Coveo Solutions Inc.

Good afternoon, my name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the CAVEO third quarter 2023 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the two. Thank you. Mr. Moon, you may begin your conference.

Good afternoon and thank you for joining us today. With me on the call are Louis Taitou, Chairman and Chief Executive Officer of Coveo, and Jean Laviguerre, Chief Financial Officer. Before we get started, I would like to note that certain statements made during this conference are forward-looking statements within the meaning of applicable securities laws, including those regarding our future plans, objectives, growth, and expected performance, including our outlook for the fourth quarter in fiscal year 2023. These forward-looking statements are given only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake or expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise. Further information on these and other factors that could affect the company's financial results is included in filings we make with Canadian securities regulators, including under the section titled Risk Factors in the company's most recently filed annual information form, which is available under our CDAR profile at www.cdar.com. Additionally, some of the financial measures and ratios discussed on this call are either non-IFRS measures and ratios or operating metrics used in our industry. A discussion on why we use these financial measures and ratios and operating metrics and, where applicable, the reconciliation schedule showing IFRS versus non-IFRS results are currently available in our press release and our MDMA issue today, which may both be found on our Investor Relations website at ir.cobeo.com and our CDAR profile. Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars. Lastly, slides accompanying this conference call are available for viewing and accessible on our IR website under the News and Events section. I will now turn the call over to Louis to begin. Louis?

