Coveo Solutions Inc

TSX:CVO

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Mr. Moon, you may begin your conference.

[Paul Moon, 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 are forward-looking statements within the meaning of applicable securities laws, including those regarding our future plans, objectives, growth and expected performance, including our outlook for the fourth quarter and fiscal year 2023. These forward-looking statements are given 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 or 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 the filings we make with Canadian securities regulators, including under the section titled Risk Factors in the company's most recently filed Annual Information Form, which is available under our SEDAR profile at www.sedar.com.

Additionally, some of the financial measures and ratios discussed on this call are either non-IFRS measures and ratios or operating metrics used in our industry.

A discussion on why we use these financial measures and ratios and operating metrics and, where applicable, reconciliation schedule showing IFRS versus non-IFRS results are currently available in our press release and our MD&A issued today, which may both be found on our Investor Relations website at ir.coveo.com and our SEDAR profile.

Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars. Lastly, slides accompanying this conference call are available for viewing and accessible on our IR website under the News & Events section. I will now turn the call over to Louis to begin. Louis?

[Louis Tetu, executive]

Thank you, Paul, and thank you all for joining us today. I am pleased to report that Coveo once again delivered solid results that exceeded the top end of our quarterly guidance for both SaaS subscription revenue and total revenue. We also continued to demonstrate an accelerated path to profitability by beating our guidance for adjusted operating loss.

For the third quarter ended December 31, we delivered year-over-year SaaS subscription revenue growth of 25% and total revenue growth of 23%. Our net expansion rate for the quarter was 107% and within our target range of between 105% to 115%. The decline, compared to the prior quarter, was principally related to anticipated customer churn following the Qubit acquisition.

Customer retention rates remained very high. And together with the good visibility we have on cross-sell and upsell opportunities within our existing customer base, we expect an NER to gradually improve in subsequent quarters while remaining within our target range.

Our revenue growth, continued focus on operational efficiency, and favorable FX movements resulted in an adjusted operating loss of $3.9 million for the third quarter, significantly ahead of our guidance. As such, we once again have improved our adjusted operating loss guidance for the fiscal year 2023.

The trend of large enterprises investing in AI-powered customer experience platforms to drive business optimization, which we believe is an imperative, has continued. A recent survey of 500 IT professionals by Bank of America concluded that businesses intend to increase their IT spending by 8% this year compared to 7% in 2022.

Moreover, the data shows a positive correlation between company size and expected spending growth. Coveo's target customers, large enterprises, are investing the most on software, growing 10% over last year compared to smaller businesses. And they also showed the largest IT hiring budget increase at 12%.

As we continue to make strategic investments in our Coveo Relevance Cloud platform, we are seeing consistent interest from enterprises who are also investing in high ROI solutions, particularly in the commerce sector and in industries that are currently experiencing strong relative demand.

While we, like others, are seeing demand soften in certain sectors and persistent delegation of sales cycles, we are also seeing relative strength in sectors such as manufacturing, which we believe represents a compelling opportunity for Coveo.

Business-to-business commerce is, by nature, more complex than business-to-consumer. There is a need to manage a greater number of SKUs, far more product attributes, longer-term customer relationships, customer-specific pricing, volume pricing and so on. These complexities play to Coveo's strength relative to our competitors.

In business-to-consumer commerce, we believe our ability to create true one-to-one personalized experiences for customers and treat individuals as people and not personas can drive compelling improvements in business outcomes in a market where a suboptimal digital experience can have a huge impact on revenue and margins.

And in service, our ability to help enterprises lower costs and increase NPS to preserve existing customers and revenue also applies across any macroeconomic cycle, especially the current one.

We are excited about our progress with new customer wins in the quarter, which continues to strengthen the foundation of our business. We landed new logos across all of our lines of business and once again had the strongest commerce bookings quarter in the history of the company.

These land transactions included the largest commerce land to date. In fact, our largest land transaction for any line of business with a global direct seller of nutritional products operating in 100 countries and a major manufacturer of mechanical power transmission solutions used in several industries.

We also landed large 6-figure deals in our service and platform lines of business, including those with a multinational semiconductor and telecommunications company and a multinational pharmaceutical services company.

We also completed significant expand transactions across all our lines of business, including with an American healthcare services company, a multinational oil and gas corporation, a large home improvement and outdoor living retail chain as well as with Synopsys, Finastra, Bombardier Recreational Products, Pet Supplies Plus and others with whom we continue to strengthen our relationship.

I would now like to highlight some recent examples of customers using Coveo's platform to optimize business outcomes and provide personalized relevant digital experiences.

In November 2021, we signed an initial deal with a top 3 global consumer electronics manufacturer. They were looking to not only improve their commerce operations for both B2B and B2C but also wanted to optimize their customer support sites.

The company's U.S. brand began a digital transformation journey with the goal of becoming the best in their geography and industry. They partnered with Coveo with specific goals in mind: to increase conversions, improve search accuracy, improve merchandising and automate with AI wherever possible.

The U.S. region went live with commerce and support in mid-2022 and saw significant results. Impressed with how well Coveo powered their commerce and support sites simultaneously, the client introduced Coveo to their international team, who subsequently decided to deploy our technology and platform globally.

In 2023 and beyond, Coveo will be expanding its services and will start to power their commerce and support sites across 81 different countries. This is an exciting opportunity for our commerce and service lines of business to work seamlessly together with a single global customer.

