Coveo Solutions Inc

TSX:CVO

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo First Quarter 2023 Financial Results Conference Call. [Operator Instructions]

Mr. Goode, you may begin your conference.

[Nicholas Goode, executive]

Good afternoon, and thank you for joining us today. With me on the call are Louis Têtu, Chairman and Chief Executive Officer of Coveo; and Jean Lavigueur, Chief Financial Officer.

Before we get started, I would like to note that certain statements made during this conference call are forward-looking information within the meaning of applicable securities laws, including those regarding our future plans, objectives, growth and expected performance, including our outlook for the second quarter and fiscal year 2023. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Further information on these and other factors that could affect the company's financial results is included in filings we make with the Canadian securities regulatory authority, including the section titled Risk Factors in the company's most recently filed Annual Information Form, which is available under our profile on SEDAR at www.sedar.com.

Additionally, some of the financial measures discussed on this call are either non-IFRS measures or operating metrics used in our industry. A discussion on why we use non-IFRS financial measures and operating metrics and, where applicable, a reconciliation schedule showing IFRS versus non-IFRS results are currently available in our press release and our MD&A dated as of today, which may both be found on our Investor Relations website at ir.coveo.com or our SEDAR profile at www.sedar.com. Please note that, unless otherwise stated, all references to any financial figures are in U.S. dollars.

Now I'll turn the call over to Louis to begin.

[Louis Tetu, executive]

Thank you, Nick, and thank you all for joining us today. Building on the momentum of our record fiscal 2022 results, we had a solid start to fiscal 2023. Even in an uncertain macro environment, we're seeing continued demand for our AI-powered relevance platform as businesses look to maximize efficiency and gain ROI from their investments. And as digital transformation remains a priority for businesses worldwide, Coveo helps to enable these enterprises deliver the relevant experiences that optimize business outcomes at scale.

For the first quarter ended June 30, we delivered year-over-year SaaS subscription revenue growth of 47% and total revenue growth of 45%. Gross bookings remained solid, with all lines of business growing double digits on a trailing 12-month basis.

And of note, we're continuing to attract and add customers with increasing cost efficiency. Our net expansion rate as of June 30, 2022, came in strong at 112% compared to 110% in Q4 of fiscal 2022, demonstrating continued momentum in cross-sells and upsells and strong customer retention.

Lastly, but importantly, we demonstrated the operating leverage inherent in our business and our commitment to accelerating our path to future profitability by posting bottom line results better than our guidance.

I'm also pleased to share that we had a strong start to our fiscal Q2, with 2 significant e-commerce deals closing just after the first quarter ended, with 1 of these deals being a large cross-sell of Coveo search and recommendations capabilities to a legacy Qubit customer and the other being a large upsell in EMEA. Had those deals signed in Q1, we would have had the second largest bookings quarter in the history of the company, and commerce bookings would have been in line with last quarter.

However, we've also seen some elongation of sales cycles like many other software companies, especially for some larger transactions. Having said that, demand for our platform remains strong, as evidenced by the record pipeline generation levels we experienced in the quarter. In parallel, we also continue to improve our efficiency in sales and marketing spend.

Coveo remains steadfast in our mission to deliver the relevant and personalized digital experiences crucial to compete and thrive in the current environment, which can only be achieved through the application of AI. We believe AI is not only a true disruptor in the digital landscape but has the potential to change the world even more than the Internet did. We want to see Coveo as a leader in this new wave and believe we are at the forefront of this large opportunity.

As we enter into a period of more macro uncertainty for many businesses, platforms like Coveo become even more relevant to conversations around strategically applying AI and leveraging tools to deliver optimal business outcomes, including improving profitability. Each of our lines of business represent a compelling ROI for customers as they look to achieve the dynamic goals of their business.

In commerce, this means delivering a relevant and personalized shopping experience that boosts customer conversations and spend while optimizing margins and lifetime value. Fostering customer loyalty, however, requires ongoing support that is prompt and addresses the customers' needs. Coveo's service business enables our customers to achieve not only this but does so while reducing cost and the need for manual intervention. And lastly, for websites and workplaces, improvements in search and recommendations give users personalized and relevant content that optimizes their experience, leading to more engagement and proficiency.

In the quarter, we expanded our relationships with a number of key customers in terms of contract value and use cases and complete and expand transactions with customers such as Hewlett Packard Enterprise and Enbridge. We also completed a 7-figure expand transaction with a leading multinational enterprise software company. We added new customers in the quarter, such as Groupe Deschênes and Nordstrom, as well as a leading multinational health care services company with whom we believe there is a significant opportunity to expand our relationship over time.

I would now like to take a moment to highlight a few examples of customers using Coveo's platform to optimize their business outcomes with personalized, relevant digital experiences. One of Canada's largest alcoholic beverage retailers leverages our e-commerce solutions for over 100,000 products in their catalog. These solutions include query suggestions with automatic relevance tuning to access the most relevant content for customers, content recommendations to complement product search, dynamic navigation to assist with filtering and machine learning models to deliver highly personalized experiences for users at scale. Since going live with Coveo during the first quarter, they have experienced a 20% uplift in click-through rates and a significant increase in average cart size.

