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.

To date,

our partnership has resulted in a 40% increase in revenue for one of their major brands, including approximately $2 million from product badging alone. We also had a number of expand transactions in the quarter from our websites and workplace lines of business. As an example, we are partnered with a global leader in pharma and life sciences, to deliver a best-of-breed employee experience with a new global AI-powered intranet. Since implementing Coveo's workplace solutions across a number of business units, their employee intranet usage has grown exponentially, with the number of monthly users increasing more than 700%. The partnership has recently expanded, to enable research associates within one of their groups to access global content delivered through a chatbot and other communication channels. During the fourth quarter, we also announced several new enhancements to the Coveo Relevance Cloud Platform that bring new innovative capabilities to customers as we continue to revolutionize and democratize the use of AI across digital experiences. As I mentioned previously, Our new relevance generative answering capability is the Highlight, which will combine our platform with large language models to create a generative AI question answering capability that is applicable within enterprises. We have been engaged with many CIOs, and our design partner and self-service beta programs are completely full for summer availability. We look forward to reporting on our progress as well as releasing additional use cases in the future. As I mentioned on our last earnings call, we believe our release of the Covil merchandising hub, which is the culmination of the integration of Qubits technology into our platform, gives us an unmatched offering in commerce. The combined capabilities include an array of AI-powered innovations providing insights on shopper intent, enabling merchandisers to quickly deploy the winning strategies to optimize campaigns and revenue per visit, boost specific products for revenue, and showcase higher margin products. We're also very excited about our collaboration with Scale AI. a global AI innovation cluster funded by the governments of Canada and Quebec to develop additional proprietary, cutting-edge machine learning and personalization algorithms, which we believe will further enhance our leadership position and increase our competitive moat in commerce. These algorithms consider factors such as margins and costs of storage, shipping, disposal, and returns, in addition to revenue-generated costs to optimize the end customer's full basket profitability while maximizing consumer relevance and digital experience. Our goal is to empower merchandisers with profitability-aware analytics, recommended actions, and statistical analysis so they can make informed decisions that are driven by data and not instincts to benefit their bottom line. We also introduced several new and advanced features to the Coveo Relevance Cloud Platform in the fourth quarter, some of which are included on the slide shown. Although I won't go through them all here, these and future enhancements aim to deliver optimized digital experiences with unmatched efficiency, scalability, and security, allowing customers to drive impactful business results and get a faster ROI. all while increasing ease and reducing total cost of ownership. With that, I will now hand the call over to Brandon to discuss our quarterly results in more detail.

