Coveo Solutions Inc.

Good afternoon. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo fourth 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 Luite Tu, Coveo's Chairman and Chief Executive Officer, Brandon Nessie, Chief Financial Officer, and Jean Lavigier, Senior Advisor and former Chief Financial Officer of Coveo. Before we get started, I would like to note that certain statements made during this conference call are forward-looking statements within the meaning of applicable securities laws, including those regarding our plans, objectives, expected performance, and our outlook for the first quarter in fiscal year 2024. These forward-looking statements are given as of the date of this call, And while we believe any statements we make are reasonable, they are based on current expectations, which are subject to risks and uncertainties, and the actual results could differ materially. We do not undertake and expressly disclaim any obligation to update our forward-looking statements, whether because of new information, future events, or otherwise. Further information on 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 or operating metrics used in our industry. A discussion on why we use these results and where applicable, a reconciliation schedule showing IFRS versus non-IFRS results are available in our press release and our MD&A issue today, which may be found on our investor relations website at ir.covao.com and our CDAR profile. Please note that unless otherwise stated, all references to 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. We are pleased with our fourth quarter financial and operating results in the current macroeconomic environment as we continue to accelerate our path to profitability. We delivered financial results at the top end of our guidance for both fast subscription and total revenue, and we significantly beat our guidance for adjusted operating loss. For the fourth quarter ended March 31st, 2023, we delivered year-over-year SaaS subscription revenue growth of 19% and total revenue growth of 16%, both on a constant currency basis. Our continued focus on efficiency resulted in adjusted operating loss of $4.3 million for the fourth quarter, a significant improvement compared to a loss of $8.6 million last year. Our net expansion rate improved to 110% compared to 107% reported in Q3, reflecting continued strong retention rates and customers adopting additional applications of our suite of AI solutions during the fourth quarter. We also had another strong bookings quarter in commerce, with growth in excess of 40% year over year. and one of the best quarters in terms of pipeline generation in the history of Coveo. Throughout the year, we have remained committed to our growth ambitions and further expanding our market leadership position by making strategic investments in both our people and apply AI technology innovation. We focus on delivering high ROI solutions that leverage AI models to provide one-to-one personalized experiences and optimize business outcomes for large enterprises. This approach, which we call to personalize and profitize, has enabled us to continue growing our business even in the face of challenging macroeconomic conditions. We are particularly excited about the recent advancements and demand for generative AI and large language models, or LLMs. which have opened up even more possibilities for our Coveo Relevance Cloud platform. Broadly speaking, generative AI refers to a type of artificial intelligence technology trained on massive amounts of data to produce or generate various types of content, including text, imagery, and even audio with some degree of novelty. Related to this, LLMs are a specific type of generative AI model that focuses on generating text in response to prompts and chats as in answers versus links to documents like traditional search results. Several well-known generative AI chatbots released recently, such as ChatGPT and BingChat, built on top of LLMs, have democratized the AI paradigm within digital experiences to a broad audience. ChatGPT in particular has truly taken the world by storm. Everyone, people, consumers, employees, now better understands the difference between traditional search results versus intelligence, chat, and answers. We view these advancements and the interest in generative AI as a strong positive for all of our lines of business. For a few years now, we have been a pioneer in the application of semantic AI and LLMs within enterprises. For example, our Smart Snippets technology released two years ago to many of our customers uses semantic AI and LLM features to generate relevant answers in the context of customer service not just search results and links to documents. Our case classification feature is another example where semantic AI helps understand and guide the user towards the right solutions automatically extracted from the context. During the fourth quarter, we made an important announcement with the introduction of our Coveo Relevance Generative Answering capability. which integrates LLM technology with Coveo's Relevance Cloud Platform. Our AI platform will feed generative AI with a secure index unifying multiple content sources, real-time content, contextual relevance, and personalization accuracy. The interest we are seeing from our customers and partners on our initiative in this area is unprecedented. and is a great validation of our strategy. We believe this is a critically important innovation for enterprises. Our customers are primarily large global brands. They deal with large volumes, variety, and complexity of content, compounded by the need to globally serve large and diversified audiences of consumers, customers, or employees in highly personalized ways. While generative AI chatbots such as ChatGPT are powerful, their current shortcomings make them unimplicable for many users of the enterprise, predominantly around security, truthfulness, and cost. First and foremost, enterprises must prioritize protecting their brands and ensuring accurate information delivery to their stakeholders. This requires the use of up-to-date content, which is crucial when the answers provided carry significant consequences. Therefore, having access to current content is a key requirement, making solutions like ChatGPT, which currently relies on older trained content from 2021, insufficient. Second, enterprises require the ability to generate answers from diverse sources of content, including those not publicly available, such as internal knowledge bases. It is essential that they can derive these answers securely, ensuring that end users can access the necessary data or content from each source. Third, another key aspect for enterprises is the need to maintain a verifiable connection to the original source that generated a particular answer. This ensures proper verification and compliance, providing transparency and accountability. And finally, CIOs are conscious of the costs associated with running LLM, which currently