Coveo partnered with one of the best-known telecom companies in Europe. Their communications and cloud infrastructure solutions for telecommunications enterprises are sold worldwide. And they're using Coveo's AI and machine learning capabilities to increase findability and content personalization on both their corporate website and technical help center. With multilingual content spread across various repositories, their main objective is to increase content consumption and customer satisfaction while streamlining support costs. Noticing how valuable the experience was to their end users, they expanded their use case internally to help their support agents solve cases more efficiently.

Earlier this year, Coveo partnered with one of the largest publicly traded food-based companies in the world with over 250,000 employees. As our largest-ever workplace implementation, we're currently powering their custom-built workplace sites across several of their larger European and South American territories ahead of a gradual rollout in October 2022. Coveo is helping employees search through vast amounts of internal content to find relevant information. The results of our collective work have been warmly received by end users with further optimizations planned.

And lastly, Coveo brought artificial intelligence to the public-facing websites of one of the oldest continuously operating companies in Northern Europe. Although still very early in deployment, we have implemented close to 50 machine learning models, which are already bringing end users the most relevant products and information, driving higher cart sizes, click-through rates and recommending the most relevant items.

I'd now like to give you an update on some exciting new features and launches made within the quarter as we continue to prioritize research and development as one of our strategic investment focuses. We released new recommendations decisioning capabilities to allow deployment of explicit, finer-grained strategies for specific audiences and streamline deployment of global, multi-region configurations to help generate more engagement from merchandisers and increased revenue driven through the Coveo Merchandising Hub. We also simplified the ingestion of complex catalogs found in SAP Commerce by introducing native SAP Commerce sources to make the deployment of Coveo alongside SAP significantly easier as well as to enable processing of all catalog data by our machine learning algorithms.

Additionally, we introduced new decisioning capabilities that allow merchandisers to tailor recommendations at the user type or audience level, enabling them to test entirely different strategies per audience or apply granular rules to specific audiences on top of the personalization based on user behavior performed by Coveo recommendations models. And finally, we added a new no-code builder experience for hosted search pages to enable any user to easily create and share next-gen Coveo Atomic search page experiences.

In closing, I am pleased with the progress we are sharing today that demonstrates not only the demand for our platform but also the compelling opportunity in AI, which Coveo sits at the forefront of. To deliver relevant, profitable digital experiences at scale, you need AI, and Coveo has created an industry-leading platform that enables businesses to do just that while getting full value out of their strategic investments. I look to the future with conviction that this large and underserved market will continue to be of utmost importance to all businesses looking to compete and succeed.

I will now hand the call over to Jean to discuss our financial results in more detail. Jean?

[Jean Lavigueur, executive]

Thank you, Louis, and good evening, everyone. As Louis noted, we kicked off our fiscal year in a strong demand environment despite the more uncertain macro environment.

We had another solid bookings quarter, with all lines of business growing double digits on a trailing 12-month basis. Our bookings in the quarter included a 7-figure expand transaction with a large enterprise software company with whom we continue to grow our business. As Louis mentioned, we did see some elongation of sales cycles related to economic uncertainty, like many other software companies. This was especially notable with larger deals, where the size of the deal often incurs another layer of approvals in the current economic environment.

We also continue to deliver strong organic SaaS subscription revenue growth, with a year-over-year growth rate in constant currency of greater than 30%. Note that the strengthening of the U.S. dollar had an approximately 1% negative impact on our year-over-year organic SaaS subscription revenue growth rate this quarter.

Turning to our results. SaaS subscription revenue for the first quarter of fiscal year 2023 was $24 million, up 47% year-over-year. Note that the strengthening of the U.S. dollar had an approximate 2% negative impact on our year-over-year SaaS subscription revenue growth rate this quarter.

Total revenue came in at $26.5 million, growing 45% on a year-over-year basis. Self-managed licenses and maintenance revenue was $0.3 million, and professional services came in at $2.1 million. Please note that all figures include the contribution from our acquisition of Qubit, which was completed on October 14, 2021.

Current SaaS subscription RPO for the quarter came in at $84.4 million, growing 49% year-over-year. Our net expansion rate as of June 30, 2022, was 112%, an increase of 2% compared to March 31, 2022 and within our target range of 105% to 115% as retaining and expanding within our existing customer relationships remains a key priority.

Turning to our operating results. Our first quarter gross profit percentage came in at 75% compared to 76% for the same period last year. Adjusted gross profit percentage, which normalizes for the effects of share-based payment and related expenses and acquisition-related compensation, was 76% for the first quarter, a decrease of 1% compared to a year ago. Our product gross profit percentage was 80% in the quarter, in line with the prior year. And our adjusted product gross profit percentage was 81% for the quarter, a 1% increase compared to the year ago period.

Our professional services gross profit percentage was 7% for the quarter compared to 20% for the same period last year while our adjusted professional services gross profit percentage was 15%, a 7% decrease compared to the prior year period and primarily driven by lower professional services gross margin of Qubit, which we continue to improve.

Operating loss for the quarter was $13.3 million, and adjusted operating loss for the quarter was $7.4 million. Note that our adjusted operating loss for this quarter was favorably impacted by the weakening of the Canadian dollar compared to the U.S. dollar.

