“We are still in the early stages”: Nice defends AI strategy as investors grow cautious
CEO Scott Russell says customer adoption of AI is accelerating, but the company faces pressure from slowing growth and the costly transition to new platforms.
At first glance, the financial results published on Wednesday by Israeli software company Nice for the second quarter appear strong. However, beneath the headline numbers, investors identified several warning signs, sending the stock down 3.8% in trading in New York, following a 5.8% decline on the Tel Aviv Stock Exchange. The drop extends Nice’s annual decline to 37%, as the AI revolution reshapes the customer service software market where the company has long been a leader.
Nice is facing pressure from two directions. On one side, technology giants such as Microsoft and a growing number of AI companies are entering the customer service automation market. On the other, customers are increasingly considering smaller, cheaper AI-based solutions offered by startups.
To respond to the challenge, Nice acquired German startup Cognigy about a year ago for $1 billion, integrating conversational AI capabilities into its customer relationship management platform and enabling automated bots to handle customer calls without human operators.
By the end of June, Nice’s AI business had reached an annual revenue run rate of $362 million, accounting for 15% of the company’s business. However, the pace of growth disappointed investors: AI revenue increased only 5% compared with the previous quarter.
Another source of concern was a slowdown in cloud growth, which had been Nice’s main growth engine in recent years. While cloud revenue increased 12% year over year, the pace was only slightly higher than the previous quarter, raising questions about whether the company can maintain its previous growth trajectory.
Despite these challenges, Nice exceeded revenue expectations, reporting quarterly revenue of $782 million, an 8% increase compared with the previous year. However, much of the growth came from its financial crime prevention division, Actimize, which the company has been attempting to position as a separate asset.
Nice CEO Scott Russell is reportedly targeting a valuation of $2.5 billion for the company’s non-core business. Another key element of his strategy since taking over leadership roughly a year and a half ago has been expanding beyond the U.S., where Nice remains heavily concentrated.
Currently, 82% of Nice’s revenue comes from the U.S., but growth in the region was limited to just 5% in the second quarter. By comparison, revenue from Europe, the Middle East and Africa (EMEA) jumped 30%, although from a much smaller base of around $100 million per quarter. Revenue in the Asia-Pacific region totaled $42 million, highlighting significant room for international expansion.
The company also announced its largest contract in history during the quarter: a $670 million, eight-year agreement, alongside two IT services companies, to provide software for the U.K. Tax Authority’s call centers.
However, the most concerning trend in the report was the deterioration in profitability.
Nice’s gross margin declined to 64% of revenue, compared with 66.8% in the same quarter last year, contributing to a decline in operating profit to $104 million. Adjusted operating margin fell to 25%, compared with 30% a year earlier.
Net income totaled $83 million, a decline of more than 50% from the same period last year. Excluding one-time and accounting items, adjusted net income reached $160 million, compared with $190 million in the corresponding quarter. Earnings per share came in at $2.70, at the high end of the company’s guidance range, although the figure was supported by continued share repurchases.
Nice attributed the margin pressure to an aggressive pricing strategy for new and renewed contracts as it attempts to accelerate customers’ migration to AI-powered platforms.
For Nice, 2026 is expected to be a year of investment, including completing the integration of Cognigy, expanding its AI capabilities and accelerating geographic growth. The company expects profitability to recover next year and reiterated its long-term target of reaching $3.5 billion in revenue by 2028.
For the third quarter, Nice issued conservative guidance, forecasting revenue of $780 million-$790 million and earnings per share of $2.73-$2.83. The company maintained its full-year outlook of $3.2 billion in revenue and adjusted earnings per share of $11.06-$11.26.
Russell said the company expects contract activity to accelerate in the second half of the year, eventually translating into faster growth.
"We are still in the early stages of a much broader AI adoption cycle across our customer base," Russell said.
