Coveo Solutions Inc.

Good afternoon. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo fourth quarter fiscal 2024 financial results conference call. All lights 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 star, then the number two. Thank you. I'll now turn the line over to Lorne Gorber, Coveo Investor Relations. Mr. Gorber, you may begin your conference.

Good afternoon. Thank you for joining us. With me to discuss Coveo's Q4 2024 results are Louis Tatu, Coveo's Chairman and Chief Executive Officer, and Brandon Nussie, Chief Financial Officer. A reminder that some remarks made today will be 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 and fiscal year 2025. These forward-looking statements are given as of June 3rd, 2024. And while we believe any statements we make are reasonable, they are based on current expectations, which are subject to risks and uncertainties, and actual results could differ materially from those expressed or implied. Coveo disclaims any intent or obligation to update our forward-looking statements, whether as the result 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 the Canadian securities regulators, including in the risk factors section of the company's most recently filed annual information form, as well as in the key factors affecting our performance section of the company's most recently filed MD&A, both of which are available under our CDARplus profile at cdarplus.ca and on ir.covao.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 metrics and, where applicable, a reconciliation schedule showing IFRS versus non-IFRS results are available in our press release and our MD&A issue today. Please note that unless otherwise stated, all references to financial figures made today are in U.S. dollars. Finally, presentation slides accompanying this conference call can be accessed on our IR website under the News and Events section. I will turn the call over to Louie first to review the operational and strategic highlights of our fourth quarter and full fiscal year before Brendan takes you through the financial details and provides our outlook for Q1 and fiscal 2025. We will then open the line to your questions. So with that, Louie.

And thank you all for joining us today. I'm pleased to report that Coveo's fourth quarter exceeded the high end of our guidance on revenue and is well ahead of our guidance on the bottom line. We're reporting positive adjusted EBITDA and strong positive cash flow from operations a full year ahead of our previously announced plans. This caps the year where we grew the SAS subscription revenue line on our core Coveo platform by 19%. and did so in a year where we also became operating cash flow positive for the first time. Underneath these high-level metrics, I'm very encouraged by the amount of interest we're seeing in our solutions, as demonstrated by our pipeline generation, which for fiscal 24 was our strongest year ever. We're seeing interest in our solutions coming from both our existing base of customers along with new prospects. In fact, In the fourth quarter, nearly half of our new pipeline was from net new companies. This, for Coveo, is an important signal. During 2023 and early 2024, our market came to a holding pattern due to both hype and uncertainty around generative AI. When enterprises were in discovery mode around AI, predominantly due to a mix of fear of missing out and fear of messing up. Enterprises are now more knowledgeable about AI and its significant opportunity and have seen the significant impact Coveo AI is having on our customers' business results, particularly with our new generative AI solutions. Now, we sense a readiness to move into production, and our decade-long presence in the enterprise AI space, coupled with our differentiated technology and proven track record of delivering significant results, makes Coveo a trusted partner to invest with. On the customer side, we capped off another year of strong customer unit economics with adjusted product gross margin reaching a new high of 83% in our fourth quarter, growth retention rates exceeding 95% for fiscal 24, and a net expansion rate of 107% for fiscal 24, both when excluding the Qubit acquisition product. I attribute the strong customer loyalty to our relentless focus on driving superior business outcomes for our customers, our exceptional technology, and our rapid pace of innovation. I believe our mission and innovation for this market is both unique and differentiated. As a reminder to investors, We are a recognized leader in the application of AI and generative AI to tailor digital experiences in real time in commerce, websites, service, and workplace experiences for enterprises. But they always at work when a person is live online, interacting with an enterprise to buy, fix, or learn something. Our enterprise customers often deliver millions of such experiences every week to consumers, dealers, or employees. And we help them tailor with AI at every point of interaction. And we also use AI models to maximize the business outcomes of each of those interactions. Our ability to democratize AI and productize generative AI revolutionizes and raises a new standard for the way enterprises serve digital experiences. Our fundamental belief is that enterprises will either embrace AI at every point of experience, or they will soon compete against it, and that the double-digit quantum leap in efficiency will create a very important competitive divide. In simple terms, it will be soon hardly impossible to compete against AI-powered experiences that drive deep personalization, provide advice, and optimize business outcomes in real time in areas such as commerce, customer