Thank you, Paul, and thank you all for joining us today. I am pleased to report that Coveo once again delivered solid results that exceeded the top end of our quarterly guidance for both SAS subscription revenue and total revenue. We also continued to demonstrate an accelerated path to profitability by beating our guidance for adjusted operating loss. For the third quarter ended December 31st, we delivered year-over-year SAS subscription revenue growth of 25%, and total revenue growth of 23%. Our net expansion rate for the quarter was 107% and within our target range of between 105 to 115%. The decline compared to the prior quarter was principally related to anticipated customer churn following the Qubit acquisition. Customer retention rates remained very high and together with the good visibility we have on cross-sell and up-sell opportunities within our existing customer base, we expect NER to gradually improve in subsequent quarters while remaining within our target range. Our revenue growth, continued focus on operational efficiency, and favorable FX movements resulted in an adjusted operating loss of $3.9 million for the third quarter, significantly ahead of our guidance. As such, we once again have improved our adjusted operating laws guidance for the fiscal year 2023. The trend of large enterprises investing in AI-powered customer experience platforms to drive business optimization, which we believe is an imperative, has continued. A recent survey of 500 IT professionals by Bank of America concluded that businesses intend to increase their IT spending by 8% this year. compared to 7% in 2022. Moreover, the data shows a positive correlation between company size and expected spending growth. Coveo's target customers, large enterprises, are investing the most on software, growing 10% over last year compared to smaller businesses, and they also showed the largest IT hiring budget increase at 12%. As we continue to make strategic investments in our Coveo Relevance Cloud platform, we are seeing consistent interest from enterprises who are also investing in high ROI solutions, particularly in the commerce sector and in industries that are currently experiencing strong relative demand. While we, like others, are seeing demand soften in certain sectors and persistent delegation of sales cycles, We are also seeing relative strength in sectors such as manufacturing, which we believe represent a compelling opportunity for Coveo. Business-to-business commerce is by nature more complex than business-to-consumer. There is a need to manage a greater number of SKUs, far more product attributes, longer-term customer relationships, customer-specific pricing, volume pricing, and so on. These complexities play to Coveo's strength relative to our competitors. In business-to-consumer commerce, we believe our ability to create true one-to-one personalized experiences for customers and treat individuals as people and not personas can drive compelling improvements in business outcomes in a market where a suboptimal digital experience can have a huge impact on revenue and margins. And in service, Our ability to help enterprises lower costs and increase NPS to preserve existing customers and revenue also applies across any macroeconomic cycle, especially the current one. We are excited about our progress with new customer wins in the quarter, which continues to strengthen the foundation of our business. We landed new logos across all of our lines of business and once again, had the strongest commerce bookings quarter in the history of the company. These land transactions included the largest commerce land to date. In fact, our largest land transaction for any line of business, with a global direct seller of nutritional products operating in 100 countries, and the major manufacturer of mechanical power transmission solutions used in several industries. We also landed large six-figure deals in our service and platform lines of business, including those with a multinational semiconductor and telecommunications company and a multinational pharmaceutical services company. We also completed significant expand transactions across all our lines of business, including with an American healthcare services company, a multinational oil and gas corporation, a large home improvement and outdoor living retail chain, as well as with Synopsys, Finastra, Bombardier Recreational Products, Pet Supply Plus, and others with whom we continue to strengthen our relationship. I would now like to highlight some recent examples of customers using Coveo's platform to optimize business outcomes and provide personalized, relevant digital experiences. In November 2021, we signed an initial deal with a top three global consumer electronics manufacturer. They were looking to not only improve their commerce operations for both B2B and B2C, but also wanted to optimize their customer support sites. The company's U.S. brand began a digital transformation journey with the goal of becoming the best in their geography and industry. They partnered with Coveo with specific goals in mind to increase conversions, improve search accuracy, improve merchandising, and automate with AI wherever possible. The U.S. region went live with commerce and support in mid-2022 and saw significant results. Impressed with how well Coveo powered their commerce and support sites simultaneously, The client introduced Coveo to their international team, who subsequently decided to deploy our technology and platform globally. In 2023 and beyond, Coveo will be expanding its services and will start to power their commerce and support sites across 81 different countries. This is an exciting opportunity for our commerce and service lines of business to work seamlessly together with a single global customer. Coveo partners with one of the largest DIY and home hardware store chains in the Oceania region. The company has been utilizing Coveo's relevant platform and machine learning capabilities in three key areas. Website search to ensure customers receive relevant results and improve user experience. Category and product listing pages to prioritize products that have a higher likelihood of being selected. end up selling at multiple stages of the customer's personalized journey. We are extremely pleased with the results of our collaboration, which has led to millions of dollars in upsells in a recent quarter, attributed to products recommended by Coveo. Lastly, Coveo works with a global leader in network security who has deployed nearly a million of its integrated multifunction threat management appliances worldwide to businesses of all sizes, from SMEs to large distributed enterprises. With more than 250,000 customers, 17,000 security resellers, and close to 100 service agents, they've been leveraging our platform to power their partner and customer portal, case deflection page, agent insight panel, and full search page. Thanks to Coveo's solution, they have been able to significantly increase customer and partner self-service, allowing for growth without hiring new agents and maximizing the value of their content by distributing that knowledge more effectively. The impact of Coveo was instant and significant as the case deflection rate increased meaningfully within a very short period of time. We believe that customers that select the Coveo Relevance Cloud platform receive a subscription to ongoing innovation, including AI research and investment, expertise, and customer success, as well as a compelling ROI driven by continuously optimizing business outcomes. You saw us recently announce the release of the new Coveo Merchandising Hub, which we believe to be a game changer. This groundbreaking platform is the result of our successful integration with Qubits and has allowed us to significantly expand the capabilities of the Coveo Relevance platform by offering the first ever comprehensive suite of tools tailored specifically to merchandisers. We are excited to continue showcasing these new capabilities to our customers that help to create more value by optimizing both the alignment to shopper intent, as well as enabling merchandisers to optimize their business outcomes using AI. Next, I'll review some product features of the Coveo Relevance Cloud platform we announced during the quarter that further differentiate our offerings and help optimize business outcomes for our customers. We launched our intelligent out-of-the-box facet generator which simplifies the implementation and configuration of website navigation for large enterprises. Coveo is one of the only search platforms that can automatically leverage hundreds of filtering options and select the best ones to use to help improve the end user experience without any traffic or behavioral data. Combined with the intelligence of our machine learning models, Coveo has the ability to go even deeper when data is available. As a result, our platform can help to drive unmatched relevance and personalization in website navigation. We also released analytics and developer tools for use within data cloud company Snowflake. The new features provide real-time access to Coveo Analytics through Snowflake's reader account where data can be leveraged in any business intelligence tool and even combined with other external data sources for a more complete visualization of search engagement and business performance. Lastly, I would be remiss if I didn't mention that for the fifth consecutive time, Coveo has been named the leader in the 2022 Gartner Magic Quadrant for Insight Engines. This acknowledges the Coveo Relevance Cloud platform in terms of its maturity, market presence, capabilities, and overall vision compared to other established technology vendors, which we are very proud of. Coveo was also recently named a champion in the 2023 Enterprise Search Data Quadrant from Software Reviews, a division of Infotech Research Group. We are humbled by this particular award as it is based on objective feedback from real customers and is a testament to our dedication to customer success and delivering business value to our customers. History has shown that companies that have succeeded regardless of economic cycle are those that have continued to make strategic investments, remain focused on the fundamentals of their business, and been disciplined in their approach to efficiency. We believe that Coveo's strategic investments in our Coveo Relevance Cloud platform are strength in commerce and service, and our ability to address the complexities of the industries we serve while delivering strong ROI for our customers position us very well to weather the current macroeconomic environment, and we remain excited about the significant market opportunity in front of us. With that, I will now hand the call over to Jean to discuss our quarterly results in more detail. Jean?

