Coveo Solutions Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 9 speakers on the call.

Operator

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 Second Quarter Fiscal 20 24 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

Mr. Moon, you may begin your conference.

Speaker 1

Good afternoon, and thank you for joining us today. With me on the call are Louis Tetou, Coveo's Chairman and Chief Executive Officer and Brandon Nussey, Coveo's Chief Financial Officer. Before we get started, I would like to note that certain statements made during this conference call forward looking statements within the meaning of applicable securities laws, including those regarding our plans, objectives, expected performance and our outlook for the Q3 and 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 actual results could differ materially.

Speaker 1

We do not undertake or 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 AIF and the section key factors affecting our performance in the company's most recently filed MD and A, 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 and A issued today, which may be found on our Investor Relations website at ir.coveo.com and our SEDAR Plus profile. Please note that unless otherwise stated, all references to financial figures are in U. S.

Speaker 1

Dollars. Lastly, slides accompanying this conference call are available for viewing and I will now turn the call over to Louis to begin. Louis?

Speaker 2

Thank you, Paul, and thank you all for joining us today. Starting off with the financial results, I am pleased to report that 2nd quarter SaaS subscription revenue excluding the impact of Cubit churn grew 19% Year over year. Additionally, our adjusted operating loss for the quarter was 1,000,000 a significant year over year improvement from $4,700,000 for the same quarter last year and was ahead of our guidance for the quarter. We are incredibly excited by the promising early results and customer interest from our generative AI rollout program, And we're thrilled to announce Xero as our first customer to go live with Coveo relevant generative answering with SAP and overall interest in our AI platform creates a substantial opportunity for us In the mid to long term and expect a positive impact on bookings in the coming quarters. Generativeai has been for Coveo extension of the capabilities we have built over the last decade in our platform.

Speaker 2

Having said that, following the release of Chad GPT, we have observed so far this year a landscape where enterprises have been grappling with the Hype surrounding generative AI and have been carefully assessing and evaluating its practical applications along with its many risks, including security, factuality, accuracy and cost. With that hype came an onslaught of marketing messages and pitches that enterprises have been forced to sit through to a certain what is reality And what is actually worth buying that will drive real business outcomes. As a result, many customers have been in evaluation mode as they further refine their strategies around generative AI and have been cautious about entering into new deals, especially in light of the ongoing macroeconomic headwinds that have more broadly impacted customer spending on software. While this has, of course, been disrupted the sales cycle, I believe this ultimately plays to our advantage and believe the market has started to coalesce around 4 main areas where tangible ROI, even in the current macroeconomic environment can be achieved. These areas are customer service, knowledge management, commerce, Content creation and co piloting.

Speaker 2

In the first three, we believe we are extremely well positioned to be successful through our unique ability to solve the many challenges of leveraging generative AI in enterprise use cases, Our approach to creating an enterprise grade generative AI solution has always been guided by our last to hype first the results principle. And as I'll talk about shortly, we now have the results to justify the hype. So in summary, we are very bullish on the underlying long term growth drivers of Coveo in spite of what we believe are near term macroeconomic headwinds. As I mentioned, we're extremely excited about the early progress rollout of our generative AI program, and I'm pleased to announce that we're on track for general availability of Coveo Relevance generative answering for service, website and workplace use cases in December 2023, a major accomplishment by all measures. We also recently announced early access availability of Coveo relevance generative answering for B2B and B2C Commerce, offering customers an enterprise scale generative answering solution for commerce.

Speaker 2

This innovation empowers customer experiences with AI driven question answering and advisory capabilities, Fostering customer engagement and product knowledge discovery and e commerce. KAYO's generative answering solution is designed to enhance the digital We signed our first 5 generative AI transaction in our fiscal Q2, including 1 in commerce that I'll talk about Later, with a substantial number of additional deals expected to close in our fiscal Q3 and Q4. The significant customer interest in generative AI and our platform more broadly resulted in another good quarter for pipeline generation Commerce and our partnership with SAP in particular continuing to represent a significant portion of our growing pipeline. Most excitingly, while we have been articulating the value that we believe relevance generative answering can bring to our customers, we finally were able to see the benefits via AB testing. And I am excited to share that the early results were far better than our expectation, with customers seeing case deflection improvements in excess of 20%.

Speaker 2

This would equate to significant cost savings, especially when considering the scale of most of our enterprise customers. Importantly, these savings are in addition to the cost savings already realized by our customers through the use of our AI platform. Being able to show concrete and tangible improvements and business outcomes like case deflection and customer service At the end of the day is what our customers care about. It was the one question we still had as we began providing product access This is the most significant and massive advancement in self-service we have seen that can significantly improve self-service, Tonic shift of value from the contact center into intelligent self-service, an area where Coveo is also uniquely positioned. As I mentioned, we had our first customer Xero go live with Coveo Relevance answering to enhance its customer service for its 3,700,000 business subscribers.

Speaker 2

We believe this is one of the first examples in the market the company deploying generative answering for self-service use cases at scale globally. This enhanced solution aligns with Xero's vision of delivering real time conversational answers, leveraging Coveo's unified index for secure and complete with citations for traceability to sources of truth. By offering personalized and generative self-service journeys, Xero helps their subscribers to independently manage complex tasks, freeing up their contact centers' capacity while delighting more customers, in the coming weeks, Xero intends to implement generative AI for internal employee support and knowledge Xero's vision is to streamline and enhance the overall digital experience across their organization, SCORxX0's ongoing commitment to improving interactions with both customers and employees, and we at Coveo are thrilled to play a central part in this journey. Another compelling example of the potential of generative AI Coveo within our commerce line of business is our collaboration with a major U. S.