Net loss came in at $12.5 million compared to net income of $73.2 million in the first quarter of fiscal year 2022. As we mentioned last quarter, we are focusing closely on our organizational efficiency and accelerating our path to profitability. While we continue to make disciplined strategic investments into the areas of greatest opportunity within our business, we are constantly monitoring our strong unit economics to achieve operating leverage while driving growth.

Looking at our balance sheet. We ended the quarter with $217.7 million in cash and cash equivalents. Cash flow generated from operations was $1.4 million in the quarter compared to $6.5 million used in the same period last year. The positive variance was mainly caused by the collection in the quarter of refundable government tax credits from fiscal year 2021.

Finishing with guidance. For the second quarter of fiscal year 2023, we expect SaaS subscription revenue to be between $24.4 million and $24.9 million, representing growth of 41% to 44% year-over-year; total revenue in the range of $26.6 million to $27.1 million, representing growth of 36% to 39% year-over-year; adjusted operating loss in the range of $6.5 million and $7.5 million; and between 104 million and 104.5 million weighted average shares outstanding. Note that our adjusted operating loss for the second quarter is favorably impacted by seasonally lower expenses due to accrued vacations taken in the quarter.

For fiscal year 2023, we expect SaaS subscription revenue to be between $101.5 million and $103 million representing growth of 30% to 32% year-over-year; total revenue in the range of $110 million and $111.5 million, representing growth of 27% to 29% year-over-year; adjusted operating loss in the range of negative $31.5 million and $33.5 million; and between 104 million and 105 million weighted average shares outstanding.

This guidance does take into account some of the macroeconomic uncertainty we are seeing. It also assumes FX rates roughly in line with where they are today for growth and adjusted operating loss.

In conclusion, our first quarter results captured the momentum we continue to build upon, underpinned by the considerable opportunity in AI that is still in its early stages. Since becoming a public company, we have shown our commitment to executing and capturing demand while maintaining focus on profitability, a commitment that we look to extend upon for years to come.

Before we move to Q&A, I would like to invite members of the financial analysts and institutional investor community to our first Capital Markets Day being held in-person and virtually at the TMX Market Centre in Toronto on November 17, 2022. Registration information is available within our earnings press release issued today or by e-mailing our Investor Relations department at [e-mail]. We hope you can join us during this important half-day event where you will meet other members of our team and learn more about our differentiated AI-powered platform.

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

[Operator]

[Operator Instructions] And your first question will be from Thanos Moschopoulos at BMO.

[Thanos Moschopoulos, analyst]

Maybe just starting off on the macro question. You mentioned longer sales cycles. I mean, clearly, you were able to bump up guidance despite that and despite the [ mild OpEx ] headwinds. That's great. But on the sales cycles, any themes that you would call out? You mentioned large deals. Any differences you're seeing as far as geographies, as far as verticals and the various use cases that you sell into in terms of the elongation you're seeing?

[Louis Tetu, executive]

Yes. So I think we've seen -- as you know, we work on fairly large transactions. And perhaps -- and that's our thesis. And as you know, we tend to be a little conservative there as always. And our thesis is that given the economic backdrop, companies will be a little more meticulous, I would say, on spending. And so what we've seen in the case of 2 large transactions is that we were able to hold large prices, but it came with an additional level of approval. And we prefer to maintain the discipline of protecting the company revenue and the solution value.

So only -- it's only 2 data points here. That is probably not enough for us to extrapolate, but our thesis certainly, Thanos, again, is that companies will be a little more -- there will be a little more scrutiny and prudence in terms of how they spend. Yes, on the flip side, our solutions, as you know, demonstrate -- we're able to demonstrate very high ROI, both on the revenue gain and the cost savings. And so we don't anticipate much slowdown at this time from a bookings perspective.

[Thanos Moschopoulos, analyst]

And in terms of, let's say, the kind of deals that are kind of 6-figure range, the low 6-figure range, those types of deals are still kind of going through without any slowdown?

[Louis Tetu, executive]

I -- pardon me, can you speak closer to the phone? [indiscernible] from my side. I apologize. Yes.

[Thanos Moschopoulos, analyst]

Yes, sorry. I said in terms of -- yes, if we talk about smaller deals sort of deals kind of more in the $100,000, $200,000 range, which I think a lot of that's your bread and butter, those smaller deals, are they kind of going through without delay at this point?

[Louis Tetu, executive]

Yes, that's correct. It's really on the bigger transactions. Sometimes, the dynamics also of the enterprise software industry is such that the procurement department believes that they can get a better deal on the last day of the other quarter. And given our business model, obviously, we can -- we're able to maintain that discipline and certainly our pricing sometimes at the expense of waiting a day or whatever because we wouldn't do unnatural things.

And so it's pretty much from that perspective, the way enterprise software has behaved in the past. But perhaps we predict with -- we do foresee elongated -- slightly elongated approval processes without overall affecting much the bookings at this time.

[Thanos Moschopoulos, analyst]

Okay. And maybe just a quick one for Jean. As far as the Qubit integration, remind us, are there more synergies to be captured? Or at this point, from an OpEx margin perspective, are we mostly there as far as integration?