Thank you, Louis, and thank you again everyone for joining us on our third quarter conference call. Starting off with bookings, we are pleased with our commerce performance, which was a record for the second quarter in a row. This was driven by some significant transactions, including the largest land transaction in our history, as mentioned by Louis earlier. In addition, we booked significant new work within the service and platform lines of business during the third quarter, adding to our already strong foundation of enterprise customers. Overall, we are pleased to see that all lines of business continue to grow at a double-digit rate from an ARR perspective. We are encouraged by the fact that deals are not disappearing and that we continue to see solid pipeline generation, which we believe bodes well for our future growth prospects and is a testament to the resiliency of our business. As we saw in our fiscal Q2, foreign exchange fluctuations against the U.S. dollar had impacts on top line and adjusted operating loss performance. As a reminder, approximately 20% of our revenues are in currencies other than the U.S. dollar, and more than 50% of our costs are in Canadian dollars. And this, combined with our continued focus on operating efficiency, had a positive impact on our third quarter adjusted operating loss. As such, we have further improved the midpoint of our full-year adjusted operating laws guidance by $2.6 million, which is on top of the $8.5 million improvement we announced last quarter, while improving the midpoint of both our full-year SAS subscription revenue and total revenue guidance. Moving to our third quarter results, SAS subscription revenue was $26.4 million, an increase of 25% year-over-year, and total revenue came in at 28.5, growing 23% year-over-year. Boring exchange impacts represented an approximately 3% headwind to growth for both measures. In addition, these growth rates are substantially representative of organic growth, as the acquisition of Qubit was completed 14 days into the third quarter of fiscal 2022. Current SAS subscription remaining performance obligations as of December 31st, 2022 came in at 92.1 million, growing 28% compared to a year ago. Our net expansion rate as of December 31st, 2022 was 107% and within our target range of between 105 and 115%. The decline from the prior quarter mostly relates to the expected churn following the Qubit acquisition. As Louis stated earlier, we believe NER will gradually improve in subsequent quarters while remaining in our target range. As our gross retention rates remain very high and we have good visibility on upsells and trusses. As a reminder of what was presented during our Capital Markets Day in November, we see significant opportunities with approximately 65% of our customers who are currently using Coveo in only one line of business and approximately 50% have only used Coveo in one use case. We currently anticipate converting a portion of those customers, evidenced by some of Louis' earlier comments, to adopt other lines of business or other use cases. Our internal teams are aligned and focused on this significant opportunity ahead of us. Turning to our operating results. Our third quarter gross profit percentage came in at 77% compared to 74% for the same period last year. Adjusted gross profit percentage, which normalizes for the effects of share-based payments and related expenses and acquisition-related compensation, was 78% for the third quarter, an increase of 2% compared to a year ago. Product gross profit percentage was 81% in the quarter, 2% higher than the prior year, and our adjusted product gross profit percentage was 82% for the quarter, also a 2% increase compared to the year-ago period. Professional services gross profit percentage was 9% for the quarter compared to 2% for the same period last year. Adjusted professional services gross profit percentage for the quarter was 17%, a slight 1% decrease compared to the prior year period. Operating loss for the quarter was $10.7 million and adjusted operating loss for the quarter was $3.9 million, meaningfully ahead of previous guidance due to a continued focus on operational efficiencies. As mentioned previously, our adjusted operating loss for this quarter was favorably impacted by exchange rates of non-U.S. currencies compared to the U.S. dollar. Finishing with guidance, for the fourth quarter of fiscal year 2023, we expect SAS subscription revenue to be between 26.6 and 27.1 million, representing growth of 15 to 17% year-over-year. Total revenue in the range of 28.6 to 29.1 million, representing growth of 12 to 14% year-over-year. Adjusted operating loss in the range of 5 and 6 million, and between 105.5 and 106 million weighted average shares outstanding. Our fourth quarter guidance assumes an FX headwind against both SAS subscription revenue and total revenue of approximately 2% and assumes FX rates roughly in line with where they are today for SAS subscription and total revenue growth and adjusted operating loss. Our total revenue growth and adjusted operating loss guidance includes the impact and the completion of the end-of-life process for our self-managed licenses and maintenance revenue, which represented approximately $300,000 of revenue last quarter. Please also note that adjusted operating loss in the fourth quarter is negatively impacted by the resetting of social benefits as of January 1 of this calendar year, salary raises, and a slightly shorter quarter in terms of number of days relative to others, which has an impact on SAS subscription revenue recognition. For fiscal year 2023, we expect SAS subscription revenue to be between 102.5 and 103 million, representing growth of 32% year-over-year. Total revenue in the range of 111.5 and $112 million, representing growth of 29% year-over-year. Adjusted operating loss in the range of 20.9 and $21.9 million. And between 104 and 105 million weighted average shares outstanding. And with that, operator,

You may now open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. You are using a speakerphone. Please lift the hands up before pressing it.

One moment, please, for your first question.

First question comes from Thanos Moskopoulos of BMO Capital Markets. Please go ahead.

Hi, good afternoon. I think just starting off, I believe, Maybe just starting off on the macro, I mean, obviously, you had a good revenue growth in the quarter. Sounds like you had good bookings. But just how would you say the environment's developed over the last three months? Has it been pretty consistent? Any change in sales cycles? What are you seeing on that front?

Hey, Thanos. I think pretty much the same all along versus what we've been talking about, these previous earnings calls. Obviously, we all read the same news, so certainly economic slowdown and et cetera. We're continuing to see demand because, as a reminder, we provide high ROI solutions and increasingly – the use of AI in digital experience is becoming a must-have, not a nice-to-have. And we can demonstrate, particularly in the service and commerce area, that we bring high ROI. So from a demand perspective, that hasn't changed. What we're seeing is more scrutiny with purchases. Precisely, every expense and every sales campaign must include a high ROI component, which we're accustomed to. And more delays. We're not losing deals. We're seeing, in some instances, deals being either paused or delayed. But overall, pretty much the same for now.

Great. And then on the expense side, you've kept expenses remarkably flat, even as revenues grown, which is obviously quite dynamic. So maybe just write some color where you found those efficiencies as part of that from, you know, degrading Qubit, cutting some costs there. And then it might be too early to talk about 2024, but just maybe qualitatively, how should we think about the expense ramp in the coming months?

