on the prior question, I should have mentioned before, whilst we are not satisfied with our cloud growth, our total revenue has been strong and we have been delivering to what we had indicated both last year and at the beginning of this year. So, whilst we will definitely deliver, we think we can do better on the cloud, I am being really pleased with how the company has been able to manage that changing mix and being able to deliver strong operating margin performance as well. But back to your question. So, there is a few ways that you can view this. First and foremost, and the dimensions that we look at are the following. One is, what does it do for total interactions?
And as you could probably expect, the total interaction volume in the market has been relatively stable, slightly growing year-on-year. Historically, it's been more about how much you can capture of that. Our expectation, and it's based on our customer feedback, is interaction volumes will accelerate. It's the same as what enterprises are doing. Enterprises are using agents to do work. Personal agents for each of us as consumers will do the work on our behalf, and that means that the constraint of time is no longer there. They don't have a time constraint, and I think anybody who's been interacting with any of these platforms, it's going to become commonplace. That means that the agents will be interacting with service channels, customer experience platforms, with a higher volume of interactions than what we'd historically seen. It's not just displacing work, it's increasing work.
The second is then consumer behavior, where you've got consumers will not, because they don't have the constraint in time, try to model that. I was talking to hospitality, travel, and transport companies, and they're trying to figure out, well, how many times is a consumer going to interact through their agent, through Muse or Dots or whatever they're using, to discover, to change flights, to upgrade, to ask for credits? They've got no constraints, so you can do more and more volume. And so, one of the things enterprises are thinking about is how do they handle that? Last but not least is, what does that mean for us? Well, this is one of the advantages of having a world-class AI platform, because we monetize based on interactions. Now, we have offered our customers outcome-based pricing. We'll deliver a containment rate or a resolution and a solution.
That allows us to monetize that volume. And I would just highlight that historically, seat-based revenue is fantastic because it's predictable, but the more efficient the agent is, we don't necessarily get to monetize that volume. With the AI agents having to be AI agents that the enterprise need to absorb that volume, for the most part, we're able to monetize that by interaction. So, it is my expectation that we're going to have really good conversations with our customers about how do they manage an economically viable way for them to handle high volumes, use of agents, great customer experiences, which involves human and AI, and do it in a way that delivers real value for them. And that is one of the reasons why we have confidence in our long-term cloud growth outlook, because it'll be driven based on that AI volume interactions increasing materially.
And Scott, I would just add to that, I think that you highlighted, but it's important to note that our pricing model today already allows for that. So there's nothing that's required for us to reach to the customer. That happens naturally, and we're already prepared as a natural part of our business to embrace that additional growth that we expect to see.
Your next question comes from the line of James Fish with Piper. Your line is open.
Hey, guys. Thanks for sneaking me in here. Going back to kind of the slower growth buckets, especially as a large value proposition for NICE has been around one platform offering workforce engagement and contact center together. Can you just unpack for us, are we fully penetrated on workforce engagement and migrations, or why is that former core seeing such a slowdown as that had been a big value proposition for you guys? As my follow-up, Beth, on gross margin, you guys called out, like, excluding the credit, it would be 67%, but that still would have been a little bit light of what we've been seeing and what all of us were estimating. Are we still having to discount on some of these larger renewals, or how to think about that as we finish out the year? Thanks.
Yeah, great question, Jim. I'll handle the first one, and then I'll hand it over to Beth for the second. I'm glad you asked it because it is important to provide the clarity. On workforce management, included in CXone as that unified platform, it's actually performing really well. I expect that to continue. Enterprises are increasingly managing that hybrid human-AI workforce, and CXone with Cognigy embedded is the platform that allows us to do that. Where we're seeing the slower growth and what we've called out is when it's on a standalone cloud workforce management. It's selling to enterprises that do not have CXone. The growth of that business has changed. It's healthy. It's still growing, and it's got great customer references, but it's growing at a slower rate.
We're obviously trying to help support our customers managing the transition onto the unified platform because we know that where that is to go. For the customers that want to stand alone, we still try to then be able to convince them to take the full CCaaS, but that's the reason why it's only a slower growth on a purely standalone basis rather than the unified platform. Our unified strategy is on song and continues to perform well. Beth, on the second question.