Brandon? Thank you, Louis, and thank you again, everyone, for joining us on our fourth quarter and year-end conference call, my first of what I hope to be many. I'm thrilled to be here and joining Coveo at this exciting stage of the company's history. I'm also grateful to Jean for his outstanding leadership and for leaving me with a world-class G&A function. He and his team have built a solid foundation for the company's continued growth and I will strive to make it even better. As mentioned earlier, there's heightened interest in our offerings driven by continued advancements in AI and LLMs and our focus on high ROI use cases for enterprise customers. While we remain cautious in the near term due to the overall macroeconomic environment and its effects on sales cycle lengths and enterprise spending overall, we are pleased to see promising leading indicators across our business, such as growth in our pipeline, as Louie mentioned previously, and early success with our new strategic relationship with SAP. I'm further encouraged by the number of customers that are buying more from us. indicating that customers are seeing value from using our platform. This demonstrates the critical nature of our platform and how we can help drive positive ROI during these challenging economic times. As Louis mentioned, commerce bookings again led the way with growth in excess of 40% year-over-year and included a close to seven-figure transaction in our EMEA region. And as with past quarters, on an annualized contract value basis, all of our lines of business continued to experience double-digit growth. Moving on to our fourth quarter results, SAS subscription revenue was $27.1 million, an increase of 19% year-over-year in constant currency, and total revenue came in at $29.1 million, growing 16% year-over-year, also in constant currency. Current SAS subscription remaining performance obligations as of March 31st, 2023 came in at 95.3 million, growing 18% year over year. Importantly, our net expansion rate as of March 31st, 2023 improved to 110% compared to 107% we reported in our Q3 results. The improvement relates to the higher proportion of expand versus land transactions we saw in the quarter as well as our continued strong gross retention rates. We expect NER to remain within our target range of between 105% and 115% as our gross retention rates remain high and we have good visibility on upsells and cross-sells. Moving to our operating results, our fourth quarter gross profit percentage improved to 77% compared to 73% 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 fourth 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, a 1% increase compared to the year-ago period. Operating loss for the quarter was $8.8 million, a significant improvement compared to a loss of $19.4 million last year. Adjusted operating loss for the quarter was $4.3 million, also a significant improvement compared to $8.6 million and meaningfully ahead of previous guidance due to strong expense management and a favorable FX environment. For fiscal 23, we are very pleased to have improved our adjusted operating loss by almost $13 million compared to our guidance at the beginning of the year. Our cash use and operations for the year was $6.3 million, a significant improvement compared to $35.4 million a year ago. Finishing with guidance, our guidance reflects an appropriate degree of near-term caution given the well-known challenges in the overall macro environment. As mentioned, we believe we are well positioned to benefit from the significant interest around LLMs and how Coveo's solutions can help enterprises capitalize on this opportunity, and we are seeing many promising signs from our customers and strategic partners such as SAP. We also anticipate our business momentum to accelerate as the year progresses. Our guidance further reflects our continued prioritization of our path to profitability while making the investments needed to capture the opportunities in front of us. With that in mind, for the first quarter of our fiscal year 2024, we expect SAS subscription revenue to be between $27.9 and $28.4 million, representing growth of 16% to 18% year over year. total revenue in the range of $29.9 to $30.4 million, and adjusted operating loss in the range of $4 to $5 million. Our first quarter total revenue growth and adjusted operating loss guidance includes the impact of the completion of the end of life process for our self-managed licenses and maintenance revenue, which represented approximately $300,000 of revenue in the comparable quarter last year. For the full fiscal 2024, we anticipate SAS subscription revenue to be between $118.0 and $120.0 million, representing growth of 15% to 17% year over year. Total revenue in the range of $127.0 and $129.0 million, and adjusted operating loss in the range of $13 to $15 million, with expected cash used in operations of less than $10 million. We continue to track well towards our plans to achieving positive operating cash flow in our next fiscal year, being fiscal 2025. Our fiscal 2024 guidance 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 of the completion of the end-of-life process for our self-managed license and maintenance revenue, which represented approximately $900,000 of revenue last year, and also reflects the impact of churn from certain customers using standalone Qubit products that we anticipate will not migrate to the now-integrated Coveo offering. This churn is one time in nature and primarily affects fiscal 24 only. Excluding these items, our core growth rate on SAS subscription revenue for fiscal 24 is forecasted to exceed 20%. Lastly, today we announced the launch of a $40 million in Canadian dollars substantial issuer bid and also announced our intention to apply to the Toronto Stock Exchange and launch a normal course issuer bid upon completion of the substantial issuer bid. As of March 31st, we have approximately $198 million in cash and cash equivalents, an undrawn $50 million revolving credit facility, and no debt. As we've guided in the past, we estimate we require less than $15 million to achieve positive operating cash flow by the end of fiscal 2025. We believe we have capital available for investments, including potential M&A activity, and as such, believe this is an action that will drive significant shareholder value, given what we believe to be the depressed valuation of our public stock. We believe we are finding the right balance between a clear line of sight to profitability and making the necessary investments to capture leadership in a very exciting time for the company. 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 touchstone phone. you will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question. Your first question is from David Kwan from PD Securities. Please ask your question.

Good evening. Thanks for taking my questions here. I guess, first off, can you talk about, I guess, the mix of new business, you know, whether it's mostly coming from existing customers more than what we've seen in the past, just given the macro environment?

Yeah, I'll take that one.

Yeah, as you heard in our comments and as you see in the NER results for the quarter, We have had a nice quarter of expand transactions. You know, tougher economic times, of course. It's a lot easier to see your existing customers adopt more of the platform, and we certainly saw that in the quarter we just reported here today.

That's helpful. Thanks, Brandon. You guys have done a great job on narrowing the adjusted operating losses. I think you've really focused on trying to generate some strong operational efficiencies. I was wondering, is there much more that you can do from that standpoint going forward? And to what extent did we see the beat this quarter driven by that versus maybe some kind of end of year adjustments?