[Jean Lavigueur, executive]

Thank you, Thanos. Yes, so certainly, what we're seeing right now, we are very excited as we've reported that large cross-sell that we were able to sell search and recommendations into one of the Qubit customers that had implemented merchandising features of Qubit. So certainly very excited with customers. Kind of, as you know, the thesis was certainly where we would see that the merchandising market, combining with search and recommendations, and that certainly is evidence that it is moving forward to that.

So from that perspective, I think what we're still working on is we you did see a decrease in professional services margin year-over-year, and that is due to Qubit. So we are still working on improving this motion to ensure that we do get margins that are closer to that 10% to 20% on professional services, but that's the main one I would call out, Thanos.

[Operator]

Next question will be from Paul Treiber at RBC.

[Paul Treiber, analyst]

Just a question on the guidance, the full year guidance for SaaS. It did -- the low end decreased slightly. Could you just walk through some of the reasons there? How much is foreign exchange versus macro assumptions?

[Jean Lavigueur, executive]

No. So Paul, thank you for the question, Paul. No, the guidance increased, not -- did not decrease. So it was -- for the -- for fiscal year, Paul, right, we were guiding at $101 million to $103 million, and now we're guiding that $101.5 million to $103 million. So we are seeing an increase in our guidance.

[Paul Treiber, analyst]

Okay. My mistake there. The -- just on -- with these larger deals taking a bit longer, the -- about a year ago, you had some self-service offerings up on the website. Is that a higher priority in this environment? Or do you see more uptake? I know that's targeting developers. But could that drive more sort of organic uptake of your offerings without going through these more approvals?

[Louis Tetu, executive]

Yes. So we continue to invest in the self-service offerings and the developer motion. But let's keep in mind that our market at Coveo is the large enterprises. And so this, to us -- the self-service is really, Paul, to us, a channel to help companies assess our technology, put our technology in the hands of developers as well as the developers of our large systems integrator partners.

Once they do that, they're able to test it and validate the functionality and the power of our AI models and our platform. And then we engage in sales cycles. So we don't do, today per se, much self-service sales because the nature of our market is such that those are large, complex, oftentimes global, multi-country situations that require some -- quite a bit of expertise in addition to, obviously, to leverage our platform.

And so help me understand if I'm answering your question.

[Paul Treiber, analyst]

Yes, you are. Just -- yes, in terms of the adoption among developers, has the adoption or the breadth of the uptake being in line with your expectations when you launched the program?

[Louis Tetu, executive]

Absolutely, and we're continuing to invest there. The -- what we're doing -- this is part of a broad theme at Coveo, which is to really, really reduce to the maximum the friction to engage with customers, help them understand and quickly touch the value of our platform in most cases before they buy. And so the answer is absolutely yes. The developer community is really engaging quite a bit with that. And the platform has become full open APIs, as you know, and headless infrastructure and really a composable platform, and that's what the market is looking at.

[Operator]

Next question will be from DJ Hynes at Canaccord.

[Lucas Morison, analyst]

This is Luke on for DJ. So it sounds like you haven't seen much sign of this at all, but we're curious how, if at all, generally slower e-commerce volumes and activity might affect your customers' decision-making and prioritization of AI-driven personalization implementation decisions.

[Louis Tetu, executive]

Yes. And obviously, we've seen the broader news as it relates to the perception, obviously, and in certain areas, certainly, probably the reality that e-commerce might be slowing down. So there's a couple of ways to look at this. First of all, you're absolutely correct in your preamble, DJ (sic) [ Luke ]. We haven't seen any of that. We deal with large enterprises, both in the B2B and B2C, business-to-consumer and business-to-business space.

In business-to-business, these large enterprises are typically, obviously, large global companies. They're typically very well capitalized. And the one thing that doesn't slow down in an economic downturn is digital transformation. And given that our solutions, essentially, we can triangulate to the value. We can actually measure that we can increase revenue. And increasingly, we're focusing a lot of our machine learning models on looking at things like profitability and so on.

They won't slow down these kind of investments. Obviously, there maybe -- in the case of a more abrupt recession, which everyone seems to be talking about, there maybe certain subsets of the commerce market that will slow down mainly on the consumer side. And we have the ability to pull the levers to adjust and focus our attention on the segments that don't. That's really the key.

Now the other piece of -- the other part to this topic is really the fact that our customers don't see digital commerce as a separate silo. They see it as part of a multichannel strategy which drives commerce on all channels. So as a simple example of what I'm describing, for some of our customers, as much as 40-plus percent of their in-store transactions start online. So they really value -- there was this whole debate with Shopify about -- or about Shopify, about the fact that people were going back into stores and we're going less online. The types of companies we deal with don't quite see that. And in fact, they look at the commerce and digital as well as in-store and across all channels as one and the same.

And so for that reason, we don't anticipate much slowdown for these types of solutions that really can optimize -- Coveo really can optimize existing commerce infrastructures in a way as to increase not only conversion but really revenue and, ultimately, margins. And this is what companies care about in commerce in particular.

[Lucas Morison, analyst]

That's really helpful. And then [indiscernible] -- yes, my other question would be, in a tougher economic environment, are you changing at all your go-to-market strategy to prioritize certain use cases or otherwise emphasize messaging that resonates maybe a little better in a tighter spend environment?