Yeah, sure. Thanks for the question, Jim. I think with respect to cloud gross margin, first I will highlight it is completely unrelated to any kind of renewal event. Really, there are two things that are driving the cloud cost to revenue that you are seeing in the quarter. The first is really the hosting and infrastructure costs that are related to these large enterprise and Cognigy deployments we have talked about. We are incurring a lot of those costs and loading the cost prior to getting the fully ramped revenue. So as they become live and get to where we expect as a typical run rate and continue to expand through more use case adoptions, we will see that growth in terms of the profitability and a positive uptick into the gross margin. So that is the first. The second is, we have talked about some of the partners we are using as well this year.
I think we are using some of those as well. Some of that is also impacting into the margin. But really, the greatest impact is the AI that I talked about. I think as we reach scale, of course, we expect to see those stabilize and continue to expand in the future, both from the AI expanded adoption, but as well as a lot of the internal efficiency initiatives that we are driving as well.
Your next question comes from the line of Patrick Walravens with Citizens. Your line is open.
Oh, great. Thank you. Scott, Beth, can we talk a little bit more about the $10 million credit to resolve an atypical customer-related matter? I mean, obviously, you cannot tell us who it is, but just can you talk a little bit about what happened there so investors can develop their own confidence that it is really atypical?
Yeah, listen, I think what's important is to talk about what it's not. It was not a pricing discount.
Okay.
It was not anything tied to a renewal event. It was really an internal matter related to a customer, as I said, one large, longstanding customer, unique situation. I think from our standpoint, what's important to highlight is that it's fully resolved. We don't have any exposure in future periods. The customer relationship is unimpacted. Their ARR is intact.
Okay. Have you ever had something that big before?
We have not, which is why we-
Never seen a credit that big?
Yeah, we have not, which is why we have specifically referred to it as atypical. It is not something that we have seen.
Okay, thank you.
Your final question comes from the line of Clark Wright with D.A. Davidson & Company. Your line is open.
Hi there. I think it was a notable highlight that you guys provided around the CXone seat count growth accelerating sequentially. Could you maybe just explain what you're seeing on the customer side around seats specifically and how that's changed since the beginning of the year?
Yeah. It's really important because it forms part of the reason, as I said at the beginning of the call, Clark, around our outlook and what we see in the market conditions. We continue to win large enterprise, net new big wins, and expansion of our existing customers that have got a strategy of saying one of the reasons why they differentiate their experience with their customers is the quality and capability of the people that they've got engaging. And using AI in augmentation as well as in automation is a key part of their strategy. So they look at it very much in a combination rather than a replacement. I think they're also anticipating, and so the numbers don't lie. It is sequential growth, and it's sequentially growing on the back of the strength of our CXAI.
Core CXone continues to grow, more customers coming on board, their seat counts continuing to rise, and they're investing with AI at the same time with Cognigy, which means it's already acknowledging what they think the workloads will be with Cognigy in the AI piece, but they're continuing to expand the number of seats that sit on the platform. I think it's important also to acknowledge that over time, we have also always indicated that at some point, we do believe seat growth may, as a market, moderate, and I think we've all been projecting that for a period of time. But for me, our company is very confident of our outlook because if we continue to win, our win rates remain strong, we're able to win more of these customers onto the platform, and we're able to use the AI workloads, we get the best of both worlds.
We're able to then manage increased seat count on NICE, but also manage high workloads with the AI, and we expect that trend to continue.
Got it. Thank you for that. If we think about cloud NRR, that's held in the last few quarters around 106. As we think about the growth formula going forward, should we think about 106 as being a stable ground or at least a trough before we see the acceleration going forward?
Look, we don't typically guide forward on NRR, but I think the stability you've seen is something that we would anticipate looking forward ahead. I think we've highlighted some of the challenging areas, but yet CXone platform continues to be of a larger and larger portion of the overall install base and the renewal base. Of course, that's very healthy and outpacing from a cloud growth on CXone relative to the overall cloud.
That concludes our question and answer session. I will now turn the call back to Scott Russell for closing remarks.
Yeah, thank you, operator. I appreciate the questions today and the opportunity to share our Q3 results. I think what you've heard is a very clear view. We're a strong company. We're in a great position with our CXAI platform. We feel confident about our outlook, but we're also not satisfied with the cloud growth. We very much understand that our total revenue performance, our operating margin, and the way that we're managing the mix shift as we go through the business continues to be dynamic, and we're managing it very well. Our outlook over the long term continues to be one that is not only optimistic, but it's also backed by great products, great people, great customers, and a great business. I appreciate the time today.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.