Coveo partners with one of the largest DIY and home hardware store chains in the Oceania region. The company has been utilizing Coveo's Relevance platform and machine learning capabilities in 3 key areas: website search to ensure customers receive relevant results and improved user experience; category and product listing pages to prioritize products that have a higher likelihood of being selected; and upselling at multiple stages of the customer's personalized journey.

We are extremely pleased with the results of our collaboration, which has led to millions of dollars in upsells in a recent quarter, attributed to products recommended by Coveo.

Lastly, Coveo works with a global leader in network security who has deployed nearly 1 million of its integrated multifunction threat management appliances worldwide to businesses of all sizes, from SMEs to large distributed enterprises.

With more than 250,000 customers, 17,000 security resellers and close to 100 service agents, they've been leveraging our platform to power their partner and customer portals, case deflection page, agent insight panels and full search page.

Thanks to Coveo's solution, they have been able to significantly increase customer and partner self-service, allowing for growth without hiring new agents and maximizing the value of their content by distributing that knowledge more effectively. The impact of Coveo was instant and significant as the case deflection rates increased meaningfully within a very short period of time.

We believe that customers that select the Coveo Relevance Cloud platform receive a subscription to ongoing innovation, including AI research and investments, expertise and customer success as well as a compelling ROI driven by continuously optimizing business outcomes.

You saw us recently announce the release of the new Coveo Merchandising Hub, which we believe to be a game changer. This groundbreaking platform is the result of our successful integration with Qubit and has allowed us to significantly expand the capabilities of the Coveo Relevance platform by offering the first-ever comprehensive suite of tools tailored specifically to merchandisers.

We are excited to continue showcasing these new capabilities to our customers that help to create more value by optimizing both the alignment to shopper intent as well as enabling merchandisers to optimize their business outcomes using AI.

Next, I'll review some product features of the Coveo Relevance Cloud platform we announced during the quarter that further differentiate our offerings and help optimize business outcomes for our customers.

We launched our intelligent, out-of-the-box Facet Generator, which simplifies the implementation and configuration of website navigation for large enterprises. Coveo is one of the only search platforms that can automatically leverage hundreds of filtering options and select the best ones to use to help improve the end-user experience without any traffic or behavioral data.

Combined with the intelligence of our machine learning models, Coveo has the ability to go even deeper when data is available. As a result, our platform can help to drive unmatched relevance and personalization in website navigation.

We also released analytics and developer tools for use within data cloud company, Snowflake. The new features provide real-time access to Coveo Analytics through Snowflake's reader account, where data can be leveraged in any business intelligence tool and even combined with other external data sources for a more complete visualization of search engagement and business performance.

Lastly, I would be remiss if I didn't mention that for the fifth consecutive time, Coveo has been named the leader in the 2022 Gartner Magic Quadrant for Insight Engines.

This acknowledges the Coveo Relevance Cloud platform in terms of its maturity, market presence, capabilities and overall vision compared to other established technology vendors, which we are very proud of.

Coveo was also recently named a champion in the 2023 Enterprise Search Data Quadrant from SoftwareReviews, a division of InfoTech Research Group. We are humbled by this particular award as it is based on objective feedback from real customers and is a testament to our dedication to customer success and delivering business value to our customers.

History has shown that companies that have succeeded regardless of economic cycle are those that have continued to make strategic investments, remain focused on the fundamentals of their business and been disciplined in their approach to efficiency.

We believe that Coveo's strategic investments in our Coveo Relevance Cloud platform, our strength in commerce and service and our ability to address the complexities of the industries we serve while delivering strong ROI for our customers position us very well to weather the current macroeconomic environment. And we remain excited about the significant market opportunity in front of us.

With that, I will now hand the call over to Jean to discuss our quarterly results in more detail. Jean?

[Jean Lavigueur, executive]

Thank you, Louis, and thank you again, everyone, for joining us on our third quarter conference call. Starting off with bookings, we are pleased with our commerce performance, which was a record for the second quarter in a row. This was driven by some significant transactions, including the largest land transaction in our history, as mentioned by Louis earlier.

In addition, we booked significant new work within the service and platform lines of business during the third quarter, adding to our already-strong foundation of enterprise customers.

Overall, we are pleased to see that all lines of business continue to grow at a double-digit rate from an ARR perspective. We are encouraged by the fact that deals are not disappearing and that we continue to see solid pipeline generation, which we believe bodes well for our future growth prospects and is a testament to the resiliency of our business.

As we saw in our fiscal Q2, foreign exchange fluctuations against the U.S. dollar had impacts on top line and adjusted operating loss performance. As a reminder, approximately 20% of our revenues are in currencies other than the U.S. dollar, and more than 50% of our costs are in Canadian dollars.

And this, combined with our continued focus on operating efficiency, had a positive impact on our third quarter adjusted operating loss. As such, we have further improved the midpoint of our full-year adjusted operating loss guided by $2.6 million, which is on top of the $8.5 million improvement we announced last quarter, while improving the midpoint of both our full-year SaaS subscription revenue and total revenue guidance.

Moving to our third quarter results. SaaS subscription revenue was $26.4 million, an increase of 25% year-over-year. And total revenue came in at $28.5 million, growing 23% year-over-year. Foreign exchange impacts represented an approximately 3% headwind to growth for both measures.