I'll take that one as well. I mean, look, I think being an efficient company during times like this has been a priority that this team has prioritized and certainly something we will continue to prioritize. Of course, we're balancing, you know, what we think is a really exciting time in the company's history right now with all the interest around generative AI and how that can help, you know, as it pairs up with technology. With Coveo Solutions, the SAP partnership is off to a wonderful start as well. And, of course, we want to make sure to give that all of the energy it deserves as well. So, you know, we are trying to balance the investment needs of the business to make sure that we take advantage of these opportunities. But, of course, cost of profitability and efficiency is something we will continue to be quite vigilant on. And our guidance reflects that.

That's helpful. Maybe a couple for Louie or Brad, if you want to jump in. Just on the competitive environment, I'm curious to see how much has changed since the start of this year, or at least since we last talked. Just given the seemingly plethora of Gen AI announcements that have come out from your traditional competitors, but even some non-traditional ones.

Right. I'll take that one. Hi, David. Look, there's no doubt that this is a technology that, as we said in the call, has taken the world by storm. But for us, it's good news because we've been in AI platforms and deploying AI for the purpose of, in fact, providing better answers to customers and employees and so on. That's what the search technology search is all about. And as you know, in, in the area of relevance. So a, um, you know, what this has, uh, created, uh, is, is a very broad understanding, I would say of, of AI as a paradigm shift as a paradigm breaker. Uh, number one, number two is as enterprises are, um, feeling the need, I guess, and starting to think about how to deploy generative AI, they are naturally pointing to issues around relevance. So security matters. You cannot generate an answer. The big enterprises we deal with won't risk their brands on an answer that would be hallucination, as they call it. or inaccurate, or generated from pieces of data across multiple platforms that wouldn't be securely accessible. And without, they need verifiability, linkage to the source of truth, etc. So David, these are problems that we've been working on for a decade. And we also have been working with LLMs for a few years now. So this is music to us, and that's evidenced by the unprecedented interest we get from our customer base following the announcement of Coveo Relevance Generative Answering.

That's helpful. And maybe one last question. On the Coveo Relevance Generative Answering, you talked about it being much lower cost relative to other Gen AI. Can you provide some more color around that? Can you quantify that?

Well, the ability of the current of the Covil platform without generative AI to index broad sources of data and essentially bring it contextually relevant using AI to a specific set of customer answers you know, allows us to narrow the data corpus and the problem to a data corpus that is manageable and then to apply an LLM on that. You know, large language models and generative AI in a way is going to become a commodity, you know, because it's broadly accessible. It's really what you feed it with. And the cost of running on a large corpus of data, GPT-4 openly or so on, is significantly higher than the architecture that we propose.

That's great. Thank you.

Thank you.

Your next question is from Itai Kidron from Oppenheimer. Please ask your question.

Thanks. And Louis, thank you for the detailed overview of generative AI and how you work with it and I guess address the shortcomings of it. I guess my question is, this is a point in time. What are the odds that if you and I will talk 12 months from now, generative AI continues to evolve and address a lot of the shortcomings of Isn't there a concern that it could displace or disrupt some of the value, at least in the eyes of your customers, perhaps reduce somewhat of the value that you bring to them? What is the risk that you see with generative AI to your business?

You know, we always monitor that risk. And, you know, personally and with many of my colleagues, you know, we've been in tech for, you know, closer to 30, more than 33 years. So innovation never stops and you never know where it'll come from. But I'll say a couple of things. Number one is in order to apply generative AI within the enterprise, we talked a little bit about some of the shortcomings, et cetera. There's a certain number of components you need. First of all, generative AI will fuel the need for sourcing content and pieces of information from disparate content sources. This is a Coveo strength, and it's not easy. Connectivity to CRM information, knowledge bases, data records, ERP, et cetera, et cetera, is not easy to do securely at scale within a large corporation. As you know, we have a background in search. You need that kind of background to do that. You then need a layer of software to enrich that index, essentially. and contextualize it, then you need to apply AI on top, both on the data side and on the personalization side. Ultimately, we've been applying semantic search for a few years now, dealing with pieces of information, paragraphs, and et cetera, as opposed to more lexical type. And now you need to feed that into generative AI. So I'm saying, Itai, everything is possible. You know, anybody can reinvent it. But the Coveo platform is the cumulative work because it's a single platform that's constantly improved, as you know. It's the cumulative work of working for a dozen years in AI with some of the largest data sets coming from some of the largest corporations in the world, including most of the leading tech companies. So I guess it's a way to answer your question is that it takes a lot to apply this at enterprise grade and at the scale of a global enterprise in our view. And that's true for certain types of use cases. If you're Instacart and you want to use generative AI to generate a recipe using broccoli for vegans, I guess that's non-consequential. But if you're an airline manufacturer with compliance trying to answer a customer with accurate information that is traceable, there are veracity issues and security issues, that's where we come into play, and that's not easy to match.