[Louis Tetu, executive]

Coveo, DJ (sic) [ Luke ], has always had a singular focus on value and being able to calculate and triangulate the value that we deploy and that we can unleash with customers, be it, as I just mentioned, either increase in revenue, increase in conversion rates, increases in loyalty that can be measured through A/B testing. And then the service area increases in customer self-service satisfaction while reducing manual interventions and costs.

And so companies -- I would argue that companies in a recession, the types of customers we deal with, continue to invest. They just will invest -- they won't invest in nice-to-have. They will invest in must-have. And I would argue that delivering better digital experience is a must-have nowadays. The reason why they move -- they continue to move forward with this is because they -- it's actually more costly to keep the status quo than it is to -- for them than to deploy Coveo. So in a way, we're handing them a bag of diamonds for a nickel, and we continue to pursue that strategy. And so far, it's working well.

[Operator]

Next question will be from Taylor McGinnis at UBS.

[Taylor McGinnis, analyst]

So one, just to understand the full year guide and the 2Q rev guide a little bit more. So it looks like you raised the low end of the guide -- on the subscription guide by the -- roughly the beat in the quarter but then kept the high end of the guide the same. And then I guess when we look at this 2Q guide, it looks like it implies sequential growth that is stronger than what you initially guided to last quarter. So I guess when we think about what that guide means, are you assuming, I guess, that the macro environment worsened in the second half of your fiscal year than what you're seeing today? And then maybe you can talk a little bit about some of the assumptions there as well as the FX impact that's embedded in the full year guide.

[Jean Lavigueur, executive]

Yes. Thank you for the question, Taylor. So certainly, you're absolutely correct. So I think we -- I think the message is, yes, we did raise guidance for both SaaS subscription revenue and total revenue, as you correctly stated. One on the lower end of the range, the other one on the top end of the range. So certainly pleased to be able to do that, right?

However, clearly, there is conservatism in the way we are projecting the rest of the year. So we did beat both, as you know -- by $0.5 million, we did beat the SaaS subscription. We beat by $1.5 million, the top -- the total revenue. So that certainly partly made its way into the guidance. So again, Taylor, certainly being conservative.

When you look at FX, it is really a minimal impact. When you look at, almost 80% of our revenues are denominated in U.S. dollars. So not -- from the revenue perspective, I think the fact that we are highly concentrated in the U.S. certainly favors this low variance when it comes down to FX. So certainly, from that perspective, I think please only read only some conservatism in how we're guiding, but certainly very, very confident in our ability to -- as we've been doing, this is the third time, right, where we're beating and raising. And I think from that perspective, very pleased with the results of this quarter and what's coming for the rest of fiscal year.

[Taylor McGinnis, analyst]

Got it. And then my next question is just on -- it looks like the operating income guide didn't really change a whole lot. You have a lot of software companies just given some of the uncertainty in the macro that are starting to pull back on headcount and things like that. So curious, when you think about what the guide like implies for the back half of the year, are you guys starting to temper some of those OpEx areas? Or are you just continuing business as usual? How should we think about some of the puts and takes there?

[Jean Lavigueur, executive]

Yes. No, thank you, Taylor. So first of all, if you recall, we had guided $8 million to $9 million, and we delivered $7.4 million this quarter. So certainly, again, we bid on the bottom line this quarter. Again, but -- and if you look at the guidance again for next quarter, we certainly guided substantially below what we had initially communicated at the time of IPO. So again, I think we are taking steps to accelerate our path to profitability.

With regards to full year guidance, again, while we did slightly, again, improve our guidance, with regards to the bottom line, you're correct in stating this, again, we're being conservative from that perspective. So if you go to our website, Taylor, you'll see that there are over 50 jobs right now still open. So we're still hiring, but we're hiring in areas where we will see, of course, high ROI. So right now, you'll see job openings in R&D for machine learning, in sales and marketing alliances, very specific pockets. So we are certainly being more careful in where we are making investments, but we are making investments as right now, as we've seen our unit economics keep being very strong, strong expand and right now very disciplined with our sales and marketing investments. So that gives us a lot of confidence in providing guidance for the rest of fiscal year.

[Operator]

Next question will be from Koji Ikeda at Bank of America.

[Unknown Analyst]

It's actually [ Danica Mera ] for Koji today. So my first question is, I know at the start of the year, you guys hired a new Chief Growth and Strategy Officer, Nicolas. I was just wondering if you could talk about some of the changes that he implemented. And are there any changes in your strategies going forward? Any of them starting to bear fruit? And also, I saw that you launched like a host of new capabilities in commerce and merchandising as well as search. Just wanted to know, were they customer-driven through feedback? And any color -- additional color you can offer there?

[Louis Tetu, executive]

Yes. Great. Yes, we're very excited about that functionality. So let me talk about Nicolas first. Nicolas, as we might recall, was the Chief Evangelist globally at Google who essentially all the evangelist team ad Google reported to Nicolas and think about them as kind of the internal McKinsey worldwide of Google. A very strategic mind, obviously. And yes, as a result -- but that was the goal, too, and we're constantly evolving our strategy to focus on markets that provide the company with greater economics in terms of how we think constantly about where is our technology creating the most value, in which segments, for which type of customer.