In addition, these growth rates are substantially representative of organic growth as the acquisition of Qubit was completed 14 days into the third quarter of fiscal 2022.

Current SaaS subscription remaining performance obligations as of December 31, 2022, came in at $92.1 million, growing 28% compared to a year ago. Our net expansion rate as of December 31, 2022, was 107% and within our target range of between 105% and 115%.

The decline from the prior quarter mostly relate to the expected churn following the Qubit acquisition. As Louis stated earlier, we believe NER will gradually improve in subsequent quarters while remaining in our target range as our gross retention rates remain very high and we have good visibility on upsell and cross-sell.

As a reminder of what was presented during our Capital Markets Day in November, we see significant opportunities with approximately 65% of our customers who are currently using Coveo in only 1 line of business and approximately 50% that only use Coveo in 1 use case.

We currently anticipate converting a portion of those customers, evidenced by some of Louis' earlier comments, to adopt other lines of business or other use cases. Our internal teams are aligned and focused on this significant opportunity ahead of us.

Turning to our operating results. Our third quarter gross profit percentage came in at 77% compared to 74% for the same period last year. Adjusted gross profit percentage, which normalizes for the effects of share-based payments and related expenses and acquisition-related compensation, was 78% for the third quarter, an increase of 2% compared to a year ago.

Product gross profit percentage was 81% in the quarter, 2% higher than the prior year. And our adjusted product gross profit percentage was 82% for the quarter, also a 2% increase compared to the year-ago period.

Professional services gross profit percentage was 9% for the quarter compared to 2% for the same period last year. Adjusted professional services gross profit percentage for the quarter was 17%, a slight 1% decrease compared to the prior year period. Operating loss for the quarter was $10.7 million.

And adjusted operating loss for the quarter was $3.9 million, meaningfully ahead of previous guidance due to a continued focus on operational efficiency. As mentioned previously, our adjusted operating loss for this quarter was favorably impacted by exchange rates of non-U.S. currencies compared to the U.S. dollar.

Finishing with guidance. For the fourth quarter of fiscal year 2023, we expect SaaS subscription revenue to be between $26.6 million and $27.1 million, representing growth of 15% to 17% year-over-year. Total revenue in the range of $28.6 million to $29.1 million, representing growth of 12% to 14% year-over-year.

Adjusted operating loss in the range of $5 million and $6 million and between 105.5 million and 106 million weighted average shares outstanding.

Our fourth quarter guidance assumes an FX headwind against both SaaS subscription revenue and total revenue of approximately 2% and assumes FX rates roughly in line with where they are today for SaaS subscription and total revenue growth and adjusted operating loss.

Our total revenue growth and adjusted operating loss guidance includes the impact of the completion of the end-of-life process for our self-managed licenses and maintenance revenue, which represented approximately $300,000 of revenue last quarter.

Please also note that adjusted operating loss in the fourth quarter is negatively impacted by the resetting of social benefits as of January 1 of this calendar year, salary raises and a slightly shorter quarter in terms of number of days relative to others, which has an impact on SaaS subscription revenue recognition.

For fiscal year 2023, we expect SaaS subscription revenue to be between $102.5 million and $103 million, representing growth of 32% year-over-year; total revenue in the range of $111.5 million and $112 million, representing growth of 29% year-over-year; adjusted operating loss in the range of $20.9 million and $21.9 million; and between 104 million and 105 million weighted average shares outstanding.

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

[Operator]

[Operator Instructions] First question comes from Thanos Moschopoulos of BMO Capital Markets.

[Thanos Moschopoulos, analyst]

I guess just starting off -- maybe just starting off on the macro. I mean, obviously, you had a good revenue growth in the quarter. It sounds like you had good bookings. But just how would you say the environment's developed over the last 3 months? Has it been pretty consistent? Any change in sales cycles? What are you seeing on that front?

[Louis Tetu, executive]

Thanos, I think pretty much the same all along that -- versus what we've been talking about the previous earnings calls. Obviously, we all read the same news, so certainly, it's not a slowdown and et cetera.

We're continuing to see demand because as a reminder, we provide high-ROI solutions and increasingly the use of AI and digital experience is becoming a must-have, not a nice-to-have. And we can demonstrate, particularly in the service and commerce area, that we bring high ROI. So the -- from a demand perspective, that hasn't changed.

What we're seeing is more scrutiny with purchases. Precisely every expense and every sales campaign must include a high-ROI component, which we're accustomed to, and more delays. We're not losing deals. We're seeing, in some instances, deals being either paused or delayed. But overall, pretty much the same for now.

[Thanos Moschopoulos, analyst]

Great. And then on the expense side, you've kept expenses remarkably flat, even as revenue's grown, which is obviously a great dynamic. So maybe just to some color, wherever you found those efficiencies, was part of that from integrating Qubit, putting some [ costs ] there?

And then it might be too early to talk about 2024, but just maybe qualitatively, how should we think about the expense ramp in the coming months?

[Louis Tetu, executive]

Right. I'll start, Thanos, and then Jean will continue. I think from an efficiency perspective, we're seeing the effect of focusing as a firm, number one, on markets that deliver better efficiency for us, which means relative to our sales and marketing and engagement costs with prospects yielding bigger deals, and we are seeing increasingly bigger and bigger deals at Coveo. That's number one.