Right. I'll start Thanos and then Jean will continue. I think from an efficiency perspective, we're seeing the effect of focusing as a firm on number one on markets that deliver better efficiency for us, which means relative to our sales and marketing and engagement costs with prospects yielding bigger deals. And we are seeing increasingly bigger and bigger deals at Coveo. That's number one. Number two, so from an efficiency perspective, I think, you know, starting, you know, pretty much at the IPO, even before Coveo, We drove, I would say, quite a bit of obsession internally as it relates to the effectiveness of our team and overall efficiency of our organization and drove a number of initiatives internally just to make our organization better. So more focused on markets where we win more effectively and we win bigger, number one. and number two, where we can grow with customers, and number two, you know, internally, really continuing to top grade the team and continuing to structure our organization for more and more efficiency. And I think we're seeing the results of that. So, Jean?

Yeah, thank you, Louis, and thanks for the question, Tano. Certainly, I'd like to call out a little bit of seasonality that's included in our guidance for next quarter. First of all, you know, Jan 1st is when we pretty much reset all social benefits in the company. So that does create an increase in expenses starting Jan 1st compared to the previous quarter. Salary raises, you know, so of course this is also anniversary date where many salaries are increased. And certainly on the top line, I'd like to call out that You'll see that everything that calls out on the self-managed license of minutes revenue, as we had previously committed, we're done with all on-prem products. So there's $300,000 of revenue that was there last quarter that you will not see in the next quarter. And, of course, for every SaaS company, the March quarter you have – two less days to recognize revenue. So those are the seasonality that we've taken into account in our guidance, Thanos. Does that make sense?

It does, yeah. Great offline, thanks.

Thank you, Thanos.

Thank you. The next question comes from Ty Kedron of Oppenheimer. Please go ahead.

Thanks, Louise. I want to follow up on the previous questions. I mean, your fast growth and your current RPO growth have both have been cut by half essentially from last quarter to this quarter. So clearly macro is having a big impact on your business, not a small one. I'm just trying to make sure how do you gauge whether this deceleration in growth is wholly macro related versus performance-related, productivity-related internally in the company. Help me sort this out.

Right, and I'll let Jean-Etai sort of qualify this because there's obviously the impact of acquisition and et cetera. So, Jean, can you take that one?

Yeah, no, certainly. And, Etai, if you look at, you know, for the December quarter, you know, you saw the growth rate for SaaS subscription revenue coming in at 25%, and there was, you know, 3% of headwinds certainly from FX there. Though, you know, there was, you know, 2%, certainly from the impact of having Qubit for one last time included in the December quarter, where, you know, as you know, we only had two and a half months a year ago. So, but certainly very pleased with that growth rate. Now, certainly when you look at the guidance, you know, you're correct that, you know, we're guiding in the range of 15 to 17%, but keeping in mind that again, there will be 2% of headwind from effects there as well. So certainly effects adjusted at 17 to 19% versus in the range of 30%. Certainly, there is definitely deceleration that we're seeing from definitely from macro, right? So when we look at tied to pipeline generation, pleased with the growth rate, the conversion rate is holding steady. However, especially for new logos, for new customers, it's definitely seeing, you know, those longer sales cycles that keep pushing out. And certainly, you know, last quarter was no exception to what we had seen and commented on. So hopefully that puts it in the right context.

Jean, I want to just fine-tune this a little bit more. Today versus exactly three months ago, have things got incrementally worse? Or they have not, they were weak three months ago, but they have not changed in their intensity from three months ago.

No, no, clearly, you know, because we did comment on those elongating sales cycles, the tie, as you know, last quarter. So clearly, if we're commenting on it again this quarter, is that being, you know, certainly we've seen you know, more of it, right? Because some of the pushes from NASCAR did close in the December quarter, but we did see some deals that we expected to close December 31st that pushed into January and into, you know, we certainly expect them to close by March 31st. So certainly, you know, it's been challenging, certainly that macro environment, and which is why you're seeing that deceleration there.

Got it. Okay, maybe last one for me, Louis. Just from a big picture standpoint, ChatGPT, a lot of headlines. Does that mean anything to your business? What do you make of this?

It's huge for our business, Itai, and we're very excited by this development. We're embracing this wholeheartedly. Our company has been involved working with large language models for quite some time. we've announced basically features and functionality that our customers use, like question answering, like case classification, like smart snippets, and et cetera. And I would say the world in general didn't quite grasp the importance of that. The fact that, you know, the difference between getting answers, not links, getting answers, you know, a stronger capability to converse and get advice as opposed to specific, you know, SKUs recommendations or specific links recommendation. So what we're doing right now, first of all, that's bringing the world's attention to that and we've been working on that. We think that combining that technology with what we do is going to bring some amazing use cases in customer service and commerce and will add important features enterprises will demand, namely security, privacy, data freshness, links to actual sources of truth, etc., which are not available, as you know, in the current technology, relying on older data and not being as cost-effective, etc., So to conclude on this, we couldn't be more excited because the world is waking up to the paradigm and some of the things that we had been working on for quite some time. We've been working as a firm on large language models, as you know, which is really what Chad GPT is all about. And we think we can combine this into... with the kind of functionality that the RAI platform offers and really lead in the market. So the answer is we couldn't be more excited with all the consciousness, I would say, around that topic right now.

Very good. Thank you. Good luck, guys.

Yeah. Thank you.

Thank you. Bye.

Thank you. The next question comes from David Weiss of Scotiabank. Please go ahead.

Hi. Can everybody hear me?

Hi, David. Yes.