Got it. Very good. And then as a follow-up on your plans to buy back stock here, one would have thought that with the market and economy doing what they're doing, you'd have more M&A opportunities. I mean, should we interpret this to mean that you just don't really see that many good, interesting things out there? Help me think about this.

Hey, it's Brandon here. No, look, quite the opposite, actually. We do see lots of interesting opportunities out there, of course. You know, there's always a meeting of minds that has to happen on valuation, which remains a challenging dynamic for everyone, I think. But, you know, look, the decision to do this was based on $200 million in the bank, $50 million of available line of credit. You know, we've drastically pulled forward our path to profitability. So we're going to spend less than $10 million this year in operating cash flow, less than 15 in aggregate to get to positive cash flow. So our intent is to still invest in the right areas, but we just see a significant opportunity to drive shareholder value with this, which shareholder value and a healthy share price is an important part of an M&A agenda as well. And what we see is a undervalued stock out there and a good use of capital to help try and reward shareholders right now.

Okay. Thank you.

Thank you. Your next question is from David Wise from Scotiabank. Please ask your question. Hi.

Thanks for taking my question. So just in terms of your generative AI answering solution, Would you potentially be leveraging multiple large language models or LLMs? Are customers interested in that flexibility on that front? And is that also a potential differentiator in the marketplace?

The answer is yes. Okay. Okay, great.

And then, so just in terms of, you've mentioned, you know, very strong commerce bookings and strength with SAP Commerce Cloud. Could you perhaps comment on the consumption patterns within additional key integrations with your solution, for example, Salesforce or ServiceNow? Are there other strong areas that you're seeing improvement on?

What we're seeing, David, in the current environment, it's kind of interesting. So on the one hand, in the knowledge solutions area, you know, service, workplace, to-a-degree websites. We're seeing a tremendous amount of renewed interest for search now given the catalyst of generative AI. On the other hand, from a sales perspective, we're seeing the most traction in commerce for the simple reason that companies are really, really focused on revenue and And our approach is 100% directed ROI focused and directed at demonstrating beyond any doubt to customers that when they invest a dollar with us, they get far more return in terms of increases in sales and et cetera. So as soon as you put AI in commerce, you increase revenue. in a tough economic environment, needless to say, anything that is an extremely compelling story around revenue increase precedes, takes over. We do have a similar sales motion and value proposition in service where we can demonstrate that we cut costs and increase revenue net promoter score and customer satisfaction at the same time by delivering, as you know, self-service intelligence and so on. And that's also, you know, all these knowledge solutions and workplace solutions are also growing healthy, as Brandon mentioned. But there's no question that commerce right now is the driver. And, you know, we're obviously investing aggressively given that now we're aligned with the largest e-commerce vendor in the world.

Okay, thanks. And then you had mentioned in your prepared remarks some strong traction with Coveo Merchandising Hub. Could you perhaps provide us with an update in terms of how that's contributing to new wins and potential upsell and cross-sell as well?

Well, I think the biggest of those wins is the SAP endorsed status, which, again, only a few handful of technologies in the world enjoy that status. And that demonstrates, in fact, the leadership of our solutions and so on. We don't break down revenue by product portion or module, as you know. But we can certainly say that from our perspective, it's mission accomplished as far as the integration of Qubits which really for a big part was the embryo of the merchandising hub into the broader Coveo platform and how that helped us gain leadership into retail, in particular B2C and fashion retail.

Okay, thanks. And then last one here, hopefully quick for me. In terms of the government awards due to the scale AI program that you've disclosed, it looks like it was about $1.4 million in the quarter. Is that sort of the run rate that we can expect for the duration of that program on a quarterly basis?