service, websites, or workplaces. This new digital interaction paradigm will become the new expectation, where people online will be able to obtain advice and gain proficiency in ways otherwise not possible, while enterprises will maximize outcomes in real time using AI models. We call this the AI experience advantage, and it is our view that this market will grow very fast. The public launch of ChatGPT took the world by storm. it became the catalyst for an unprecedented interest from enterprises globally in adopting AI. This is unlike anything we've ever seen before. Throughout fiscal 24, we've observed every enterprise trying to distill the AI and generative AI opportunity, learn and understand the implications of this disruption on consequential issues such as data security, compliance, currency of responses, hallucinations, costs, roi and practical applications of ai we responded to this by partnering with our customers and rolling out market leading innovation and generative ai in line with our mission to bring ai to every point of experience we believe these use cases in service commerce websites and workplace digital experiences will become some of the most important and high roi application for enterprises We also believe that the AI experience economy will soon create an important competitive divide, a true catalyst for our market. In other terms, enterprises will be competitively compelled to embrace AI to deliver the digital experiences people expect and maximize their margins in near real time, or they will compete against AI-enabled companies. In fiscal 24, Our customers and prospects progress from initial discovery to ideation and experimentation. We are proud to be one of the first and the few companies that have completed the full cycle from innovation to deployment and measurement and full production, and now even to public customer advocacy, as you will find on our websites. Many large and global enterprises are now live in production with our relevance augmented generative solutions, with some already speaking publicly about the remarkable business benefit they are achieving with it. We now routinely measure substantial gains with our generative AI technology and real-life use cases, giving us confidence about the inflection and acceleration of a new monetization phase. Overall, we have more than 75 generative AI projects at various stages of deployment, experimentation, or negotiation, including those that have already signed contracts and are now in production, and many others in the pipeline. The pattern we see in our go-to-market globalization is that enterprises are evaluating and testing GenAI solutions with great scrutiny on their ability to handle different types of customer questions and digital experiences. They want to manage the risks associated with data security, compliance, hallucinations, and while also assessing the business cases and ROI. In my view, this heightened level of customer diligence ultimately benefits Coveo in the mid to long term. as we have proven repeatedly now that we outperform our competition in technology performance, security, relevance, and accuracy for enterprise-grade use. Our success and the differentiation of our platform stems from our extensive use of AI for more than a decade to personalize relevance in customer and employee search and recommendations experiences. Our powerful secure indexing Semantic search, vector graph, and AI relevance technology became the crucial foundation to power composable AI search and generative experiences. In simple terms, this means only accurate, relevant content, secure and current, is used to ground and engineer the prompt to a large language model. We believe this is a unique technology that we refer to as relevance augmented generative answerings. This results in higher trust and accuracy from Coveo responses, full traceability, and lower costs compared to solutions that do not have the extensive AI relevance layer that we built over more than a decade. One year ago, amid the generative AI disruption, I made the comment that Coveo would be last to hype and first to result. I believe we are largely succeeding at this. Our performance in A-B tests and high ROI for customers has resulted in exceptional win rates for us in competitive generative AI situations. Our Gen AI wins with companies like United Airlines, Dell, SAP, Concur, F5, Xero Software, and many others after extensive testing and side-by-side comparisons are what give me this confidence. Being able to show concrete and tangible improvements in business outcomes, like case deflection and double-digit contact center volume reduction, within weeks is fundamentally what our customers love, and we're proud to see some stand up and publicly boast about their remarkable results. Our commitment and success in innovation was recently acknowledged by Gartner. where Coveo was recognized as leader in product search and discovery, ranking highest of all vendors in ability to execute. In addition, the report stated that Coveo has a differentiating vision with its use of AI, with rich functionality and AI models that customers can configure easily. A recent January 24 report by the Boston Consulting Group concluded that 89% of executives ranked the deployment of AI and Gen AI as a top three tech priority for 2024. A topic BCG's CEO himself says he has never seen grow that fast in size and relevance. The expectations are that Gen AI can deliver 30% efficiency and effectiveness gains in several areas. According to a recent Gartner report, Improving the digital experience alongside conversational AI are ranked as among the few very strong business value patterns for AI use cases. Of