Number two, so from an efficiency perspective, I think starting pretty much at the IPO, even before, we drove, I would say, quite a bit of obsession internally as it relates to the effectiveness of our team and overall efficiency of our organization, and drove a number of initiatives internally just to make our organization better.

So more focused on markets where we win more effectively and we win bigger, number one; and number two, where we can grow with customers; and number two, internally, really continuing to top-grade the team and continuing to structure our organization for more and more efficiency, and I think we're seeing the results of that. So Jean?

[Jean Lavigueur, executive]

Yes. Thank you, Louis, and thanks for the question, Thanos. Certainly, from -- I'd like to call out a little bit of seasonality that's included in our guidance, Thanos, for next quarter.

First of all, as you know, Jan 1 is when we pretty much reset all social benefits in the company, so that does create an increase in expenses starting Jan 1 compared to the previous quarter. Salary raises, so of course, this is also the anniversary date where many salaries are increased.

And certainly on the top line, I'd like to call out that we will -- you'll see that self -- everything that calls out on the self-managed license of [ minus ] revenue, as we had previously committed, we're done with all on-prem products. So for example -- so there's $300,000 of revenue that was there last quarter that you will not see in the next quarter.

And of course, for every SaaS company, the March quarter, you have 2 less days to recognize revenue. So those are the seasonality that we've taken into account in our guidance, Thanos. Does that make sense?

[Thanos Moschopoulos, analyst]

It does, yes.

[Operator]

The next question comes from Ittai Kidron of Oppenheimer.

[Ittai Kidron, analyst]

Louis, I want to follow up on the previous questions. I mean, your SaaS growth and your current RPO growth have -- both have been cut by half essentially from last quarter to this quarter. So clearly, macro is having a big impact on your business, not a small one.

I'm just trying to make sure how do you gauge whether this deceleration in growth is wholly macro-related versus performance-related, productivity-related internally in the company. Help me sort this out.

[Louis Tetu, executive]

Right. And I'll let Jean, Ittai, sort of qualify this because there's obviously the impact of acquisition and -- et cetera. So Jean, could you take that one?

[Jean Lavigueur, executive]

Yes. No, certainly. And Ittai, if you look at -- for the December quarter, you saw the growth rate for SaaS subscription revenue coming in at 25%, and there was 3% of headwinds certainly from FX there, though there was 2% certainly from the impact of having Qubit for one last time included in the December quarter, where as you know, we only had 2.5 months a year ago, so -- but certainly very pleased with that growth rate.

Now certainly, when you look at the guidance, you're correct that we're guiding in the range of 15% to 17%. But keeping in mind that again, there will be 2% of headwind from FX there as well. So when you -- so certainly, FX adjusted at 17% to 19% versus in the range of 30%, certainly, there is definitely deceleration that we're seeing from -- definitely from macro, right?

So when we look, Ittai, to pipeline generation, pleased with the growth rate. The conversion rate is holding steady. However, especially for new logos, for new customers, Ittai, definitely seeing those longer sales cycles that keep pushing out. And certainly, last quarter was no exception to what we had seen and commented on. So hopefully, that puts it in the right context.

[Ittai Kidron, analyst]

Jean, I want to just fine-tune this a little bit more. Today versus exactly 3 months ago, have things gotten incrementally worse or they have not -- they were weak 3 months ago but they have not changed in their intensity from 3 months ago?

[Jean Lavigueur, executive]

No, clearly, because we did comment on those elongating sales cycles, Ittai, last quarter. So clearly, if we're commenting on again this quarter, is that being -- certainly, we've seen more of it, right?

Because we -- some of the pushes from last quarter did close in the December quarter, but we did see some deals that we expected to close December 31, that pushed into January and into -- we certainly expect them to close by March 31. So certainly, it's been challenging, certainly, that macro environment, and -- which is why you're seeing that deceleration there.

[Ittai Kidron, analyst]

Got it, okay. Maybe last one for me, Louis. Just from a big-picture standpoint, ChatGPT, a lot of headlines. Does that mean anything to your business? What do you make of this?

[Louis Tetu, executive]

It's huge for our business, Ittai. And we're very excited by this development. We're embracing this wholeheartedly. Our company has been involved working with large language models for quite some time. We've announced basically features and functionality that our customers use, like question answering, like case classification, like smart snippets and et cetera.

And I would say, the world, in general, didn't quite grasp the importance of that, the fact that the difference between getting answers not linked, getting a stronger capability to converse and get advice as opposed to specific SKUs, recommendations or a specific links recommendation.

So what we're doing right now, first of all, that's bringing the world's attention to that and we've been working on that.

We think that combining that technology with what we do is going to bring some amazing use cases in customer service and commerce and will add important features enterprises will demand, namely security, privacy, data freshness, links to actual sources of truth, et cetera, which are not available, as you know, in the current technology, relying on older data and not being as cost effective and et cetera.

So to conclude on this, we couldn't be more excited because the world is waking up to the paradigm and some of the things that we have been working on for quite some time. We've been working as a firm on large language models, as you know, which is really what ChatGPT is all about.

And we think we can combine this into -- with the kind of functionality that our AI platform offers and really lead in the market. So the answer is we couldn't be more excited with all the consciousness, I would say, around that topic right now.