And then relative to the cost of acquiring these customers and the potential for growth, we signed, as we mentioned in the release, one of the largest transactions that the company signed especially as a first customer, large 7-figure deals with -- in this quarter. And so we continue to focus on that, and that's a key change with the strategy.

The other one is really around better aligning our solutions and our pricing with what generates the most value and really getting our fair share of that value. And I would say those are 2 of the key driving strategies aside from continuously looking at prioritizing. We know where the target markets are. The key here is to prioritize, what's more important in terms of verticals and use cases and geographies in managing that mix.

As it relates to your second question, [ Danica ], we're very excited with the merchandising hub and what we've released. E-commerce and especially with large organizations is very complex. Coveo has been in machine learning and deep learning for more than a decade. And as we've said earlier on the call, there are some customers where we've tested more than 50 machine learning models and so on. What the merchandising hub allows merchandisers to do is to tailor recommendations by user type or types of audiences and then enable them to test. So it's really about evolving the role of merchandisers to people who make, I would say, human decisions around which products to promote to who, to people who test machine learning models on different audiences at scale and can look at the analytics and the results.

And so we're excited with that. And we're also excited with our no-code builder experience. That's highly technical, but it's extremely important for large commerce infrastructures and their capability to go headless and composable essentially and really take the merchandising to the next -- into the future to the next level.

Did that answer your question, Danica?

[Unknown Analyst]

Yes, yes, yes. It definitely did.

[Operator]

Your next question will be from David Kwan at TD.

[David Kwan, analyst]

I had a question. Just following up on Taylor's question on the adjusted operating loss. We saw that come in nicely below expectations this quarter, or I guess, better than expected, but below what you had been guiding. And then when you look at the guide for this upcoming quarter in Q2, it looks to be a further sequential improvement. But when you, I guess, back out the second half, it looks like it implies a widening of the losses in the second half. So I was curious to get your thoughts as to what's happening there.

[Jean Lavigueur, executive]

Yes. No, so you should not read that. It's clearly -- I think, David, we are -- you should instead read that the -- that we need to take some conservative assumptions in building the forecast for the balance of the -- for Q3 and Q4. But I think what you should expect is as you've seen in Q1, where we've delivered that $7.4 million guiding to that $8 million to $9 million. And then again, a further reduction right now in the guide for Q2 at $6.5 million and $7.5 million, I think right now, it is just being -- for us, being conservative, but we did improve, of course, the guidance for fiscal year, right?

We were guiding between $32 million and $34 million, right, for fiscal year. Now, we're improving on it, guiding to $31.5 million to $33.5 million. We get it that we did not, of course, reflect the entire savings on to the full fiscal year guidance. And please only look into this as a conservatism on our -- from our perspective as to -- as we look into Q3 and Q4. But certainly, right now, Q2, looking at -- we're very comfortable with the guidance we provided again for adjusted operating loss.

[David Kwan, analyst]

I was just trying to get a sense of -- it seems like you've done a good job in looking to narrow the losses here and get to breakeven quicker. I just didn't know to what extent we could extrapolate that in the second half because if we did, then obviously, the guidance that you've put out for the full year is significantly off. So I'm just trying to understand the dynamic, whether it was FX-related, like you're expecting the dollar to reverse, or something else.

[Jean Lavigueur, executive]

Yes. No, so part of the reason why you've kind of -- you're kind of spot on certainly from that perspective. So certainly, while we did adjust guidance for the FX that -- as of June 30 or for the most, we will just -- we are not hedging, as you know. So right now, we wanted to be conservative that we didn't know that the USD to CAD would revert back to where it was. So right now, it is providing a little bit of a tailwind for us. It is helping us, as you know, because about a little bit less than half of our expenses are in Canadian dollars because of the R&D centers being located in Canada.

So however, given that we're not hedging, as I mentioned, we wanted to be -- to have some room there, so it does revert. Then with the full year guidance, we'll be able to have some room. But right now, if the FX stays as it is right now, you should expect us to -- as we've done the last 2 earnings calls, to, again, beat and raise each and every quarter, again, on AOL.

[David Kwan, analyst]

Hopefully, we'll see that. I appreciate that, Jean. Two more questions. You talked about Qubit a bit just, I think, in particular, as it relates to helping bolster some of the margins from the professional services side. Can you maybe talk about, a, when you could expect the, I guess, the overall professional services margins to move up into that 10% to 20% range? And then just in terms of the integration overall, how that's been going, has been any surprises either on the positive or negative side?

[Jean Lavigueur, executive]

Yes, certainly -- thank you. So certainly, where -- Qubit before the acquisition, certainly, the priority was mostly on recurring revenue and not so much on professional services. So as part of the acquisition now, I think we're trying to work with the customer base of Qubit to gradually implement a certain type of discipline where you're getting margins as well on professional services as we are on recurring revenue that are in that range of 10% to 20%. We believe it's going to take another 2 to 3 quarters from that perspective, keeping in mind that this is -- professional services represents less than 10% of our total revenue.

So again, it is still only -- it is all about product gross profit margin, as you can imagine. But certainly, from that perspective, to answer your question specifically, I would say 2 to 3 quarters on the professional services front.