course, to make sure we capture this market opportunity, we need to continue to be innovators in our space. As we've always maintained, subscribing to our platform means subscribing to our AI innovation. This is because 100% of our customers use the exact same platform which is continuously enhanced from the collective feedback of our customers by our team of 280 developers and data scientists. I want to highlight a few generative AI customer wins and bookings in the fourth quarter. We landed a new deal with one of our largest customers and one of the largest tech companies in the world. Coveo stood out amongst other solutions considered during the beta phase as the ideal solution for rapid transition to production with generative answering in their global customer service area. The value Coveo GenAI brings is substantial. By greatly improving customer self-service with accurate generative answers to their specific problems, customers can accomplish more on their own, reducing the number of cases that require agents' assistance. This not only enhances customer satisfaction and loyalty, but also significantly reduces the cost to serve. We also secured a significant win with a leading financial software company by offering relevance augmented generative AI to enhance their employee knowledge experience across the entire enterprise content. In a competitive bake-off process, we won over a competing workplace-focused solution, due to Coveo's evident provision of AI search accuracy and answer generation tailored for the workplace environment. We won several other generative AI deals in the service and workplace areas, partly also due to our ability to quickly deploy our technology on customer data and launch testing quickly, often within days, and to demonstrate improved customer satisfaction cores and reduced service costs. Within B2B Commerce, We won significant new business with a global distributor of security products and services. Due to our AI search capabilities and comprehensive platform, we were chosen over a key competitor due to several factors, including a straightforward pricing model and the platform flexibility for future scaling. These wins, among many others, are examples that yet again underscore Coveo's commitment to delivering leading edge and effective solutions, that meet the evolving needs of our enterprise customers and drive tangible business outcomes. Brandon will get into the specifics shortly, but as we look ahead to fiscal 25, I am optimistic that we're getting past the period of disruption in our market and through the inflection point. According to Gartner Research, we're now beyond the peak of the AI hype cycle which forced enterprises to filter through the noise, gain the necessary knowledge, verify claims, applicability, and use cases. This did lengthen decision-making cycles during a period that was also a challenging macro environment. I believe fiscal 25 is the year where we will start to see customer experimentation turn into monetization. For the few in the industry, like Coveo, that are delivering real results, for real customers at scale. We think we are well positioned to capture our share of this very significant market opportunity and have confidence in our growth drivers. We also see the opportunity to improve our own execution as we head into fiscal 25. While our market was disrupted, we did not sit idly by and have made significant changes to improve our operations retool our go-to-market teams and drive efficiency for scale as evidenced by our operating leverage performance. We've created new teams that will focus on customers and improve our net expansion rate. We've brought new leadership into our international regions and created more focus on new logo acquisition within sales. We've also appointed a new executive and built a substantial internal education team and enablement infrastructure necessary for scale and consistency of our global team members and partners. I am confident that we have made the necessary moves here to scale the company, to be ready as the market inflects, and that while it will take a couple of quarters to really start to show up in our numbers, given our revenue model, we will accelerate our bookings drought. Our outlook incorporates our decision to focus all of our innovation energy into the Coveo core platform and continue our wind down and integration of the platform and IP that was acquired with Qubit. This has already paid off as recognized by the above mentioned leadership with Gartner and commerce search and discovery. We do expect this will lead to further churn in that customer base in fiscal 25. which will have a brief impact on our short-term top line revenue. We will be a more focused and efficient company as a result, however, focused on capturing the important opportunity where we're well positioned. To wrap, I want to underscore my enthusiasm for the significant opportunities ahead in fiscal 25 and beyond. In 2024, Our focus on generative AI innovation with our customers marked a successful and significant step forward, democratizing AI's and Gen AI's potential within the enterprise, an area Coveo has excelled in for over a decade since we started in AI in 2012. With our pipeline expanding, our partnership strengthening with large enterprise software companies and systems integrators, tangible customer results, competitive wins, and disciplined business management, Coveo is uniquely positioned for success, and we're committed to leveraging this advantage to drive growth and capture market share. With that, I will now hand the call over to Brandon to discuss our Q4 financial performance and outlook in more detail. Brandon, take it away.