Speaker 2

Home improvement retail chain. We successfully created a proof of concept that can connect their extensive internal product documentation to their product catalog, resulting in a RIDGE guided discovery and advisory experience for their customers. This groundbreaking capability showcases how shoppers can gauge with in-depth product exploration much earlier in their buying journey, while maintaining their focus on the retailer's website, removing the need to navigate to external sites. This achievement not only exceeds our initial expectations within Commerce, But also shows our ability to rapidly implement new capabilities and applications of generative AI, thanks to our single AI platform. We are thrilled to continue innovating with this customer to further optimize results.

Speaker 2

Additional generative AI wins with our customers included a leader in high performance silicon chip design, verification, IP integration and software security, we believe these early wins are a great start as we continue to penetrate what we believe is a very significant opportunity, both within our installed base and with net new customers. In addition to our generative AI successes thus far, we also won a new commerce customer that is a leading global B2B distributor of connector and This customer shortlisted Coveo and one other competitor to replace their existing homegrown search solution, ultimately decided to partner with Coveo because of stronger product capabilities and our ability to handle large and complex catalog. Their goal is to make significant improvements in the digital experiences they provide to their customers to maintain their leading market position. We also secured a significant new customer win with a major Australian retailer for their next generation employee portal, marking another important milestone in the ANZ region. The customer was looking to address critical gaps in their usage of sales this is the first of many other opportunities we will have to expand our relationship with this large customer.

Speaker 2

As shown on the slide, we made several announcements during the quarter that highlight the strength of our AI platform developed over more than a decade, demonstrating our commitment to ongoing and high velocity innovation. Subsequent to the end of the quarter, we announced more than 15 additional innovations to our AI search and generative experience platform to further enhance digital these advancements solidify Coveo's leadership position empowering billions of individualized, trusted and connected digital experience interactions on a global scale, enabling enterprises to excel in an ever evolving digital landscape. I'm especially pleased with the remarkable speed at which, in collaboration with our design and advisory partners and the strength of our R and D team, we have successfully established a truly enterprise ready generative AI solution. It has been approximately 7 months since our announcement of relevant generative answering to now having our first customer live with solution and Coveo is one of very select few vendors to have any customer live with a generative AI solution That we believe generates a substantial and tangible ROI. This achievement built on our robust AI

Speaker 3

platform enriched and

Speaker 1

refined over

Speaker 2

a dozen years, offers Enriched and refined over a dozen years offers customers a powerful technology to drive the new business the person imperative through semantic search, AI recommendations and now generative experiences that are fully secure and accurate. We know what it takes for enterprises to gain a trusted AI experience advantage, and this places us at Forefront of this journey where search, recommendations, generative answering, chat, conversations and personalization All converge. This completely redefines a new much more powerful digital experience paradigm And we are proud to see Coveo at the forefront of that innovation, already delivering results at scale with some of the leading brands in the world. With that, I will now hand the call over to Brandon to discuss our quarterly results in more detail. Brandon?

Speaker 4

Thanks, Louis. It's obviously a very interesting time for the business with several moving parts to it at the moment. So to try and succinctly summarize the most salient first, we delivered 19% SaaS subscription revenue growth for the quarter, excluding the impact of Cubit churn, Which was slightly ahead of our guidance. Customer retention and expansion remained solid with NER for the quarter at 111 percent outside of Cubit related churn, indicating customers continue to buy more from us. We delivered our 2nd consecutive quarter of positive cash flow from operations and are well ahead of our plans on adjusted operating loss and for ongoing cash flow positivity.

Speaker 4

This combined with our strong balance sheet keeps us well positioned in this fast evolving market. And importantly, we continue to believe that we have multiple opportunities on hand to reaccelerate our revenue growth rates. The first of these, of course, is our Relevance Generative answering solution. We continue to see customer interest building for this product and believe we are one of a small number Companies that are actually beginning to monetize generative AI within the enterprise segment. We remain positive in our outlook for this offering and in quarter signed our first five customer order forms with further signings in the current quarter.

Speaker 4

As a reminder, we have always said this will be primarily a fiscal 2025 growth driver as customers evaluate the offering and finalize the purchasing decisions. 2nd is our opportunity inside of Commerce and more specifically with SAP as an endorsed partner. We are similarly seeing a lot of promising signs of progress, Again, I've said this will be a fiscal 2025 growth driver given the work that goes into enabling their sales team and overall sales cycle lengths. Hopefully, many of you will attend our Capital Markets Day next week where SAP CX's Chief Operating Officer will be present to highlight to you firsthand While these growth drivers give us optimism in the immediate term, you've heard from Louis that customers are being forced To dissect the noise in the market around generative AI while making their purchasing decisions. This affected sales cycles in the near term we've seen our typical pipeline conversion metrics and deal cycle lengths elongate.

Speaker 4

As we look into the back half of the year, we are seeing signs of customers resuming and finalizing the purchasing decisions after this period of disruption and our pipeline of deal activity is encouraging. However, we will remain cautious in our outlook as I'll get into shortly. We've also discussed Cuba Churn in the past and as expected, this Churn is materializing. In aggregate, it is unchanged in estimated amount, but a portion of it did occur earlier in the year than previously estimated. And in the meantime, you can count on us to be efficient capital allocators.

Speaker 4

We have retired almost 5,000,000 shares via share buybacks And as mentioned, are tracking well ahead of our targets on reaching cash flow positivity. We are improving our AOL guidance for the year even with Now let's get into some of the details. For the Q2, SaaS subscription revenue was $29,400,000 an increase of 15% year over year and total revenue is $31,200,000 growing 12% year over year. Excluding the impact of the legacy Cubit churn I mentioned, SaaS subscription revenue grew 19% year over year. In Q2, we observed both land and expand bookings across all of our lines of business and consistent with previous quarters, all four of our lines Business continued to grow double digits year over year on an ARR basis.