can be 100 times to 1,000 times higher than traditional enterprise surge solutions. Addressing this concern is crucial for enterprises to effectively manage their budgets while benefiting from LLM technologies. Coveo Relevance Generative Answering will solve these challenges to apply generative AI within crucial use cases by ensuring that the generative AI is fed by the Coveo Relevance Cloud Platform, our leading proven AI platform built over a decade, for which the role is precisely to consolidate content securely and deliver accurate, secure, and contextually relevant information. Moreover, The need for ingesting and unifying multiple sources of content across the enterprise, a key competitive advantage of the unique Coveo indexing and search technology, is fueled by demand for generative AI, which now has the ability to combine pieces of disparate content to generate answers. Finally, search is not going away. Hence, the search and chat channels need to deliver coherent answers and therefore be fed from a common index. These are all critical capabilities that we master with our AI platform. In our service line of business, for example, our customers want case resolution intelligence. We believe the combination of our secure unified indexing technology with LLMs will enable customers to leverage their own data through our platform with up-to-date, secure, and AI-powered relevant knowledge fed to large language models, resulting in more accurate responses that are securely delivered with significantly lower risk of hallucinations and ultimately higher self-service and case deflection rates. In commerce, The ability to bring outside content beyond the catalog in the form of generated advice from buyer questions and based on their needs, as opposed to quarrying products and SKUs, will help consumers find what they're looking for in more effective ways. This is why we believe Coveo is uniquely positioned to solve the challenge of bringing advancements in large language models to enterprises given our unparalleled ability to securely ingest, index, and unify massive volumes of disparate siloed content and to use AI to generate relevance at scale for millions of users. We expect the demand for this capability to increase rapidly as the worlds of intelligent search and chat converge into a more modern digital experience paradigm that is conversational, prescriptive, and advisory in nature. I'll elaborate later about our design partner and data program, but to restate the point I made earlier, we have received unprecedented interest from our existing customer base about adding this capability when it becomes available more broadly this summer. We continue to believe enterprises will either adopt AI and digital or be left behind by their competitors. According to the IDC, the worldwide AI market is expected to grow to almost a trillion dollars by 2026, with AI-centric systems spending, applications where AI technology is critical to function, growing approximately 27% year over year. With the rapid pace of innovation in AI and large language models, these advancements are finally shining a light on the criticality of using AI and the value-leading platforms such as Coveo can bring to enterprises. Additionally, our unique position in this market is getting the attention of strategic partners, and we are thrilled that Coveo became an SAP endorsed app globally in the fourth quarter, a privilege that less than 1% of SAP's technology partners enjoy. Through this important partnership with the number one commerce platform in the world, as measured by gross merchandise value, Coveo AI enhances the immediate business metrics of SAP Commerce Cloud and provides strong competitive differentiation while supporting the growth of SAP's cloud install base. Coveo and SAP will jointly promote and deliver modern capabilities that meets the needs of both B2C and B2B customers for personalized AI-powering search and recommendation, leading to optimized campaigns and tailored shopping experiences that drive increased revenue per visit, reduced selling costs, and increased profitability for retailers, brands, manufacturers, and distributors. SAP's go-to-market team will be strongly incentivized to co-sell to customers with Covail. We are confident this partnership will contribute significantly to our future growth and have already seen encouraging results, with SAP pipeline generation more than tripling year over year in the fourth quarter, and the fourth quarter representing the strongest SAP Commerce bookings quarter in our history. We secured new business in the quarter with well-known brands across all our lines of business, And we look forward to nurturing these important partnerships for long-term growth and strengthening the foundation and resiliency of our business. In commerce, we landed new work with a leading SaaS platform used for creating interactive, real-time content for numerous industries and applications. In service, we landed new work with a multinational provider of software and hardware products for IT security. We also landed a number of deals in our websites and workplace lines of business, including with a global cooperative connecting the agriculture and energy markets and the leading global video game company that develops and delivers games, content, and online services for various platforms. In the fourth quarter, we saw a larger proportion of expand transactions from upsells and cross-sells. Underscoring the critical role our platform plays for our customers and its applicability across the entire enterprise, especially in the current macroeconomic environment, we saw a number of expand transactions across all of our lines of business, including a near seven-figure annual subscription deal in commerce, which is an SAP customer, with a subsidiary of a multinational food corporation. In addition to leveraging Coveo's platform for search and recommendations for their B2C and B2B e-commerce stores, this growing partnership focuses on leveraging the best available commerce technologies to further enhance and elevate the consumer experience. We have successfully collaborated on various digital experiences initiatives in the U.S. market. Their largest and fastest growing. with plans to roll out these initiatives to other geographies across more than 100 websites and in over 30 languages. Also in commerce, we had another significant expand transaction with a global e-commerce technology group and brand owner based in Europe that controls dozens of brands and has more than 200 businesses on their platform. We had previously highlighted this customer back in Q2, following a successful pilot that delivered a multi-million dollar uplift in revenue. At that time, the next phase of the partnership involved the combined go-to-market strategy leveraging Coveo's commerce and merchandising solution as a value-added service for other retailers. Today, I'm pleased to share that we are now working with the largest retailer within this group.