Hi. Great. Yeah, so just a very high-level question. You had previously discussed it. I think it was your Capital Market Day. Just in terms of the value that you are offering your customers in terms of their sales increases and so on, the potential for maybe looking at raising prices, Is there any indication that this might happen more broadly or within select accounts where there's a proven track record?

Right. We're continuing to evolve our pricing strategies and the way we engage with our customers. It's very evident that in this current economy, anything we can do to reduce the risk and the line, any kind of pricing and the pros that we have with customers with the value that we generate, that we create for them is very, very welcome. So we've recently hired an executive who's full-time devoted to that topic and evolving and adapting our business model even better As in the same time, we're continuing to measure extremely high value from the implementation of our platform with key customers. So we're very confident that there's some runway in terms of bridging the gap, I would say, between what we currently charge today to our customers relative to what we could be charging them given the value that we can measure.

Okay, great. And then you'd also indicated over time adding more customer metadata in commerce that platform customers could use to garner insights and help improve areas such as margins or manage inventory. So could you provide us with an update on that front, and particularly the margin improvement use case and some potential that you might be seeing there?

Right. When you look at – this is a very interesting area, and we're investing quite a bit. I would say this is probably the major portion of our research and development investments is around that theme. which is not only the idea of using artificial intelligence to create great user experiences that people love, that are highly personalized and can anticipate and et cetera. So satisfying the customer, but really satisfying the shareholder as well, which is controlling the business outcomes. And to your point, when you think about commerce, there are applications of that in commerce and service and in any kind of digital experience in general. But if you think about commerce in particular, things like inventory levels, things like obsolescence, things like margins, things like propensity of return, you know, these are, you know, multiple angles which you refer to as metadata. that need to be considered, in fact, in order to make sure that the number one issue that the e-commerce world has gets addressed, which is margins. It is broadly reported that, in fact, the biggest, you know, the largest e-commerce vendors have reported over the past five years that their margins was the number one challenge, that their margins had been eroding quite a bit And part of it is because of bad technology. In fact, that tends to promote stuff that might please the consumer but doesn't generate margins or sometimes even drives margins negatively. So the short answer, the short conclusion, not answer, David, is that this is the number one key axis of development for Coveo, which is to create the balance, optimize the balance between creating a great experience and maximizing business outcomes.

Great. And just one more quick follow-up just on in terms of professional services revenue. There was a bit of a downtick this quarter versus the past couple of quarters. I'm just wondering if there's anything to read into that or if that's Yeah, if there's anything going forward that we should note, thanks.

I'll turn it over to Jean, but I'll just qualify that, David, that we as a firm are really focused on the SaaS line, and we continue to build and expand our network of systems integrators. We work with a lot of systems integrators, and they, too, expand their practices on I mean, from the largest ones like Accenture and Capgemini and Deloitte, et cetera, to more specialized ones in the commerce service or digital area. And our goal is to transfer and let these businesses, in fact, build their services, you know, around our offering. And, Jean, perhaps you can put some numbers on that. Sure.

Yeah, no, so that's correct. David, you've, you know, when you mentioned that we've seen a very, very slight decrease, as you know, professional services can be a little bit lumpy. So some of our large transactions, sometimes we will be the lead. But as Louis stated, you know, our goal is always to, you know, turn the business over to, to our system integrators, you know, our partners, let them lead, be the lead and for us to assist them, help them out. So so you will see a little bit of that lumpiness. But overall, You know, if you look, for example, at the guidance for next quarter, you know, you'll see a slight uptick. But overall, as a percentage of revenue, it should, you know, it should remain probably, you know, pretty much in the same range, you know, in that 6% to 7% of total revenue as we keep, you know, working with our SI partners out there.

Okay, great. Thanks very much. Thank you.

Thank you. The next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Thanks so much. Good afternoon. The comments you made and the prepared remarks just on commerce and on the large transactions in that segment are quite encouraging. Could you break out the magnitude that commerce is contributing to either SaaS growth or RPO or just try to put the size of commerce relative to other segments right now?

Yes, thank you, Paul, and great question. Certainly, because when you look at ARR, as you know, customer service is the largest of our four lines of business, but certainly when you look at commerce, it is the one that is certainly growing the fastest. What is especially exciting as well for us, Paul, is when you look at, you know, Louis commented on some great wins on the BDC front, right? We had our largest land ever in that land in B2C, but we've also had a significant, you know, seven-figure deal as well on the B2B front. You know, Louis commented on, you know, why this, you know, B2B is such a great, you know, leverages all of our technology, really. So when you look at the strength in both B2C and B2B. And we've seen a number of customers as well, leveraging both of them, right? They, they do sell directly in certain regions of the world. They do sell through channels and others. So some of them do require both of them. So when you look at certainly the, the, the contribution of, of bookings, uh, you know, coming from, uh, from e-commerce, certainly we see, we've seen it coming in, you know, at, you know, over half of our bookings coming from, uh, from, from e-commerce. And we certainly, you know, as we, you know, keep, you know, adding new features, Louie talked about, you know, adding, you know, profitability, you know, optimizing on, on, on those new features. Certainly we certainly expect that, you know, into 2023, they will continue to be very, very strong for us.