Speaker 4

Overall, ARR growth was largely in line with SaaS subscription revenue growth both including and excluding the Qubit churn. Generative AI bookings are off to an encouraging start with our first 5 customer order forms signed in the quarter. While we will not start to recognize revenue from these Our net expansion rate as of September 30th was 106% compared to 109% we reported in our Q1 results. When excluding the legacy Cubit churn, our NER was 111% for the 2nd quarter, a positive sign that more of our existing customers are finding 26% for the same period last year. Adjusting for share based and other payments, adjusted gross margin was 79% for the 2nd quarter, an increase of 1% compared to a year ago.

Speaker 4

Product gross margin was 82% in the quarter, consistent with the prior year, And our adjusted product gross margin was 83% in the quarter, also consistent with the year ago period. Continue to view this as a very important leverage point in our business model that sets us up well for strong profit margins in the mid to long term. Adjusted operating loss for the quarter was $1,000,000 a significant improvement compared to $4,700,000 a year ago and well ahead of our previous guidance we have ongoing strong expense management. We generated approximately $800,000 in cash from operations in the quarter $1,800,000 for the 6 month period, which is also well ahead of our plans. On a non adjusted basis, operating loss for the quarter includes a $3,200,000 non cash impairment charge for the customer relationships recognized at the time of the Qubit acquisition.

Speaker 4

With the customer attrition realized in the quarter as a result of our decision to deprioritize this non core capability, we concluded a write down was appropriate based on updated valuation models. We ended the quarter with $168,000,000 in cash and no debt, With ongoing operating cash flow positivity clearly in sight, we are well positioned to navigate the macro uncertainty and capitalize on our market opportunity. So finishing with guidance, we continue to see positive indicators that enterprises are viewing our space as a priority, given the enthusiasm for AI and its potential impact on business outcomes. However, as you've heard, customers have been forced to dissect the immense hype around GenAI and have had to take the time to diligence their purchases and select their AI partners. Of course, while our market is a priority for many enterprises, we are also not immune to the macro environment and its overall effect on enterprise software spending.

Speaker 4

This has delayed deal cycles in the first half of our year. As we look into the back half of the year, we're encouraged by the deal activity we are seeing, and we're seeing signs of customers and prospects finalizing their decision making and moving through their purchasing decisions. We're optimistic with our position in the market and take the early order form signed for our generative answering solution as a positive indicator of this. However, these are early signs and we would like to see this materialize further. Our revenue guidance also reflects the updated timing of the Cubit related churn, which occurred earlier in the year than previously expected and impacts the amount of recognized revenue for the year.

Speaker 4

Further, we are seeing a greater portion of our bookings coming via expansion in this market, which typically carry lower professional services revenue So with that all said, we're now expecting to land at the bottom end of our previously issued guidance for SaaS revenue for the year with a conservative stance are updating our SaaS revenue guidance to $117,000,000 to $118,000,000 For the Q3, we expect SaaS subscription revenue to be between 29.1 And $29,600,000 Approximately 60% of the expected Cubit churn for our fiscal 2024 occurred in the Q2, which will have a negative impact on our sequential quarterly revenue growth for our Q3. Excluding the legacy Cubit churn, we expect our core growth rate on SaaS subscription revenue to be approximately 15% for the 3rd quarter. Reflecting the lower estimated services revenue for the reasons mentioned earlier, total revenue guidance is being updated to 124.5 to $31,400,000 Due to our ongoing efforts on efficiency, we are improving our guidance range for adjusted operating loss to $9,500,000 to $10,500,000 compared to the previous range of $11,500,000 to 13,500,000 in the Q3, we expect adjusted operating loss of $2,500,000 to $3,500,000 And we now expect cash used in operations of less than $5,000,000 in fiscal 'twenty four compared to the $10,000,000 rates roughly in line with where they are today for SaaS subscription and total revenue growth as well as adjusted operating loss.

Speaker 4

And with that, operator, you may now open the line for questions.

Operator

Thank you will hear a 3 tone prompt acknowledging your request. Questions will be taken in the order received. Your first question is from Doug Taylor from Canaccord Genuity. Please ask your question.

Speaker 3

Thank you. Good evening. Congratulations on securing the first orders for your generative AI product. With that, I'd like to hopefully revisit the discussion on the pricing dynamics that you're establishing around that module, whether there's anything more you And share with us at this time about how that's priced relative to your core enterprise search solution.

Speaker 2

Right. This is Louis. Hi, Doug. Thanks for the comments. The pricing, we went out Initially, with pricing that was in line with 3, the first movers charging a percentage.

Speaker 2

And so that percentage, and we published it, was 40%, Which was obviously well accepted given that we've been able so far to land already 5 orders. And that pricing is 40% currently with a 6 figure minimum. So It's considered for early orders to be pretty substantial. That being said, Doug, we are looking at further refining pricing as we move into production From our early beta adoption program and especially given both the cost And the value especially in particular that we generate, we expect that pricing to go up.

Speaker 3

Okay. It's helpful. Perhaps similar or along that same vein, given you've now got a customer live with your generative answering function,

Speaker 4

can you tell us a

Speaker 3

bit more about the onboarding process, Anything that you have learned about how customers once they've signed, what the adoption curve looks like relative to your Corusarex

Speaker 2

I would say, Doug, that the adoption and both the adoption and the speed and the results we're beyond our expectations. Obviously, we've marketed the solution initially, the early adopters were customers of Coveo, which already had the Coveo infrastructure, the Secure Index and all the relevance AI stack in place to feed generative AI. And we've been clear in prior calls that this Obviously, it puts Coveo in a very unique position to take advantage and for customers to take advantage of that technology. While we had initially anticipated a month in terms of adoption, And the customers themselves have been the ones probably putting more pressure on us to accelerate The global the rollouts and in some instances the global rollout of the solution and the results As you know in our space are done through AB testing. So we direct part of the traffic to the legacy solution and we direct part of the traffic to, generative answering, in this case, generative AI.