With regards to the integration, as you know, certainly, our thesis was where -- we want to have one platform, right? And that one technology platform would combine all the expertise that Qubit were bringing to Coveo with regards to merchandising, right? So all the capabilities that Louis described, we wanted that not in 2 separate platforms but in 1. So we did commit to doing this over 1 year. And certainly now, I'm very excited to have that first large customer that did purchase -- that did actually cross-sell. They were Qubit customer, now buying, of course, the Coveo search and recommendations to complement. Certainly, now we will have that lead anchor customer to certainly work with us to kind of build out that one platform.

So we certainly expect many more cross-sells on both sides and, certainly, winning new customers, new land, new logos with the combined platform towards the end of the year, where we will have that one platform, combining merchandising and search and recommendation.

Does that answer your question?

[David Kwan, analyst]

Very helpful. It does. And last question, just on your cash balance. Obviously, that's good cash flow performance this quarter, which is pretty important these days. But looking at deploying that cash, obviously, Qubit's been in the fold for a few quarters now. I'm curious to get your thoughts on the acquisition environment and your appetite and what kind you're seeing from a valuation standpoint?

[Jean Lavigueur, executive]

Yes, certainly. Right now, as you know, certainly, the public markets have been -- certainly, we've seen a rerating certainly from a -- in terms of valuation multiples that, unfortunately, in the private markets, we have not seen. So certainly, from -- we still have a large pipeline of companies that we talk to on a weekly basis. And unfortunately, right now, I think it's going to take still probably another 2 to 3 quarters before valuations of private sector come down to Earth, come down to where the public multiples are. And then it will certainly provide to us the right environment to proceed with being a little bit more aggressive on the M&A front. So right now, we're certainly very active in the market, talking still to a lot of companies, but being very disciplined in terms of how we will deploy that excess cash that we have.

[David Kwan, analyst]

So it sounds like we shouldn't be expecting anything soon?

[Louis Tetu, executive]

Well, let me add to that, David. Again, as the -- there's no question, as Jean mentioned, that the private markets lagged the public market valuations. And we all, I believe most people on this call understand the dynamics there with private equity and so on. But this -- we think that will correct. And as I mentioned, we're constantly talking. So I wouldn't conclude that we're not going to do anything. But you can expect the Coveo management team to remain extremely disciplined around acquisitions, both strategically and financially, obviously.

[Operator]

Next question will be from David Weiss at Scotiabank.

[David Weiss, analyst]

Congrats on the quarter. You always mentioned that a number of key wins in this quarter. And you previously called out there was some strength in the tech sector, financial services and health care verticals...

[Louis Tetu, executive]

David, can I interrupt you? I don't know if you're talking on a speaker phone. I know I can't hear you very well, if you wouldn't mind.

[David Weiss, analyst]

Is that any better?

[Louis Tetu, executive]

That's 10x better. Sorry about that. I apologize.

[David Weiss, analyst]

No, sorry about that. Yes, I was on a headphone. Okay. Let's try this again. So this quarter, you've mentioned a number of key wins, clearly. And you previously called out on other quarters, seeing strength in the tech sector, financial services and health care verticals. And I was wondering if you could provide an update on which verticals we're seeing the great strengths in Q1.

[Louis Tetu, executive]

Yes. So the tech sector remains a very strong sector for us. We're a dominant player across certainly a large number of the well-known tech brands across the world. We've continued to see some good traction pretty much across all sectors. Obviously, the ones that are growing, alongside with our commerce line of business, are B2B, which typically comes from manufacturers and distributors, as well as retail, right, B2C, commerce, and I would add on top of the ones that you mentioned. But it's pretty much across the board, and we're happy.

But if you think about the focus of Coveo from a vertical standpoint, it's really mainly, although we have some -- in some instances, some more horizontal solutions, such as for instance, websites and general intelligent AI-powered search applications across digital properties such as websites and so on. But for the most part, it's across tech, financial services, health care and then manufacturing, distribution and retail. So those are the main verticals for us.

[David Weiss, analyst]

Okay. That's helpful. And then -- and also in Q4, you've mentioned about when you look at bookings there, you said about 60% of the new bookings were from new customers. Just was wondering, how does that look in this quarter? Do you see similar trends? And are those expected to continue?

[Jean Lavigueur, executive]

Yes. So this quarter, we did mention that we had that important cross-sell with that large 7-figure deal. So that certainly skewed that percentage towards the existing customer base. So typically, as you said, was 60-40. For the June quarter, it was closer to the opposite, [ by 40 ], because of that large transaction. But certainly, looking forward, given the uncertain macro environment, maybe on the new logo front, we may see, as we've mentioned, sales cycles elongating a little bit, but certainly, we don't expect anything of importance to change the model, which is typically in that 60-40. Very happy with our net expansion rate at 112%, within the range that we've guided in the past. But certainly, we believe that, with all 4 lines of business right now, we're able to grow them double digits with both new logos as well as the existing customer base.

[David Weiss, analyst]

That's very helpful. And then just one last one here, again, just to touch on operating margins again. You mentioned making ongoing investments in your business as well. And I just wanted to sort of unpack. So when we think of gross margin, R&D, sales and marketing and G&A sort of the key operating expense lines, which areas should we expect to see more significant leverage or improvement over time? Or is it something that's kind of across the board?