That's, that's really helpful. The, can you provide some historical context on commerce, like, you know, over half of bookings now, you know, maybe where that was a year ago, And I'm just trying to think of or try to understand, you know, how much the momentum in commerce would help mitigate maybe some of the slowness in other areas.

Yeah, no, so I think from a year ago, certainly when you look at, you know, so it was probably, you know, half of that. So certainly as we've kept – so certainly it has accelerated, you know, clearly from – So through the growth rate and the bookings, certainly I think that growth has come from e-commerce, both B2C and B2B. But Paul, we did report that when you look at ARR for all four lines of business, they grow double digit, all four of them, again, this quarter. Ever since we've been public, we've been reporting on double digit growth for all lines of business, but certainly it's disproportional, of course, for commerce. let's be honest, we've been at commerce for three to four years, so we're starting off with a slower base, but clearly as you can tell now, it is a substantial portion of our new bookings and as well new logos.

And just a question on the competitive environment. Is your sense that through the next couple quarters or so period when the macro's weaker here, and there's this hesitancy in decision-making. Do you see any shifts competitively? I mean, how do you sort of see that shaking out here?

Yeah, no, I think, Paul, we see the same type of competition both in names and in approach. As we have reported before, some customers will look at the type of problem that we solve as a search problem. And some customers, typically the larger enterprise, the more sophisticated ones, understand that it is about search, it is about recommendations, it is about personalization, it is about, in our case, we have the ability to use deep learning for anonymous or cookie-less personalization. It is about the ability to do A-B testing on multiple AI models and analytics. And we've just added, thanks to the integration of Qubit, we just announced the merchandising hub, which allows merchandisers now to control business outcomes as opposed to simply, as I said earlier, controlling you know, customer experiences. So when you look at all that platform that we have at this current time when, you know, digital experiences, as we mentioned in earlier calls, is such an imperative and people are only a browser window away from getting a better experience at Amazon or elsewhere, we could not be more timely and more confident about our competitive position given the type of value that we can generate. When it's a value-driven decision, typically Coveo will win. When it's a bits and bytes decision or a more tactical decision, sometimes some developers or some IT people might be looking for just a little search engine or something like that. But those are not the types of customers that we deal with. So we're not seeing any change. If anything, Paul, we're seeing, given the value that we can demonstrate, we're seeing a greater imperative than ever towards AI platforms. And Coveo has been in AI for almost a dozen years, dealing with some of the largest data sets in the world. And so we feel pretty confident about our advance there. And obviously things like chat GPT just raise the attention. I would say, you know, on, on, on, on, on, on a technology that is very significant. I think that was existing before chat GPT didn't invent that, you know, Google is working with other models as you know, Lambda and meta has, you works with blender bot and, and you know, ChatGPT is open AI, but it certainly brings a lot of attention to the importance and the understanding of AI. And we say the imperative of AI in the space. So again, we couldn't be more excited around our position, where we are, our competitive position, and the growing demand for it.

Just curious, just on ChatGPT, did you see any material uptake in the leads that you've received on your website, any sort of various measures that you could disclose there?

I think it's early, frankly, Paul. You know, Chad GPT, the biggest thing is that, you know, large language models in particular and that technology and Chad GPT you know, question answering, you know, all that technology is extremely important technology. Our customers, remember, we have a lot of customers in the tech sector, you know, most large tech companies deal with us. And those are, you know, this is technology we've been talking to them and working with them on, you know, for quite some time. Not quite, you know, like Chad GPT on this kind of, you know, data corpus and etc., But the use of delivering, the idea of delivering questions as opposed to links and the idea of delivering answers, sorry, as opposed to links in the context of customer service or knowledge, for instance, has been something that we've been working on for a long time and using AI. So it's more a matter of understanding and raising the importance. Now, as it relates to inquiries for us, It's just very recent. Chad GPT itself still has, you know, a number of issues to solve, you know, as a model, as it relates to, if only the freshness of data and the source of truth, right? Most of our customers want to provide accurate answers to their customers. They can't work with a data corpus that's a year old. and prescriptions need to be a little more accurate. But again, we could talk about the key advantage of that technology and how it complements what we do. But the short answer to your question is we're not seeing any major, major uptick, but certainly the people who know Coveo understand even more the importance of what we do.

Thank you.

Thank you.

The next question comes from Richard C. of National Bank Financial. Please go ahead.

Yes, thank you. You know, given how strong the ROI is, it seems very compelling investment for your prospects in this environment. So what are the gaining factors to those decisions right now? Is it just the economy or is it sort of something else?

No, I think it's 95% plus the economy, Richard. You know, I mean, we see it in the public market sometimes. You know, even with investors, you can't sell them a bag of dimes for a nickel. You know, it's just the way, you know, companies right now put much more scrutiny in spending and investing. Sometimes, you know, cut their budgets. um, you know, preserve cash in, in, in some instances, or, you know, just, just bring a lot more scrutiny in terms of, of, uh, launching new initiatives and, and et cetera. Uh, in general, we, we get through that, uh, when, when we talk, uh, at the right level, you know, people who are empowered, um, typically more in the executive brand ranks of, of driving the business, driving growth, cutting costs, um, you know, increasing, you know, customer satisfaction at a lower cost, which is a key challenge right now, the people making those decisions continue to make those decisions. The people I would say sometimes maybe in the lower ranks of organizations may not be as empowered or have the budget, you know, to make these decisions as, as freely as they had in the past. But, but, you know, the, the, the, the, as long as you can, we can continue to, make it easy for customers to engage, reduce the risk, reduce, you know, and make the ROI very obvious and compelling for the people who care. We're going to continue to sell. But I hesitated to answer, Richard, 100% economy related. But, you know, we've seen that take before. We've been 30 years in enterprise software and we've seen multiple economic downturns and it's always been pretty much the same set of dynamics from a sales perspective.