Speaker 2

And the initial use cases were predominantly In customer service and self-service, and so we've been able to achieve that and close the loop within a matter of weeks. Closing the loop meaning being able to actually measure consistent results and gains. And as I Earlier and as Brendan mentioned, these were beyond our expectations.

Speaker 3

And maybe one last question for me then. Having the return on investment from your customers being higher than you'd previously thought would suggest that the usage and the utilization of the natural or sorry, the generative large language model function is higher. Can you speak to any observations you'd have about the cost to Coveo for providing that solution versus your earlier expectations Now that you've got the customer live.

Speaker 2

Yes, that's a very good question and we think will put us at a competitive advantage as well from a cost perspective. So not only we are in a position to deploy generative AI that generates based on current data, Thanks to the index that is secure and that is accurate and well grounded and fully traceable. But So, the way we engineer this obviously is goes a long way in terms of optimizing the cost. Generative AI, and the Cost of generating an answer can be as much as 100 to even 1000 times higher than running Quarry Engine, if not engineered properly, the ability of Coveo to provide The stack of software that isolates the secure current and relevant corpus of information in order to feed the large language models goes a long way in terms of optimizing the cost. And right now, although we don't have any completely accurate model Of the cost as we're learning a lot from the use cases, we already know that the cost part Is well under control and within the types of within the range of the zip code of the type of gross margin that we normally produce.

Speaker 3

All right. Thank you for confirming that. I'll pass the line. Okay.

Operator

Thank you. Your next question is from Asadis Mostopoulos from BMO Capital Markets. Please ask your question.

Speaker 5

Hi, good afternoon. Louis, with respect to the two factors you referenced, prompting the slowdown, the macro and then customers also Pausing to evaluate all the various options for GenAI. Maybe a hard thing to answer, but would you say one of those factors is having more of an impact than the other?

Speaker 1

Are they kind of similar? What would

Speaker 3

be your thoughts on that?

Speaker 2

I think for us, thanks for the Question, I think for us, it's really been the macro is the macro. And to the extent, however, that we can Provide solutions that generate a high ROI that we can demonstrate. There are ways around it. I mean, the main effect of the macro is more scrutiny in the deal conversions and so on. Sometimes we say we don't that generative AI and when chat GPT came out and I always joke by saying when people started writing Poems on their iPhone in December January and got all excited about generative AI.

Speaker 2

When that got into the enterprise, enterprises, it took everyone by storm. It took the world by storm and everyone by surprise and enterprises had to Enterprise and Enterprises had to distill essentially how that would be applied in which use cases And really understand the implications from an IT and data governance perspective, security And etcetera, and frankly, also the cost and really understand the true benefit. Coveo is one of the first companies That has closed the cycle. And while this has sort of stalled a lot of decisions since the beginning of the year, we're now seeing as we can demonstrate results, obviously, and we can demonstrate to CIOs that we can run that In a way that is enterprise grade and fully compliant and secure, we're seeing that level of These companies reengage and convert, especially as they see the kind of benefits that they can get. And so basically, we expect the bookings we've seen that we're seeing that in the Pipeline activity and we expect the bookings to reaccelerate and with an impact on the back half of the year and obviously fiscal

Speaker 6

25. That's great color. Thanks. And then on

Speaker 5

the SAP channel, you alluded to the fact that It's kind of in the process of ramping, obviously, a lot of training. I imagine that has to be done with respect to the sales force, but maybe could you update us in terms of where that process is?

Speaker 2

Yes. So we announced the global endorsed The deal, which is a big deal obviously with SAP globally, if you recall, at our earnings call for Last fiscal year basically in April, beginning of May. And this deal And really in April, so we started rolling it out and so on. The sales cycles, as you know, and that's mainly on the commerce side, right? The sales cycle really are no less than 6 So 9 months, so as we went through that period in the summer period and we're now rolling out more and more enablement, We've seen that pipeline continue to increase and we're obviously in deal activity That is increasing as well right now.

Speaker 2

So for us, it's sort of the normal cycle, as you pointed out, of deploying the enablement and given that it's a global deal, it's a rather large operation that spans Europe and North America mainly for now and parts of Australia, New Zealand. And so we're into it right now, but we're clearly seeing the growth and commerce as a solution continues to be our biggest Growth opportunity, but also now with relevant generative answering as well, but obviously

Operator

thank you. Your next question is from Sivan Sukumar from Stifel. Please ask your question.

Speaker 7

Good evening, Louis, Brandon.

Speaker 2

Good evening.

Speaker 7

Congrats on Some of the early initial progress here on the year, the GenAI trial, just kind of looking ahead to the anticipated commercial rollout, just curious, can you share some details on what that might look like in terms of if you'll be focused on existing customers beyond some deal adopters in your base or will We'll be looking at it, looking at driving more net new business. Just curious what your priorities are from a go to market perspective.

Speaker 2

Right. So initially, we announced We would come out with the product, if you recall, Sometime around the April timeframe, we actually demoed the product initially to our customers in June In California and then announced our beta program that started later this summer and are gradually rolling out, we previously announced that we have approximately 45 companies. There Actually more than that aligned right now. And initially, our initial rollout was with existing customers because those are customers who Already have used the large Coveo indexes across their enterprise, already have the data and etcetera ready. And for us rolling out, generative answering as an extension of that infrastructure Was a natural, and so this is why we went there.