[Operator]

The next question comes from David Weiss of Scotiabank.

[David Weiss, analyst]

Yes, so just a very high-level question. You had previously discussed it, I think it was your Capital Markets Day, just in terms of the value that you are offering your customers in terms of their sales increases and so on, the potential for maybe looking at raising prices. Is there any indication that this might happen more broadly or within select accounts where there's a proven track record?

[Louis Tetu, executive]

Right. We're continuing to evolve our pricing strategies and the way we engage with our customers. It's very evident that in this current economy, anything we can do to reduce the risk and the line -- any kind of pricing and approach that we have with customers with the value that we generate, that we create for them is very, very welcome.

So we've recently hired an executive, who's full-time devoted to that topic and evolving and adapting our business model even better, as in the same time, we're continuing to measure extremely high value from the implementation of our platform with key customers.

So we're very confident that there's some runway in terms of bridging the gap, I would say, between what we currently charge today to our customers relative to what we could be charging them, given the value that we can measure.

[David Weiss, analyst]

Okay, great. And then you'd also indicated, over time, adding more customer metadata in commerce, the platform customers could use to garner insights and help improve areas such as margins or manage inventory. But could you just provide us with an update on that front and particularly, the margin improvement use case and some potential that you might be seeing there?

[Louis Tetu, executive]

Right. When you look at -- this is a very interesting area, and we're investing quite a bit. I would say, this is probably the major portion of our research and development, investments are around that theme, which is not only the idea of using artificial intelligence to create great user experiences that people love, that are highly personalized and can anticipate and et cetera. So satisfying the customer but really satisfying the shareholder as well, which is controlling the business outcome.

And to your point, when you think about commerce, there are applications of that in commerce and service and in any kind of digital experience in general.

But if you think about commerce, in particular, things like inventory levels, things like obsolescence, things like margins, things like propensity of return, these are multiple angles, which you refer to as metadata, that need to be considered, in fact, in order to make sure that the #1 issue that the e-commerce world has gets addressed, which is margins.

It is broadly reported that, in fact, the biggest -- the largest e-commerce vendors have reported over the past 5 years that their margins was the #1 challenge, that their margins had been eroding quite a bit. And part of it is because of bad technology. In fact, that tends to promote stuff that might please the consumer but doesn't generate margins or sometimes even drives margins negatively.

So the short answer -- the short conclusion, not answer, David, is that this is the #1 key axis of development for Coveo, which is to create the balance, optimize the balance between creating a great experience and maximizing business outcomes.

[David Weiss, analyst]

Okay, great. And just one more quick follow-up just on -- in terms of professional services revenue. There was a bit of a downtick this quarter versus the past couple of quarters. I'm just wondering if there's anything to read into that or if that's -- if there's anything going forward that we should note.

[Louis Tetu, executive]

I'll turn it over to Jean, but I'll just qualify that, David, that we, as a firm, are really focused on the SaaS line. And we continue to build and expand our network of systems integrators. We work with a lot of systems integrators, and they, too, expand their practices.

I mean, from the largest ones like Accenture and Capgemini and Deloitte, et cetera, to more specialized ones in the commerce, service or digital area. And our goal is to transfer and let these businesses, in fact, build their services around our offering. And Jean, perhaps you can put some numbers on that, but...

[Jean Lavigueur, executive]

Yes. No. So that's correct, David. You've -- when you mentioned that we've seen a very, very slight decrease. As you know, professional services can be a little bit lumpy. Some of our large transactions, sometimes we will be the lead.

But as Louis stated, our goal is always to turn the business over to our system integrators, our partners, let them be the lead and for us to assist them, help them out. So you will see a little bit of that lumpiness.

But overall, if you look, for example, at the guidance for next quarter, you'll see a slight uptick. But overall, as a percentage of revenue, it should remain pretty much in the same range, in that 6% to 7% of total revenue as we keep working with our SI partners out there.

[Operator]

The next question comes from Paul Treiber of RBC Capital Markets.

[Paul Treiber, analyst]

The comments you made in the prepared remarks just on commerce and on the large transactions in that segment are quite encouraging. Just could you break out like the magnitude that commerce is contributing to either SaaS growth or RPO? Or just try to put the size of commerce relative to other segments right now.

[Jean Lavigueur, executive]

Yes. Thank you, Paul, and it's a great question. Certainly, because when you look at ARR, as you know, service -- customer service is the largest of our 4 lines of business. But certainly, when you look at commerce, it is the one that is certainly growing the fastest.

What is especially exciting as well for us, Paul, is when you look at -- Louis commented on some great wins on the B2C front, right? We had our largest land ever in that line in B2C, but we've also had a significant 7-figure deal as well on the B2B front.

Louis commented on why this B2B is such a great -- leverages all of our technology really. So when you look at the strength in both B2C and B2B, and we've seen a number of customers as well leveraging both of them, right? They do sell directly in certain regions of the world. They do sell through channels and others. So some of them do require both of them.

So when you look at certainly the contribution of bookings coming from e-commerce, certainly, we've seen it coming in at over half of our bookings coming from e-commerce.

And we certainly -- as we keep adding new features Louis talked about, adding profitability, optimizing on those new features, certainly -- we certainly expect that into 2023, it will continue to be very, very strong for us.