Super fair. But if I kind of look at it a different way, let's say you sort of stand back and you look at your pipeline growth today versus what it may have been last year, what has been sort of the cadence of that? Is that sort of the same? Is it actually faster?

I can tell you that our pipeline has continued to increase relative to last year. Okay. That I can tell you. Yeah. So it's out there. There's demand out there. There's, you know, clarity.

Okay. And then just a last one from me. You know, a lot of companies in this market are sort of looking at an opportunity to perhaps be a bit more aggressive on the cost side of business. So what's your take in terms of the next six to 12 months on that side? Are you sort of looking at headcount reductions or hiring? Just to kind of get a sense of where you're at there.

Well, we're obviously extremely proud of another strong beat on the operating leverage side, as you saw. So we are obviously looking at efficiency. I prefer personally, given the situation we're in, we are a growth company and I prefer to think about efficiency than cost cutting. And I know sometimes there's an intersection and it means the same thing. It can mean similar things. But it's really for us about how do we do more with less without forgetting that we need to continue to do more. Um, and, and, and, and this is really kind of the, the, the idea we're not, um, you haven't seen us so far, you know, do a reduction in force or anything like that. We are making the company more efficient. We are top grading the company, but let's not forget it. We are growing. And, uh, and, and, you know, over time investors, uh, you know, if I, if I reflect on my past 30 years in business, we've been together, uh, you know, investors are going to continue to reward growth. So we need to balance the two, Richard, and it's an everyday exercise. But we want to make sure that we're not affecting our ability to grow. I'm here to say that we are going to continue to seize the growth opportunity and invest for the future because we think our market is only at the inflection point. You know, the imperative for AI and digital experiences, as I always say, is right there. Companies either embrace it or they will decide to compete against it. And you don't want to be on that side of the trade. And Coveo is positioned as a leader or the leader, depending on how you look at it, in that very important space with a very important technology and hundreds of enterprise clients who've who've demonstrated the ROI. And so we're going to continue to do that. So we're not really waking up in the morning and cost cutting mode. But again, at the same time, we're, we're super proud of the gains we're making in efficiency and operating leverage.

And Richard, if you, if you recall, and Richard, if you, if you look at, you know, our fiscal year 2023 guidance for adjusted operating loss, right? Last quarter, we, you know, we, we communicated an improvement of $8.5 million. This quarter, again, you know, another 2.5 million on top of the 8.5, right? So we've kind of improved our adjusted operating loss guidance for the full year by $11 million, right? So we're midpoint right now, 21.5 million. So from where we were at the beginning of the year, I think clearly we've shown efficiency, but certainly to Louie's point, right? We certainly wake up in the morning thinking about about growth, but it's all about profitable growth, efficient growth, and I believe that that's what we've delivered to shareholders over the last two quarters and certainly what we intend to do next quarter as well.

That's great. Thank you very much.

Thank you, Richard.

Thanks, Richard. Thank you. The next question comes from Koji Aikida of Bank of America. Please go ahead.

Hey, Louis. Hey, John. Thanks for taking my question. Hi, Koji. Hey, guys. Hi, Koji. Hi. Just one question for me in the interest of time here. So another public AI vendor announced a new enterprise search tool a few days ago. So just wanted to take the time here for you to maybe address how difficult it is to replicate what Coveo does. And then, you know, also how embedded within a customer's tech stack, or I guess maybe how difficult is it to rip and replace Coveo once it becomes live at one of your customers?

It is very difficult to rip and replace Coveo because Coveo becomes the intelligence layer and sort of the brains of a customer service stack or a commerce stack. And there's some quite unique purpose-built technology that is designed for that. Now, I think I suspect which company you're talking about, about the search announcement. Look... Justified hype around Chad GPT, but there's still the word hype in my sentence. It is an important technology. It is a critical technology. It will improve and et cetera, but there's still major issues. And it's a technology that hits the imagination, obviously, and so on. And so some companies may be taking advantage of that and et cetera. And there's some practical applications too. And we certainly understand that and are embracing it and building it in our R&D plans and et cetera. But the announcement of a new type of enterprise search engine based on that alone, to be honest, doesn't cover 10% of what we do, could not deliver the kind of capabilities that we provide our customers with. both in customer service and commerce, where if you think about the enterprise needs or must have or requirements, you deal with confidentiality, you deal with privacy constraints. You deal, as I discussed earlier, with security, freshness, sources of truth, understanding, and freshness of content and et cetera. Chat GPT generates interesting answers and texts and et cetera. It's extremely powerful. But if you read carefully, it also hallucinates. um, hallucination is not allowed in the context of customer service. Uh, so, you know, so there's some, there's some practical matters here that, um, you know, let's say tomorrow is not, is not, um, you know, when, when, uh, we'll stop doing what we do. And, and in fact, we're probably the closest to embracing that technology in the context of customer, uh, of customer service and commerce, uh, again.