Speaker 2

There's no question now that relevance generative answering is a part of our Our platform is a platform that's made of numerous AI models and behavioral machine learning, deep learning, Large Language Models and now generative AI. And so that's an addition that We also promote now to new customers as well, and we expect to see some of those orders also from new customers from this type of functionality in the quarters to come.

Speaker 7

Okay, great. And just a follow on to that, when you look at your pipeline today, How much of that can you attribute how much of that growth can you attribute from GenAI and from net new Customer specifically and we think about call it the LTV to CAC opportunity For new customers, how does that compare to what you've seen today with your existing base?

Speaker 2

Right. So we don't see any pressure Given the increase in value and functionality, we don't see and we don't anticipate any downward pressure despite the economy on the deal size, first of all. So the value of our Solution keeps increasing and the breadth of the functionality keeps increasing and we can connect that functionality to the value. So that's number 1. What we're seeing is obviously more competitiveness for the overall platform.

Speaker 2

Gen AI is not a separate thing. And if there's anything that we're trying to tell the end of the market and that frankly customers are realizing now as many of them rushed to GenAI as a separate thing, they have realized And we're here to show that, that in fact, GenAI is a natural extension. You cannot Generative AI, at least not in the types of use cases that we do, which are digital experiences, commerce, websites, Customer service, workplace type of applications and mostly real time digital experiences, you cannot activate generative AI unless you master the science of data connectivity, unless you master the science of relevance in fact And understanding users at the other end in real time and their intent and their context and their behavior, which has always been The forte of Coveo. So what I want to say here is that Relevance generative AI is a natural extension to that platform. And so the way to think about it is not so much generative AI only as an incremental product, which today it is For our existing customers, but really as an integral part of our platform that becomes suddenly more valuable And more differentiated, more competitive in our markets.

Speaker 2

And so we expect more and higher bookings As bigger deals, more deals as a result of that, I guess.

Speaker 7

Okay, good. Thank you for the color, Louis, and congrats on the early progress. I'll pass the line.

Speaker 5

Maybe just in terms of the change to your full year guidance, I just want to clarify, if there was any increase to the Cubit churn that Was previously indicated in the prior quarter or if that has remained consistent?

Speaker 4

The aggregate amount is consistent. Just the timing of it, we did see it start to come in a little earlier in the year than we otherwise had planned. So the impact on revenue recognized, we lost a couple of months in some cases, but an aggregate amount remains the same.

Speaker 5

Okay. That's great. And so then you've mentioned obviously the 5 orders for generative relevance answering in your release. And then maybe in terms of the guidance for fiscal 2023 revenues, just what's implied for generative Relevant to answering in that guidance, is it those 5 deals or is it looking ahead a little bit as well?

Speaker 4

Yes. I mentioned in my comments there that of these 5 initial orders, and there will be more, The way we structured these agreements is that revenue recognition will begin once general availability is met. And as you heard from Louie on his prepared comments, that's expected in December. So good news is we're seeing order forms flow for Enterprise to put a signature on an enterprise on an order form. They've done their diligence and run it through their processes.

Speaker 4

So That's the positive news, but it's not going to really contribute a whole lot into our current year revenue. It's more of a fiscal 2025 driver for us.

Speaker 5

Okay. No, it's great. And then you had mentioned last call, some large software firms that were asking for about a 50 And I think you'd also mentioned on the order of 1,000 times the So you had provided some several strategies on how Coveo would work with customers to help on cost efficiencies for these firms, including using different LLMs and several other strategies, could you maybe help us to get a sense of like the order of magnitude of cost savings that your solution might offer Against these other competing solutions on a rough level?

Speaker 2

Well, I don't know that we can comment on the competing

Speaker 5

we're

Speaker 2

we do not see in the use cases that we run The scale, anything that's at scale, like Coveo, that is in full production in enterprises Globally, that's number 1. So it's hard to compare. However, let me give you some color on this. What we said before and what we Pete here is that, Generative AI can be very costly, if not engineered properly. So if you're trying to generate an answer from an extremely large Corpus Data and an extremely complex prompt with extremely complex Prompt Engineering, there's a very high cost to that.

Speaker 2

And so what we're able to do given the platform that we already have that again, basically is based on large scale high performance Enterprise indexing combined with the ability to, which we call relevance, the ability to understand in near real time who's at the other end, we're able to narrow the problem in a way that is extremely cost And so relative to the gains, so we've been able to measure In excess of 20%, as we said in the earlier call, in excess of 20% call deflection with some customers. And so what that means essentially is if you run a contact center By applying generative AI, and that 20% was on top of Coveo by the way. If you run a contact center by using generative AI, you suddenly have 20% less cases. So think about the economic benefits of that. So we think the costs are going to be, not negligible, but Certainly, reasonably low relative to the value, the economic value that we can generate.

Speaker 2

And again, as I said earlier, very much in the Vicinity ZIP code or the range of the COGS that we're used as you know, we currently run at about, but I don't know, last quarter off the top of my head, but roughly around 82% product gross margin. And so we think we can pretty much stay in that neighborhood. Okay, that's great. I'll pass the line. Thanks.

Speaker 7

All right. Thank you.

Operator

Thank you. Your next question is from David Kwan from TD charities, please ask your question.

Speaker 6

Hey, guys. So I was just curious, You guys talked about, I guess, from the AV testing, it took probably about a few weeks. So when you look at when the customers, I guess, started the beta testing to moving ahead to at least deciding to go ahead with live production, it sounds like probably about a month or so. Is that about right?

Speaker 2

It's, it's, yes, it's in that range, a little more than that, but it's been a matter of a few weeks, yes.

