Nice Is Poised to Capture the Enterprise Market in Contact Center Software as a Service

After a fresh look at Nice NICE, we’re raising our fair value estimate to $280 from $265 due to slightly better growth expectations as we are optimistic that Nice will capture a meaningful portion of the nascent enterprise market for contact center software as a service, or CCaaS. We’re maintaining our narrow economic moat rating but amending our moat trend rating to stable from positive as we don’t think network effects are material at this stage given lack of monetization. Our growth forecast is slightly above the FactSet consensus. Consequently, the shares look undervalued at current levels with a 4-star rating.

Nice organizes itself into two segments. In customer engagement (80% of sales), the company develops software for contact centers that primarily orchestrates omnichannel customer interactions and manages the customer service agent workforce. In financial crime and compliance, or FC&C, (20% of sales), Nice’s software solutions are focused on helping financial institutions with risk management, mainly fraud prevention, anti-money laundering, and compliance.

Nice has a narrow moat based on switching costs in both its segments. We expect Nice’s ROIC to rise to around 20% as scale benefits accrue with its transition to a full cloud-based software company. We think switching costs are primarily driven by the mission-critical nature of the customer service function for businesses. Companies rarely reduce spending in this area, even during cyclical downturns, and are very hesitant to disrupt business processes around the contact center given the tangible risk of customer loss from unsatisfactory service. Similarly, we also think fraud-detection and compliance are mission critical for financial institutions. Indeed, switching costs are likely stronger in the FC&C business given the legal and regulatory obligations, which are supported by higher segment margins compared with customer engagement.