Thanks, guys. Thank you so much. Yeah, thanks, Koji.

Thank you. The next question comes from David Vaughn of TD Securities. Please go ahead.

Hey, guys. I'll squeeze one quick one in here. Just you've done a great job here of narrowing the losses. So curious to get your take on any potential revisions on terms of the timeline to get to positivity. positive adjusted to operating income and then the amount of cash that you expect to get you there.

Yes. Thank you for the question, David. And thanks for the great comments here. Certainly from how we're, we're not announcing today that we will be able to accelerate, you know, further, you know, as we, as we, you know, previously mentioned, you know, by the end of fiscal year 2025, we, you know, expect to be cashflow profitable. Certainly when we look at our, you know, certainly what we've been delivering, you know, we mentioned our last quarter improvement of 8.5 million on the path to profitability, you know, for certainly an improvement of adjusted operating loss for this fiscal year, this quarter, again, another 2.5 million. So certainly pleased with the progress of being efficient while maintaining a, you know, a solid growth rate on the top line. So you should expect that to continue though, David, you know, you know, Louis did mention there's some exciting new innovations that we want to keep working on. We talked about the profitability, certainly large language models and the like. So we believe that we will achieve that balance of high growth and, of course, becoming profitable in the short term, but right now not announcing that we will be able to pull forward the date when we will be – casual possible at this time today.

Appreciate the color. Thanks, Sean. Thanks, guys. Thanks, David. Thanks, David.

Well, we had already pulled it forward, right, Sean? But anyway.

Yeah, yeah, but not today. Today will not be. Not today.

Not today. We're not announcing that today yet.

We're still being cautious of that. Yeah, yeah. That's right.

Thank you.

The next question comes from Kingsley Crane, Canaccord Genuity. Please go ahead.

Hi, Kingsley. Hi. How's it going, guys? It's Gabe from Kingsley. Yeah, congratulations on the quarter. I was curious to hear how the merchandise and hub has been received so far and how it did specifically at the NRL showcase. What are you hearing from customers and such?

extremely well and this was the thesis all along why we bought Qubit and it goes back Kingsley to what I explained earlier which is that really the holy grail sort of speak as we see it right now in an area such as commerce is really in fact the use of algorithms to balance both the customer experience with the profitability. And so this is really, really important. And that takes up multiple dimensions. So Coveo on one side is about merchandising and making great recommendations that people want to buy and et cetera. The merchandising hub changes the role of the merchandisers from an instinct based role. If you, you know, if you know how a merchandising department works, you know, it's a lot of people with, you know, a lot of experience in their field who understand, you know, anything from selling, you know, DIY or barbecue products and, and, and plumbing products to, to fashion or, or et cetera. They're, they tend to be very vertical and they know, you know, what sells and what to promote and et cetera, but it's not data driven. So we're changing the role with the merchandising hub. We're changing the role of the merchandiser to a role where using data, merchandisers can test multiple AI models, multiple campaigns, and basically find out what brings more revenue and more contribution to the company. And as opposed to writing rules, you know, manually to say, hey, you know, it's raining today, let's promote umbrellas, so to speak, sort of way to speak. So this idea of, and that's why we bought Qubit. So this is extremely important. And the answer to your question is it was extremely well received by our customers because we now have both. We can deliver great experiences together. and we can control how that drives better business outcomes. And this is what the market is looking for.

Awesome. Thank you. Thank you for the color there. And just if I may real quick, a follow-up. In terms of the deal profile, have you seen any evolution there in terms of workplace versus commerce? Do you continue to see relative weakness there or has anything evolved?

As Jean mentioned, Kingsley, we see double-digit growth. We've reported double-digit growth across all lines of business. It is very obvious right now that in almost every company, the initiatives that bring ROI are privileged. Most companies probably don't have as much attention improving their intranet as they have growing their revenue which is which is our value proposition in commerce it's about you know put our technology on top of your commerce infrastructure we will increase your revenue and we will impact your margin period and here's how we're going to do that and in customer service most companies are very concerned right now about how to preserve their most important asset, which is how do they keep customers happy, but they can't spend more money to do that? And typically, you know, one way to increase customer satisfaction is with brute force, right? Is by increasing either the number of agents or the number of people talking to them, investing more and et cetera. How do you increase customer satisfaction so that you preserve their revenue and you potentially grow it while reducing costs at the same time, which is, you know, and that's our value proposition in customer service, which resonates very well right now, you know, by providing, you know, intelligence in self-service within contact centers and, you know, throughout the entire customer journey, we, you know, through technology, we actually, you know, drive costs down while increasing customer NPS. And so long answer to say these are the types of use cases that customers continue to buy because, again, you're handing them a bag of dimes and you're charging them a nickel. And regardless of the economy, ultimately, those things get done.

Awesome. Thank you for that. That's very helpful. Congrats on the quarter again.

Thank you. We're very proud of the quarter. Yep.

Thank you. There are no further questions at this time. Please continue with closing remarks.

Very good then, operator.

So, again, thank you very much for all your time today. As you can see, we continue to push forward. and believe strongly that Coveo is in a very unique position and that there continues to be strong demand for what we do. So thank you for all your questions today, and we look forward to talking to you soon. With that, operator, you may close the call.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We ask that you please disconnect your lines and have a great day.