Speaker 6

Single digit weeks, perfect. And I guess going forward though, as you maybe get more data on whether they be Spinger, maybe get some actual kind of tangible ROI. Do you expect those timelines to actually improve?

Speaker 2

Yes, they'll probably be about the same. What happens is, well, it depends whether we're deploying a new Customer or an existing customer, obviously. But it will probably be about the same. What we need to understand here is that the Coveo customers are all large. We deal with large scale enterprises.

Speaker 2

And the common characteristic of our customers is they have a massive amount of content And variety of content and or products that they need to deliver to Very, very large and very diversified audience sometimes across the world. And so we're seeing volumes here that Basically converge very, very quickly. When you have hundreds of thousands of visitors a day that in some instances, You can very quickly understand through AB testing as you run 20%, 30%, 50% of Traffic through a technology and you can compare. So you don't need weeks. Now what's What's interesting and fun for us right now is that as customers have kept using the solution over the weeks, we're seeing the same The exact same pattern, but I guess the timeline in scientific terms, David, the timeline to gain a statistically

Speaker 6

Well, that's helpful. Thanks, Louis. And on Commerce then, are you guys All Pulse App plan do a beta program, like you did with Service Workplace and website. I know you've obviously you talked about one customer that's already made a purchase order here. So I wasn't sure if you were looking to doing a broader beta program for Commerce

Speaker 2

Well, we have not launched one yet for Commerce. We might actually be able to go into early Production, but I mean, to a degree, we always launch large new features In sort of in a form of or another of a beta process. But what we're doing in commerce With generative AI, I had some commonalities with what we're doing elsewhere, obviously, Except that it's applied to product discovery and constrained by the data Of the catalog and things of that nature. But so the short answer is we haven't announced A beta program in commerce, but we've already signed, as we said, one order and we Expect more because the solution is quite innovative and should prove to be extremely valuable Very quickly.

Speaker 6

Great. One last question here. Are you finding I know it's a tough enterprise Spending environment here, but are you finding that CRGA is maybe helping you progress conversations with new customers? Is it making a difference here in terms of what's going on in the current climate?

Speaker 2

Definitely. Definitely. And I think you got to look at it both ways. If you're in our space, look, we're an enterprise search vendor. I don't think of many industries that have been more disrupted by generative AI Then search when you think about it, right?

Speaker 2

So this is sort of what Brandon and I explained during the call that customers In the earlier part of this year, I had to sort of distill the hype from the reality and the use cases and how they could apply that And without getting in trouble. But the reality nowadays is if you're in search, if You're in the business we're in, which is essentially digital experience, personalization, semantic search, AI recommendations, personalization engines and that. You just cannot have a conversation now in November of 2023 without talking about generative AI. It would be like if you didn't live in the same era. And so now the good news is that Generative AI is at the same time a catalyst for, I would say a new wave of interest for search, For topics like knowledge management within enterprises because you're talking about self-service proficiency, Think about a bank for instance and how financial advisors will use generative To gain proficiency on their own so much faster.

Speaker 2

With generative AI, you can literally ask a question such How do I activate a mortgage in Fort McMurray for commercial property that has environmental issues and get an answer on that? What is the difference between a TFSA and an RRSP? And can I have one for my 18 year old child? And what's the tax impact? So think about the impact of that even in the workforce and so on.

Speaker 2

So it's very topical And of course, it's driving more and better conversations and especially if like Coveo, you can show it And show that you can deploy it and generate results and quantify those results. We think that's promising. That's great. Thanks, Lee. Thank you.

Operator

Thank you. Your next question is from Koji Ikena from Bank of America Securities. Please ask your question.

Speaker 4

Hey, Koji. Hey, how's it going? This is George on for Koji.

Speaker 2

Okay. Hi, George.

Speaker 3

Hey, how's it going?

Speaker 4

With some of the early adopters of the generative answering feature, have you noticed any commonalities among them? Or is this kind of more broad based interest

Speaker 2

I think the commonality is within the spectrum of a Think about it in 3 buckets, right? The whole and 2 of them we don't do, by the way. So the whole CoPilot cogeneration area, right? That's one area. We're not in there.

Speaker 2

Number 2 is content creation. So whether it's images or symphonies or For the most part, text, summarization, things of that nature, account summarization and Generation of marketing content and things of that nature, that's content creation. That's not something we do. The 3rd area is in the digital experience and in real time. When you have someone online, On a website, in a commerce experience, on a customer self-service experience or an agent in a contact Center or plain and simple, as I said earlier, a financial advisor or an employee in the workplace.

Speaker 2

Think about so this is the area where we're in. So it's really the commonality Is among the use case, but I would say the common attribute is how do you make how do you increase the self-service proficiency? How do you make that user smarter, faster about what is it that they're doing? What is it that they want to buy? Or what is it that they want to fix?

Speaker 2

And that from that perspective, it is a revolution. In my personal career, I've never seen anything like that in terms of the magnitude of the quantum leap that it creates for a digital experience. So I hope that answers your question.

Operator

Thank you. Your next question is from Paul Treiber from RBC Capital Markets, please ask your question.

Speaker 3

Thanks very much. Good afternoon. Just a couple of quick questions. Just on the pilots that you're conducting with the customers and it's good to see that a number of them have converted the, and the data on the AB testing. Could you speak to any alternatives that they were evaluating your solution against?

Speaker 3

Is it other competitors? Is it homegrown? And how did that sort of comparison go?