Yes, it's a total envelope until – 2020, the beginning of 2024. Okay.

Thanks.

Thank you. The next one is from Taylor McGinnis from UBS.

Please ask your question.

Hi. Yeah. Thanks. Hi. How's it going? Thanks for taking my question. Maybe just to look at the outlook. So the 1Q subscription revenue guide at the high end implies sequential growth of 5%, which is higher than the 3% sequential growth and 4Q on both subscription revenue and current SAS RPO. So I guess what have you seen in the last two months that gives you comfort in this outlook? And Brandon, since you're new to the role, can you provide a little bit of color on your approach to the guidance and how it might differ from what we've seen in the past.

Yeah, so I don't think you should expect much of a change in tone or approach from me vis-a-vis guidance. I share the conservative DNA that Louis and Jean and the team here have tried to always convey, so you'll get more of the same from me in that respect. In terms of the In terms of the sequential growth, I think we've talked about the things we're seeing in the business. On the one hand, the many positive indicators around customer interest and our relevance generative answering product that's coming down the pipe when the SAP momentum we're seeing at an early sign and then just momentum within our existing base of customers buying more of the platform. And of course, offsetting that is, you know, it's just not easy times out there. So particularly on the land transactions at a significant size, those are a little more challenging in this environment, but we're seeing success in some customers starting smaller and growing over time. So it's all of those factors that lead to the overall guidance.

Awesome. Thanks for that. And then Louie, can you maybe talk about the ability to monetize these generative AI-powered solutions that you guys are introducing? I know you talked a little bit earlier about parts maybe being commodity. So I guess how are you thinking about that as well as balancing some of the associated costs you mentioned?

I love the question because, in fact, I personally and I think we are of the view that a lot of the things that you hear out there have not quite found a way to monetization and, frankly, immediate deployment or practical application. We're the opposite. I think what Coveo Generative Answering is providing is something that companies need today that they want to deploy. And Taylor, we expect, although we haven't come out with exact pricing, we expect it to be incremental pricing as part of the solution.

Great. Thank you so much.

I'll turn it over to someone else. Thank you. The next one is from Paul Treiber from RBC Capital Markets.

Please ask your question.

Thanks so much and good afternoon. Just the comments you made in regards to your pipeline are quite encouraging. Just in regards to your 24 outlook, how much impact or can you quantify the uplift to your guidance related to that pipeline or just from the new generative answering product?

I'll take that at a high level and perhaps if you have anything to add. As I just mentioned with Taylor, we haven't come out yet with pricing for generative AI. So right now we consider this as part of the normal course of business and solutions. So the answer would be no. We haven't quantified it yet because it's a little early. We know that customers are willing to pay for it. We know that it's incremental to our knowledge solutions in workplace and service, customer service area mostly. This is where customer service is probably one of the areas within the enterprise where generative AI will be used the most. But no, we haven't quantified it. I think if you look at our growth story right now, it's just a balanced and responsible view. between, you know, what we do in customer service workplace, potentially even, you know, we think that our generative AI, our relevance generative AI functionality and story really is going to improve even our competitive position in that area, combined obviously with the strong prospect for commerce, especially given the global distribution channel that we enjoy right now working in particular with SAP, but also others.

Secondly, can you elaborate on competition and also the feedback you're having with partners? You know, these LLMs, they've opened up APIs and a number of software companies are directly integrating with them. So when you look out at the market, you know, these LLMs commoditized and are available everywhere and has become a basic function in all software. Do you see the markets are bifurcating into like a commoditized generative AI interaction or work chatbot and then a higher level of the market where you would operate?

Actually, I mentioned it before, Paul. This is such a good question. Generative AI is almost already commoditized. But it's what do you want at the outcome and what do you feed it with in order to get there? What companies are concerned about is not their ability to use generative AI. They're concerned about answering their customers with the wrong answers. They're concerned about security breaches. They're concerned about how to use, how to apply practically generative AI, which to your point is almost a commodity and will improve, you know, in a way that is, that is, that, that protects all their, their compliance, their verifiability, the linkage to the sources of truth. And again, that is cost effective in a way that's cost effective. That's what we're focused on. And remember that the Coveo customer is a customer that wants to cut across multiple sources of content in order to create a unified index that will then serve the generative AI function. So none of the large stack vendors or the software vendors that at least we know cut across multiple sources of content, this has always been a key differentiator. So we're differentiated in two ways. One, we understand how to cut across multiple sources of content at scale with high performance and more importantly, with the utmost level of security and compliance. And number two, we understand how to apply AI on top of that to make sure that, you know, to ensure accuracy, veracity, and linkage to sources of truth. And that's very, we think that's very unique.