[Paul Treiber, analyst]

That's really helpful. The -- could you provide some historical context on commerce? Like over half of bookings now, maybe where that was a year ago? And I'm just trying to think of or try to understand how much the momentum in commerce would help mitigate maybe some of the slowness in other areas.

[Jean Lavigueur, executive]

Yes, no. So I think from a year ago, when -- certainly, when you look at -- so it was probably half of that. So certainly, as we've kept -- so certainly, it has accelerated clearly from -- so through the growth rate in the bookings, certainly, I think that growth has come from e-commerce, both B2C and B2B.

But Paul, we did report that when you look at ARR for all lines of -- all 4 lines of business did grow double digit, all 4 of them again this quarter. This is -- ever since we've been public, we've been reporting on double-digit growth for all lines of business.

But certainly, it's disproportional, of course, for commerce. Let's be honest, we've been at commerce for 3 to 4 years, so we're starting off with a slower base. But clearly, as you can tell now, it is a substantial portion of our new bookings and as well new logos.

[Paul Treiber, analyst]

I just had a question on the competitive environment. Is your sense that through the next couple of quarters or so period when the macro is weaker here and there's this hesitancy in decision making, do you see any shifts competitively? I mean, how do you sort of see that shaking out here?

[Louis Tetu, executive]

Yes. No, I think, Paul, we see the same type of competition, both in names and in approach. As we have reported before, some customers will look at the type of problem that we solve as a search problem.

And some customers, typically the larger enterprise, the more sophisticated ones, understand that it is about search, it is about recommendations, it is about personalization. It is about -- in our case, we have the ability to use deep learning for anonymous or cookie list personalization. It is about the ability to do A/B testing on multiple AI models and analytics.

And we've just started, thanks to the integration of Qubit. We just announced the Merchandising Hub, which allows merchandisers now to control business outcomes as opposed to simply, as I said earlier, controlling customer experiences.

So when you look at all that platform that we have at this current time when digital experiences, as we mentioned in earlier calls, is such an imperative, and people are only a browser window away from getting a better experience at Amazon or elsewhere, we could not be more timely and more confident about our competitive position, given the type of value that we can generate.

When it's a value-driven decision, typically Coveo will win. When it's bits and bytes decision or a more tactical decisions, sometimes, some developers or some IT people might be looking for just a little search engine or something like that. But those are not the types of customers that we deal with. So we're not seeing any change.

If anything, Paul, we're seeing -- given the value that we can demonstrate, we're seeing a greater imperative than ever in -- towards AI platforms. And Coveo has been in AI for almost a dozen years, dealing with some of the largest data sets in the world. And so we feel pretty confident about our advance there.

And obviously, things like ChatGPT just raised the attention, I would say, on a technology that is very significant. I think that was existing before. ChatGPT didn't invent that. Google is working with other models, as LaMDA. And Meta has -- works with BlenderBots, and ChatGPT is OpenAI.

But it certainly brings a lot of attention to the importance and the understanding of AI and, we say, the imperative of AI in the space. So again, we couldn't be more excited around our position, where we are, our competitive position and the growing demand for it.

[Paul Treiber, analyst]

Just curious just on ChatGPT, did you see any material uptick in the leads that you've received on your website? Any sort of various measures that you could disclose there?

[Louis Tetu, executive]

I think it's early, frankly, Paul. ChatGPT, the biggest thing is it's large language models, in particular, and that technology and ChatGPT, question answering, all that technology is extremely important technology.

Our customers -- remember, we have a lot of customers in the tech sector. Most large tech companies deal with us. And those are -- this is technology we've been talking to them and working with them on for quite some time.

Not quite like ChatGPT on this kind of data corpus and et cetera, but the use of delivering -- the idea of delivering questions as opposed to links and the idea of delivering -- delivering answers, sorry, as opposed to links in the context of customer service or knowledge, for instance, has been something that we've been working on for a long time and -- using AI.

So it's more a matter of understanding and raising the importance. Now, as it relates to inquiries for us, it's just very recent. ChatGPT itself still has a number of issues to solve as a model as it relates to -- if only the freshness of data and the source of truth, right?

Most of our customers want accurate -- want to provide accurate answers to their customers. They can't work with a data corpus that's a year old. And prescriptions need to be a little more accurate.

But again, we could talk about the key advantage of that technology and how it complements what we do. But the short answer to your question is we're not seeing any major, major uptick. But certainly, the people who know Coveo understand even more the importance of what we do.

[Operator]

The next question comes from Richard Tse of National Bank Financial.

[Richard Tse, analyst]

Given how strong the ROI is, it seems very compelling investment for your prospects in this environment. So what are the gating factors to those decisions right now? Is it just the economy or is it sort of something else?

[Louis Tetu, executive]

No, I think it's 95%-plus the economy, Richard. I mean, we see it in the public markets, sometimes even with investors, you can't sell them a bag of dimes for a nickel.

It's just the way companies right now put much more scrutiny in spending and investing, sometimes cut their budgets, preserve cash in some instances or just bring a lot more scrutiny in terms of launching new initiatives and et cetera.

In general, we get through that. When we talk at the right level, people who are empowered typically more in the executive ranks of driving the business, driving growth, cutting costs, increasing customer satisfaction at a lower cost, which is a key challenge right now, the people making those decisions, continue to make those decisions.