[Jean Lavigueur, executive]

It will be pretty much across the board. But I certainly will call out, certainly, from a sales and marketing perspective, if you look at an adjusted basis, without stock-based comp, if you look -- last year, we were around 58% as a percentage of revenue. Sales and marketing, coming down to 49% this quarter. So certainly happy with the efficiency from a sales and marketing perspective. Louis talked certainly about the impact that Nick Darveau-Garneau certainly had on our team, and I think it bodes well for the future.

From an R&D perspective, I don't think that you should expect the same kind of improvement from an R&D perspective. As when we went public, certain tax credits from -- that we have from the Canadian government went away. So from that perspective, we'll probably have a year of adjustment there. And certainly, from a G&A perspective, yes, we have made a number of investments to get ready as a public company in systems, legal, as you can imagine, financial with the finance team. So expect as well some leverage from a G&A perspective.

So looking forward. So -- but all 3 are expected to contribute to our accelerated path to profitability to date.

[Operator]

Last question will be from Richard Tse at National Bank.

[Richard Tse, analyst]

Just a couple of quick ones here. In terms of the competitive environment, since you've become public, you've got an elevated profile now. Has that kind of improved your positioning here, you think, in terms of the win rates in the market?

[Louis Tetu, executive]

We're very pleased with our win rate. We're not seeing any slowdown there. We're not relying frankly, on our public presence to improve our competitive profile. This was really a financing event. We win because we believe to be the most mature firm in AI, in particular. We've been in AI a decade more than our competitors. And we've had the advantage of working with some of the leading brands in the world and very large data sets and maturing those models, and we're able to triangulate those to using analytics and so on to the benefits in ways that are unmatched, we believe, at least, that are unmatched in the industry.

So when we get in front of those types of customers who really care about that, and really care about the minutia of technology that will bring them the most amount of value, this is what makes us competitive. The fact that we're public or private, we have competitors that have a size that is also significant. And they're also good companies. They do things differently. And -- but the fact that -- long answer to say, Richard, that the fact that we're public is obviously a good branding event. I think really, it's probably more the -- well, it's certainly more the fact that our balance sheet is so strong, it's certainly a very reassuring factor. But at the end of the day, we need to perform, and that means growth and value to customers and efficiency, and that's what we're delivering.

[Richard Tse, analyst]

Great. And just one last one if I may...

[Jean Lavigueur, executive]

And Richard -- if I may add a quick one, Richard. As Louis alluded to, right, one of the verticals that we focus on is financial services. And they provide extensive financial due diligence on our company. So if you look at our balance sheet prior to the IPO, you had -- all of the equity that we had raised from venture capitalists, as you know, under IFRS, we had to put a fair market value in terms of -- on that, which was over $1 billion, right? So certainly, when you look at the balance sheet prior to the IPO and after the IPO, certainly, in the financial services market, the conversations are much easier as our balance sheet has improved tremendously from that perspective. So certainly, a big plus on that side.

[Richard Tse, analyst]

Okay. Great. And just one last one for me. As I sort of look through the MD&A and you sort of have a section on geographic expansion, clearly, there's a massive opportunity on the international side for you. Can you maybe talk about sort of the timing of that push? And just really help us understand how much of the current OpEx structure could support that expansion going forward?

[Louis Tetu, executive]

Yes, good question. First of all, for us to -- when we expand in a new geography, essentially, we need to spawn a new -- typically, given the privacy laws, et cetera, typically, we -- if it's a large geography, such as Asia Pac, for instance, or Japan or so on, we just spawn a new -- what we call a new region with our cloud infrastructure. And that's not a very significant expense and something we're ready to do and we can execute within 60 days.

Number 2 is we need to factor in that we want to deploy a full infrastructure. It's not just about selling in a territory. But it's really about being able to deliver and support our customers and gain a significant market share and presence in the country. So that means deploying marketing and sales and so on. The reason I say that is this becomes a major program within the company that needs to be factored against what other markets can deliver a share, what the existing markets we're in can deliver to shareholders.

Currently, we do not have much plans, at least in the next 12 months to enter into other geographies than the ones we're currently operating in, which is in Asia Pac, Southeast Asia, Australia, New Zealand, Europe, where we're investing right now. We just appointed a Managing Director in Europe, and we have more than 100 people in London and so on, and we're really expanding well there. And then continuing, obviously, to penetrate the U.S. market, which is largely underpenetrated in our view, where we play.

So to us, it's really a matter of factoring. Do we invest in new verticals, in new use cases, in new channels or in new geographies? And I would say long answer, Richard, to say that at this stage, we think that what continues -- the gift that continues giving to shareholders is the current markets we're in. And for that reason, we're staying very focused.

It could change in 12 months. But for now, for the next year, don't expect us to do much more than really continue to grow, grow, grow in those regions and, particularly, in Europe as well.

[Operator]

And at this time, we have no further questions. So I would like to turn the call back over to Mr. Têtu for closing remarks.

[Louis Tetu, executive]

Yes. Very good. Well, so I want to thank you all for your time and joining us today. We believe that the company, as I think probably transpired, is very uniquely positioned and poised to deliver AI to businesses and really help our customers optimize their outcomes at this critical juncture. And I look forward to updating you in the future. And thank you for attending again.

And with that, operator, you can please end the call.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.