Thank you. That's very helpful. That's fine.

Thank you.

Your next question is from Richard from National Bank Financial. Please ask your question.

Hi, it's James Burns. Yeah, it's James Burns sitting in for Richard. He's traveling right now. But I was just wondering on the professional services gross margins that are up meaningfully year over year, are you guys still kind of targeting the 20% range, or is there room for that to improve beyond that moving forward?

Yeah.

Yeah, I'll take this. And Jean, if you wanted to weigh in as well, but we do target that 20 plus percent range. That is more or less what we're forecasting for the year. Jean, if you're there, any comments on the year over year?

No, no, that's correct, Brandon. You're right on. So right now, as you know, certainly when it comes down to professional services, our goal is certainly to empower our network of SI partners that work with us to implement our solution. Of course, there's certain large customers that prefer to work directly with us. More complex projects will do so. So certainly right now, the number one goal for us is not so much to drive more margin from professional services, but rather to enable, you know, a large global network of SI partners. So the 20% rent should be expected as well. Moving forward, and it can be a bit lumpy with some of those larger projects sometimes that we close from time to time.

Yeah, that's great. Thanks a lot.

Thank you. The next one is from Koji Ikeda from Bank of America.

Please ask your question.

Hey, Louis and Brandon and John. Thanks for taking the questions. I wanted to ask you a question on net revenue retention. In the quarter, 110%, you know, up three points sequentially, so nice result there. But I think you mentioned in the prepared remarks you still expected to be in that 105 to 115 range. So, you know, the question here is, has net revenue retention troughed? as of the last quarter, or are you seeing anything out there, or maybe, you know, what should we be thinking about that could drive net revenue retention to contract again?

Yeah, so we remain comfortable with the 105 to 115. It does, you know, depending on timing of renewals and so on, you'll see that oscillate. Depending on the mix of bookings in a given quarter, you'll see that oscillate. The only thing, Koji, I do want to make sure to call to your attention in our prepared comments, we made note of some, I'll call it one-time churn that we expect to encounter as a result of our completion of the integration of Qubit now into the core platform. We are forecasting that a subset of these customers on some niche functionality that Qubit used to have. May not do the migration over to the core platform, so we're forecasting conservatively on that. And that could have some lumpiness in some of the quarters in fiscal 24, but we expect to fully digest that in fiscal 24.

Thanks, Brandon. And just to follow up here, you know, the subscription growth, looking at the first quarter guide, full your guide and just taking the commentary that you expected to accelerate. You know, the question here is how much of the growth is back, you know, back halfway to second half weighted and what is giving you the confidence if it's that back halfway to, you know, to be able to achieve that?

Uh, it is, it is, we do expect, you know, the, we're in, we're in data right now with our relevance generative answering product. We, uh, That's a controlled beta with a handful of customers. We'll look to expand that as the year goes. So we're seeing, as you heard hopefully loud and clear on this call, lots and lots of interest from our customers on how they can get involved and participate. And we anticipate as that becomes GA, that that will unlock bookings opportunities for us. But that is going to be something that builds over the course of the year. Likewise with SAP. I mean, we just announced that in March, and you're hearing lots of enthusiasm from us on the early signs there. But that, too, will build and ramp as the year goes. So we do have some of those kicking in in the back half of the year. And, of course, offsetting that is some of that one-time churn that we expect to digest as we go. So those are the dynamics and the guidance.

Taking the questions.

Thank you. The next one is from Kingsley Crane from Canaccord.

Please ask your question.

Thanks. I'll just ask one. So we've spoken before about the importance of a platform that factors in customer profitability into the relevant algorithm. I noticed you mentioned some of these features in the scale AI portion of the deck. So how does the IP work in this case? Is this an area where you continue to fine tune and extend your leadership? And then how are customers responding to this differentiation given your comments on customers focused on revenue?