The people, I would say, sometimes maybe in the lower ranks of organizations, may not be as empowered or have the budgets to make these decisions as freely as they had in the past.

But the -- as long as you can -- we can continue to make it easy for customers to engage, reduce the risk, reduce -- and make the ROI very obvious and compelling for the people who care, we're going to continue to sell. But it's -- I hesitated to answer, Richard, 100% economy-related.

But we've seen that before. We've been 30 years in enterprise software, and we've seen multiple economic downturns, and it's always been pretty much the same set of dynamics from a sales perspective.

[Richard Tse, analyst]

Yes, okay. Super fair. But if I kind of look at it a different way, let's say you sort of stand back and you look at your pipeline growth today versus what it may have been last year, what has been sort of the cadence of that? Is that sort of the same? Is it actually faster? Just to kind of get...

[Louis Tetu, executive]

I can tell you that our pipeline has continued to increase relative to last year. That I can tell you. Yes. So it's -- yes, so it's up there. There's demand out there. There's clarity.

[Richard Tse, analyst]

Okay. And then just a last one for me. A lot of companies in this market are sort of looking at an opportunity to perhaps be a bit more aggressive on the cost side of the business. So what's your take in terms of the next, I don't know, 6 to 12 months on that side? Are you sort of looking at headcount reductions or hiring? Just to kind of get a sense of where you're at there.

[Louis Tetu, executive]

Well, we're obviously extremely proud of another strong beat on the operating leverage side as you saw. So we are obviously looking at efficiency.

I prefer personally, given the situation we're in, we are a growth company, and I prefer to think about efficiency than cost cutting. And I know sometimes, there's an intersection and it means the same thing. It can mean similar things.

But it's really, for us, about how do we do more with less, but how -- without forgetting that we need to continue to do more. And this is really kind of the idea. We're not -- you haven't seen us so far do a reduction in force or anything like that. We are making the company more efficient. We are top-grading the company. But let's not forget it, we are growing.

And over time, investors, if I reflect on my past 30 years in business we've been together, investors are going to continue to reward growth. So we need to balance the two, Richard, and it's an everyday exercise, but we want to make sure that we're not affecting our ability to grow.

I'm here to say that we are going to continue to seize the growth opportunity and invest for the future because we think our market is only at the inflection point.

The imperative for AI and digital experiences, as I always say, is right there. And companies either embrace it or they compete -- or they will decide to compete against it, and you don't want to be on that side of the trade.

And so -- and Coveo's positioned as a leader or the leader, depending on how you look at it, in that very important space with a very important technology and hundreds of enterprise clients who've demonstrated the ROI. And so we're going to continue to do that.

So we're not really waking up in the morning in cost-cutting mode. But again at the same time, we're super proud of the gains we're making in efficiency and operating leverage.

[Jean Lavigueur, executive]

And Richard, if you recall -- and Richard, if you look at our fiscal year 2023 guidance for adjusted operating loss, right, last quarter, we communicated an improvement of $8.5 million. This quarter, again, another $2.5 million on top of the $8.5 million, right? So we've kind of improved our adjusted operating loss guidance for the full year by $11 million, right? So we're midpoint, right now, at $21.5 million.

So from where we were at the beginning of the year, I think clearly, we've shown efficiency. But certainly, to Louis' point, right, we certainly wake up in the morning thinking about growth, but it's all about profitable growth, efficient growth. And I believe that, that's what we've delivered to shareholders over the last 2 quarters and certainly what we intend to do next quarter as well.

[Operator]

The next question comes from Koji Ikeda of Bank of America.

[Koji Ikeda, analyst]

Just one question for me in the interest of time here. So another public AI vendor announced a new enterprise search tool a few days ago. So just wanted to take the time here for you to maybe address how difficult it is to replicate what Coveo does and then also how embedded within a customer's tech stack. Or I guess maybe, how difficult is it to rip and replace Coveo, once it becomes live at one of your customers?

[Louis Tetu, executive]

It is very difficult to rip and replace Coveo because Coveo becomes the intelligence layer and sort of the brains of a customer service stack or a commerce stack. And there's some quite unique purpose-built technology that is designed for that.

Now, I think I suspect which company you're talking about, about the search announcement. Look, justified hype around ChatGPT, but it still -- there's still the word hype in my sentence.

It is an important technology. It is a critical technology, it will improve and et cetera. But there are still major issues. And it's a technology that hits the imagination, obviously, and so on.

And so some companies may be taking advantage of that and et cetera. And there's some practical applications, too. And we certainly understand that and are embracing it and building it in our R&D plans and et cetera.

But the announcement of an enterprise -- a new type of enterprise search engine based on that alone, to be honest, doesn't cover 10% of what we do, could not deliver the kind of capabilities that we provide our customers, both in customer service and commerce, where if you think about the enterprise needs or must-haves or requirements, you deal with confidentiality, you deal with privacy constraints.

You deal, as I discussed earlier, with security, freshness, sources of truth, understanding and freshness of content and et cetera.

ChatGPT generates interesting answers and text and et cetera, is extremely powerful. But if you read carefully, it also hallucinates. Hallucination is not allowed in the context of customer service.

So there's some practical matters here that, let's say, tomorrow is not when we'll stop doing what we do. And in fact, we're probably the closest to embracing that technology in the context of customer service and commerce again.

[Operator]

The next question comes from David Kwan of TD Securities.