Speaker 2

Paul, It's really initially build. Every company went out and was looking To build something and do an early test in the area of generative with Technology or Technology of the Method that we call Retrieval or Augmented Generation or RAG, Which is essentially you isolate a corpus of data, you generate from that data, from that Corp. Is what's called embeddings, which you store in a vector DB and then you engineer a prompt to a large language model. What companies realized In doing that is that, they needed to integrate that with data that is current, data that is Secure and in a way that is across their enterprise. So it's a little more complex than working from a single knowledge base.

Speaker 2

And that also search channels, conversations, chats and navigation, this Ambiguation of results, etcetera, they weren't going away. So would you imagine a user going to a page where you would have a search box, a question answering box and then a chatbot. So ultimately, obviously, that becomes very convoluted and clogged. And so users realize that it paused some it posed some very significant security, currency Issues with Veracity, big brands can't hallucinate. So for all those reasons, A lot of these projects didn't turn out.

Speaker 2

They were experiments, but they didn't turn out to be very successful. And so against the build, obviously Coveo comes with a solution that integrates The data component, the security component, the veracity traceability component and the data currency component. And so that we think that becomes very, very attractive versus the build your own solution, especially that we can do at large language model agnostic, although today we use GPT, OpenAI GPT service on Azure pretty much, but we have side by side other Technologies as well in the lab that we can we think down the road we can interchange depending on The verticals and the application and so on. So we're keeping it very flexible.

Speaker 3

And then just One last one for me. The it sounds like generative AI is expanding the addressable market Just given that the productivity potential productivity savings, what do you think happens to traditional enterprise search? Does it Become merge or intertwined with generative AI or do you see them as use cases?

Speaker 2

No, totally. Search results, You can think about commerce or content. People don't just want an answer. They want to be able to navigate a corpus of content. They want to be able To disambiguate, they want to be able to narrow down Set of results or the corpus of data through within which they want to generate an answer.

Speaker 2

And frankly, they want an integrated experience. As I said earlier, you can't have a digital interface, Whatever it is, whether it's an intranet or an employee or dealer portal or a patient portal or a customer portal, you can't have a page Where you would have a surge box on the left hand side and a question answering box on the right hand side. And you can't just deliver an answer. People still want to control the experience and so on. So the reality is you just said it and many companies are realizing that Is the world of search, navigation, disambiguation of results and Answering and frankly, ultimately, conversations and chats and personalization and recommendations are all converging, All converging right now and this is in fact the platform that we're creating is to bring that all together.

Speaker 3

Thanks for taking the questions.

Speaker 2

Right. That was a very good question.

Operator

Thank you. Your next question is from Adir Khadwe from 8 Capital. Please ask your question.

Speaker 6

Hi, good evening, guys. Thanks for taking my question. Maybe just one on the commerce use case versus customer service use case Are you finding or do you think that a lot of the heavy lifting that you've already done on self Service will kind of transfer over, given that, Louis, you mentioned that Commerce could potentially go straight to production as opposed to going through maybe a beta test?

Speaker 2

Right. So there are differences obviously, but you're in the world what generative AI really does in our space, Again, we're not in content creation or the other things I described, but in our space, which is real time digital experiences, What generative AI does is it moves the experience from a search based experience and results oriented and recommendation oriented experience that if sophisticated enough using AI, deep learning and behavioral based machine learning is Scriptive in nature and anticipates and all of that, but still is limited to that. It moves it to an experience that becomes advisory. Should I use this or should I use that? These are answers.

Speaker 2

These are questions that can be answered by generative AI. What is the difference between product A, product B, product C? And in what circumstances should I use product C, given that I live in the North and I don't like this, right? These are the types of questions that in the context of commerce or workplace or so on can be answered. Now in commerce, there's a couple of subtle Thanks, which is you want to if you're a large retailer, let's say, you obviously want to Provide advice, but you generally would prefer to provide advice across products that you can sell and deliver.

Speaker 2

So you want to be able to limit or manage or control or team essentially the answers And the large language model to be constrained by the catalog and all the specificities around that and so on. So you want to facilitate the consumer discovery towards the product that you want to sell. Nobody wants to serve advice for you to go to Amazon And buy something, right? And so these are but we already are very confident in that. We already understand that.

Speaker 2

We understand recommendation engines and we understand relevance and we understand how to create a great consumer that will yield to stuff that you will sell, bigger cart sizes and etcetera. So from that perspective, I know it's a long answer, but I think it deserves it. It's from that perspective, we're applying Generative AI to that specific problem and we think that's probably one of the best one of the most important problems In commerce to create a much richer experience.

Speaker 6

Understood. Thanks. And then one quick one and then I'll pass the line. Just on the SAP partnership, It's been live for call it 6 or 7 months now. Just on the pipeline that you're generating from the SAP Endorse partnership, are you finding The deal sizes are changing from when you first introduced it to now as you kind of educate the SAP sales force, But any just any changes in the pipeline from SAP, any color on that would be super helpful.

Speaker 6

Thank you.

Speaker 2

Well, I'll give you And answer because as you said, it's been going on for 6 months and so on. And We're building the pipeline and seeing the deals, but until we see a larger number of deals, we'll see. But the general trend or pattern that we see For instance, Shopify has a very large number of customers, But they tend to be and they have larger ones, but they tend to be on average fairly small, Meaning that they have a large number of customers that on average probably sell about $100,000 of gross merchandise value every year. And as an aggregate Shopify probably processes today, I haven't checked last month, but In the range of about $150,000,000,000 a year of gross merchandise value across its customers. SAP has only a few 1,000 customers, but they process close to between $1,500,000,000,000 $2,000,000,000,000 And so by definition, by design, those customers are very large global corporations often that operate in many countries, often that have hundreds of thousands of SKUs.

Speaker 2

And in some cases, we've seen as much as a 1000000 consumers a day. And so I guess that answers your question. So normally, as you as this kind of technology generates more value, it commands a bigger price. Also because the consumption is higher. Yes.