The answer to the last question is extremely well. That's what they want. The world of electronic commerce, the world of e-commerce has greatly evolved over the past five years from a world that was really focused on conversion. Anything that that led to a conversion in the cot in a shopping cart was viewed as a positive. I think companies are now realizing that, in fact, there's a lot to think about beyond conversion. If you have too much inventory in the warehouse of something, probably you want to show it a little more to buyers, right? If you can detect return rates, some of the customers are You know, big companies are starting to think about, you know, the impact of return rates, you know, propensity of return, for instance, on product. So there's an overall, you know, cost component. There's not inventory, obsolescence, supply chain components, and there's a profitability component. And to be honest, only AI can deal with those multiple constraints all at once. And it's reasonably easy to make the argument, but there are not a lot of companies standing in the world that actually can achieve that. And this is why we're focused on that. Needless to say, the value creation coming from that in terms of revenue and profitability is very, very significant. So the net answer is companies, you know, again, we only deal with large global enterprises that, you know, do, you know, oftentimes and you know, billions online and, you know, or billions in sales.

And they're very, very serious about this topic. Well said. Appreciate the call. Thank you.

Thank you. The next one is from Sudhan Sukumar from Stifel.

Please ask your question.

Good evening, Jensen. I appreciate you guys squeezing me in. First question for me is on the pipeline. When we think about the expansion in your pipeline, given all this increased market attention around AI, how would you characterize some of the discussions that you're having with prospects? Are these discussions more exploratory or are you seeing more urgency in these prospect discussions?

No, first of all, what we call pipeline as Coveo, you know, has a certain set of criteria that meet, you know, real genuine interests. And, you know, so we're very pragmatic about how we look at pipeline. Look, there's no question that, you know, this is a time where, you know, if I can say something, you know, this is What happened in the past few months is not about Chad GPT. It is, in a way, about generative AI and et cetera in many ways. That's what has taken, as we said, the world by storm. But it is about the interest and suddenly the democratization of AI. People suddenly realize that AI is there, is there to stay, and as, frankly, we tell our customers our belief is, if you're a large enterprise, you're either going to adopt AI or you're going to compete against, you know, someone who does. And it's going to be brutal and binary. And so, you know, we're seeing increase in pipeline activity because there are very few companies, you know, Coveo has been at it for a dozen years. We started working in machine learning in 2011. And so we've got a lot of experience, you know, like anything else, it's about the intricacies and the devils and the details and how you practically deploy it. So there's a lot of maturity and experience. There are not many companies in applied AI that have deployed this successfully that are ready to go tomorrow and et cetera. And so suddenly, you know, when companies do their research and et cetera, of course they see us in digital campaigns and et cetera. But they naturally gravitate towards the firms who can do this. And as I said, there are not that many standing.

Great. Thank you. That's helpful. And one last one for me, just quickly, on the strength and expansion activity this quarter. Can you try some color on what solution areas or usage patterns are sort of driving that that increase upsell across selectivity within the base.

Again, in new business, we're seeing a lot of commerce. We had a great quarter in platform and workplace solutions as well. We continue to see a lot of expand. That's the mix today. As we basically launch and conclude our beta program on GenAI and price of solution and so on, we expect an important pickup in that area as well.

Thank you. I'll pass the line. Thanks for taking my questions, guys. Pleasure. Pleasure.

There are no further questions at this time. Please proceed.

Very good. Well, in closing, thank you, operator. In closing, I'll say these are exciting times in the business of AI because its novelty and power are suddenly broadly understood and, in our view, will soon be expected by consumers, by people everywhere, employees, and enterprises will need to deliver on it. We believe that our market is at an inflection point that Coveo is at the right place at the right time. And that demand for AI powered, personalized and optimized digital experience will grow very quickly and to be expected from large enterprises. So, you know, we've been at this for more than a decade. We've been bringing AI to help leading enterprises grow. deliver relevant answers and recommendations to millions and billions of people with uncompromised security and accuracy that they expect. And so we're very proud of what we've accomplished in the last year, and it's been a decade in the making, and we really look forward to even more success. I want to thank you again for attending this call and to all our shareholders for your continued support of Covail. And with that operator, you can now end the conference call.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.