[David Kwan, analyst]

I'll squeeze one quick one in here. Just you've done a great job here of narrowing the losses. So curious to get your take on any potential revisions in terms of the timeline to get a positive adjusted operating income and then the amount of cash that you expect to get you there.

[Jean Lavigueur, executive]

Yes. Thank you for the question, David, and thanks for the great comments here. Certainly from how -- we're not announcing today that we will be able to accelerate further.

As we previously mentioned, by the end of fiscal year 2025, we expect to be cash flow profitable. Certainly, when we look at our -- certainly what we've been delivering, we mentioned our last quarter, improvement of $8.5 million on the path to profitability for -- certainly an improvement of adjusted operating loss for this fiscal year.

This quarter, again, another $2.5 million. So certainly pleased with the progress of being efficient while maintaining a solid growth rate on the top line. So you should expect that to continue.

Though, David, Louis did mention there's some exciting new innovations that we want to keep working on. We talked about the profitability, certainly large language models and the like.

So we believe that we will achieve that balance of high growth and, of course, becoming profitable in the short term. But right now, not announcing that we will be able to pull forward the date when we will be cash flow profitable at this time today.

[David Kwan, analyst]

Appreciate the color.

[Louis Tetu, executive]

Well, we -- we had already pulled it forward, right, Jean? But anyway...

[Jean Lavigueur, executive]

Yes, yes, but not today. Today will not be a...

[Louis Tetu, executive]

Not today. We're not announcing that today. We're still being cautious for that.

[Operator]

The next question comes from Kingsley Crane, Canaccord Genuity.

[Gabriel Roade Gomez, analyst]

This is Gabe for Kingsley. Yes, congratulations on the quarter. I was curious to hear how the Merchandising Hub has been received so far and how it did specifically at the NRF showcase. What are you hearing from customers and such?

[Louis Tetu, executive]

Extremely well. And this was the thesis all along why we bought Qubit. And it goes back, Kingsley, to what I explained earlier, which is that really the Holy Grail sort of speak as we see it right now in an area such as commerce, is really, in fact, the use of algorithms to balance both the customer experience with the profitability. And so this is really, really important, what -- and that takes up multiple dimensions.

So Coveo, on one side, is about [ sizing ] and making great recommendations that people want to buy and et cetera. The Merchandising Hub changes the role of the merchandisers from an instinct-based role.

If you know how a merchandising department works, it's a lot of people with a lot of experience in their field, who understand anything from selling DIY or barbecue products and plumbing products to fashion or et cetera. They tend to be very vertical, and they know what sells and what to promote and et cetera, but it's not data-driven.

So we're changing the role -- with the Merchandising Hub, we're changing the role from -- of the merchandiser to a role where using data, merchandisers can test multiple AI models, multiple campaigns and basically find out what brings more revenue and more contribution to the company. And -- as opposed to writing rules manually to say, "Hey, it's raining today, let's promote umbrella," so to speak -- sort of way to speak.

So this idea of -- and that's why we bought Qubit. So this is extremely important. And the answer to your question is it was extremely well received by our customers because we now have both. We can deliver great experiences, and we can control how that drives better business outcome. And so -- and this is what the market is looking for.

[Gabriel Roade Gomez, analyst]

Awesome. And just if I may, real quick follow-up. In terms of the deal profile, have you seen any evolution there in terms of workplace versus commerce like you continue to see like relative weakness there? Or has anything evolved?

[Louis Tetu, executive]

As Jean mentioned, Kingsley, we see double-digit growth. We've reported double-digit growth across all lines of business. It is very obvious right now that in almost every company, the initiatives that bring ROI are privileged.

Most companies probably don't have as much attention improving their intranet as they have growing their revenue, which is our value proposition in commerce. It's about put our technology on top of your commerce infrastructure, we will increase your revenue and we will impact your margin, period, and here's how we're going to do that.

And in customer service, most companies are very concerned right now about how to preserve their most important assets, which is how do they keep customers happy, but they can't spend more money to do that. And typically, one way to increase customer satisfaction is to -- is with brute force, right, is by increasing either the number of agents or the number of people talking to them, investing more and et cetera.

How do you increase customer satisfaction so that you preserve their revenue and you potentially grow it while reducing costs at the same time, which is -- and we -- that's our value proposition in customer service, which resonates very well right now by providing intelligence on -- in self-service, within contact centers and something throughout the entire customer journey. Through technology, we actually drive costs down while increasing customer NPS.

And so long answer to say, these are the types of use cases that customers continue to buy because, again, you're handing them a bag of dimes and you're charging them a nickel. And regardless of the economy, ultimately, those things get done.

[Gabriel Roade Gomez, analyst]

Awesome. Congrats on the quarter again.

[Louis Tetu, executive]

Thank you. We're very proud of the quarter. Yes.

[Operator]

There are no further questions at this time. Please continue with closing remarks.

[Louis Tetu, executive]

Very good then, operator. So again, thank you very much for all your time today. As you can see, we continue to push forward and believe strongly that Coveo is in a very unique position and that there continues to be strong demand for what we do. So thank you for all your questions today, and we look forward to talking to you soon. With that, operator, you may close the call.

[Operator]

Ladies and gentlemen, this does conclude the conference call for today. We ask that you please disconnect your lines, and have a great day.