Speaker 2

Sorry about that. Also because of the volumes are higher obviously.

Operator

Thank you. Your next question is from Ittai Kidron from Oppenheimer. Please ask your question.

Speaker 3

Hi, this is Hersl on for Ittai. Can you guys hear me?

Speaker 2

Yes, Hersl. Hi.

Speaker 6

Hey, Louis. So I just wanted

Speaker 3

to ask in the early conversations that you've had with customers around generative AI, how are you finding them able to balance finding budget for these projects given the tough macro environment? Are you having to see them maybe reallocate budget from existing projects or is this mostly a new budget category that customers are creating? And then just as a quick follow-up. Yes, go ahead. Yes, just as a follow-up, given the opportunity you're seeing, are you planning to make any changes to your Go to market hiring for next year.

Speaker 2

Right. So we're Growing the hiring, obviously, in line with the pipeline. And so we're as You heard Brandon talk about our 2nd quarter cash flow positive and all that. So we're sort of Looking to balance everything, but we're really focused on growth. So as the pipeline growth, we'll continue to Higher and top grade the team accordingly.

Speaker 2

As it relates to your first question regarding budgets, I would say it's pretty much all over the map, but in 3 categories. There are companies that just won't spend money right now Because of budgets, even if you hand them a bag of dimes, they basically won't give you a nickel. And Not always logic that dictates that, but that's the reality. In our case, I think the more important story is we can demonstrate the ROI And the ROI that can be sometimes very fast. So in generative AI for self-service, I mean, look, if I go to you and you have thousands of agents in a contact center and I can say I can reduce the volume of cases by 20%, you will be able to translate the math.

Speaker 2

And by the way, it doesn't mean that you're going to necessarily slash your agents by 20%. It means that because it might be the tougher questions actually that get to your contact center. So there's a bit of a math there, But it's nevertheless very high ROI. In commerce, if you can do AB testing that shows higher cart sizes and higher conversions, You generally can justify these projects. So It's more in the justification.

Speaker 2

I would say think about it as a 2 by 2 matrix. On the one axis, it's the ability to spend, Which in some companies is just none, whatever you would show them the teleporter, they wouldn't buy it. But if they have the ability to spend, then the second axis is really the justification, the scrutiny Of the justification, only the high ROI projects typically make it through. And the good news is we're geared for that part.

Speaker 3

Got it. Thank you. I'll jump back in the queue.

Speaker 2

Great. Thank you, Arisho.

Operator

Your next question is from Claire Girtis from UBS. Please ask your question.

Speaker 8

Hi, thank you. Yes, this is Claire on for Taylor. So just a quick one quick one on the guide. I think if you look at it, it implies that The 4Q substruct guide would be a step up in sequential growth, but the 3Q guide would be flat. So Yes.

Speaker 8

Is there anything you can share on what that set up might be, those drivers? I know you called out a couple of things that are impacting this quarter, but, yes, anything you can share there?

Speaker 4

Yes. So for the Q3 or the upcoming quarter, the flat Sequential guide that you're referring to is mainly driven by that cubit churn. As I said in my prepared remarks, we digested the bulk of that churn, the majority of that churn in the second quarter, which of course then flows Through to rev rec into the Q3. And then thereafter, we're through the heaviest part of the churn and we can Get back to growing again. Our focus is, of course, on making sure that bookings, new bookings are Leading the way revenue will always lag those, but so our focus is on that on the new bookings growth.

Speaker 4

But that's a dynamic. That's a play on the reported revenue.

Speaker 8

Okay. Thank you. And then real quick on NRR, going forward, I know the adjusted on the adjusted basis, it was 111%. How has that been trending? And is there anything you can give for us to Yes,

Speaker 4

it continues to trend well for us. It's really a really Positive indicator in a market like this that our NERs have held up the way they have. As we look forward, of course, we'll be mindful of Just the broader economy and things that are impacting enterprises everywhere, but we see opportunity to grow our customer base. We've talked the bulk of this call about the generative offering and how that's increasingly applicable across the customer base, and that's Certainly a wonderful opportunity for us to grow our NERs. But to this point, yes, they've held stable and Been strong through this economy, which is a great sign.

Operator

Awesome. Thank you. Thank you. There are no more further questions at this time. You may proceed.

Speaker 2

Okay. Well, thank you very much everyone for joining our call today. As you can see, we remain very positive around the positioning of Coveo for future growth. And with that, we would like to Those of you who are interested to our Capital Markets Day next Thursday at the Toronto Stock Exchange. We hope to see you there.

Speaker 2

We'll have the Chief Operating Officer of SAP CX with us talking about what we're doing together as

Operator

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

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Key Takeaways

  • In Q2, SaaS subscription revenue (ex-Cubit churn) grew 19% year-over-year while adjusted operating loss improved to $1 M from $4.7 M a year ago.
  • Early rollout of Generative AI saw five signed transactions and Xero go live with Coveoʼs relevant generative answering, delivering over 20% case deflection in AB tests.
  • General availability of Coveo Relevance generative answering for service, website and workplace use cases is on track for December 2023, with early access in B2B/B2C commerce and a strong SAP partnership pipeline.
  • Despite macroeconomic headwinds and initial hype slowing some deals, customer demand is coalescing around high-ROI use cases—customer service, knowledge management, commerce and content co-piloting—to drive bookings in H2 and fiscal 2025.
  • Coveo achieved its second straight quarter of positive cash flow, repurchased $5 M of shares, and, while lowering full-year SaaS revenue guidance to $117–118 M, improved its adjusted operating loss outlook for FY 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Coveo Solutions Q2 2024
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