Coveo Solutions Inc

TSX:CVO

Earnings Call Analysis

Coveo Posts Strong Q3, Uplifts FY Guidance

In Q3 fiscal 2024, Coveo saw its best total bookings since 2022, alongside an increase in new customers for their Relevance-Augmented Generative Answering tech, resonating in the AI market. With partnerships like SAP and generative AI product acceleration, Coveo observed high ROI and customer value. SaaS revenue grew by 13% to $29.9 million, beating guidance. Full-year SaaS subscription revenue is now projected at $118-118.5 million, with Q4 ranging from $30.2-30.7 million. Gross margins remain solid at 77-78%, and adjusted operating loss was $1.7 million, a significant improvement over last year's $3.9 million. They improved the full-year adjusted operating loss guidance by 20% to $7.5-8.5 million for fiscal year 2024, signaling efficiency and potential for growth in 2025.

Strategic Customer Acquisition and AI-Centric Solutions

In a dynamic market environment, the company saw its largest new customer land within the commerce solutions space through a deal with a global automotive entity, valued close to a seven-figure SaaS Annual Contract Value (ACV). This partnership was driven by the AI capabilities provided out-of-the-box by the company's platform, bringing enhanced relevance and personalization to the customer's online shopping experience and supporting increased revenue per visit. Notably, the partnership is not just a transaction but the beginning of a key journey with significant potential for upselling and cross-selling newer capabilities like Relevance-Augmented Generative Answering over time.

Improved Financial Performance and Upward Guidance Revision

Financial prudence has resulted in improved performance with the adjusted operating loss for the quarter down to $1.7 million from the prior year's $3.9 million. Marking a substantial improvement, this demonstrates the company's capacity in controlling expenses and gradually moving towards profitability. The company's cash position remains strong at $163 million with no outstanding debt, allowing them to strategically repurchase shares and signaling confidence in their value. As a demonstration of this robust performance, the company confidently anticipates higher SaaS subscription revenue, projecting a range of $118.0 million to $118.5 million for the full year. Additionally, they predict fourth-quarter SaaS subscription revenue to range from $30.2 million to $30.7 million and total revenue between $32.1 million and $32.6 million for the same period.

Marching Towards Fiscal Prudence

With precise cash management, the company has strategically used only $400,000 to fuel operations, aligning itself to realize a positive cash flow from operations by fiscal 2025. Moreover, they have managed to keep adjusted operating expenses relatively unchanged, achieving significant operational leverage as expenses proportionally decreased compared to revenue growth, maintaining impressively high adjusted product gross margins above 80%.

Future Outlook and Bookings Growth

With the intention to capitalize on favorable market conditions, particularly increased customer interest in AI, the company is focusing its efforts on driving bookings growth. This strategic pivot aims to leverage growing demands, especially GenAI, as acknowledged by a top executive survey where AI and GenAI were considered top priorities. The company also witnessed an expanding interest in AI solutions despite longer sales cycles and caution in spending due to macroeconomic pressures.

Expanding Footprint in Enterprise Solutions and SAP Partnerships

Proof of the company's growing influence in enterprise solutions is the signing of three significant SAP-based deals within a single quarter. These successes illustrate a budding partnership that has fostered a healthy pipeline of prospects. The typical sales cycle for enterprise deals with SAP customers is around 9 months, indicating impending revenue potential with a broad coverage across B2B and B2C spectrums. The company expects this trend to keep up, augmenting its reach and influence in the sector.

An Agile and Proactive Response to Market Conditions

Throughout 9 quarters post-IPO, the company has shown a disciplined approach towards managing operating expenses. Despite constant dollar values in adjusted operating expenses and economic headwinds, the company has still managed to produce operating leverage. This highlights the company's agility in face of market volatility and its potential to seize opportunities, especially with the uptick in AI and GenAI interest among businesses worldwide.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo Third Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions]Thank you. 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 Tetu, Coveo's Chairman and Chief Executive Officer; and Brandon Nussey, Coveo's Chief Financial Officer.Before we get started, I would like to note that certain statements made during this conference call are forward-looking statements within the meaning of applicable securities laws, including those regarding our plans, objectives, expected performance and our outlook for the fourth quarter and fiscal year 2024. These forward-looking statements are given as of the date of this call. And while we believe any statements we make are reasonable, they are based on current expectations, which are subject to risks and uncertainties, and actual results could differ materially. We do not undertake and expressly disclaim any obligation to update our forward-looking statements, whether because of new information, future events or otherwise. Further information on factors that could affect the company's financial results is included in filings we make with Canadian securities regulators, including under the section titled Risk Factors in the company's most recently filed annual information form and the section Key Factors Affecting our Performance in the company's most recently filed MD&A, which are available under our SEDAR+ profile at www.sedar.ca.Additionally, some of the financial measures and ratios discussed on this call are either non-IFRS measures or operating metrics used in our industry. A discussion on why we use these results and where applicable, a reconciliation schedule showing IFRS versus non-IFRS results are available in our press release and our MD&A issued today, which may be found on our Investor Relations website at ir.coveo.com and our SEDAR+ profile. Please note that unless otherwise stated, all references to financial figures are in U.S. dollars.Finally, presentation slides accompanying this conference call can be accessed on our IR website under the News and Events section. Following our prepared remarks, we will be conducting a Q&A session for analysts. To foster an inclusive discussion, we kindly request analysts to limit their questions to a maximum of 2. Your cooperation is greatly appreciated, and thank you for your understanding.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'm delighted with Coveo's third quarter performance, which exceeded the high end of our guidance on revenue and is also well ahead of our guidance on the bottom line, all keeping us on track to achieve positive operating cash flow in fiscal 2025. This is a testament to our team's capabilities and dedication and to the value of our technology and our business model resilience in the current macroeconomic environment.Q3 fiscal 2024 was our best total bookings quarter since fiscal 2022. Additionally, it was our best new logo land bookings quarter with the highest mix of land bookings since fiscal 2022. We believe this has been driven in part by the differentiation and strong early interest in our Relevance-Augmented Generative Answering technology turning into tangible opportunities with customers, by the continued ramp of our partnerships, in particular, with SAP, and generally, customers starting to move from the experimentation cycle of GenAI to real buying cycles where they see clear evidence of tangible ROI.As I highlighted during our Capital Market Day this past November, for over a dozen years, Coveo has been innovating with forward-thinking global enterprises, bringing AI to their digital experiences and with a true obsession to drive the best possible relevance and business outcomes from all their digital interactions. We started integrating machine learning within search and digital experiences in 2012. Over the years, we gradually integrated deep learning, intent detection, large language models, and today, semantic search, generative AI and other new optimization AI models. This decade-plus collaboration with large and global clients has enabled us to build a market-leading AI search and personalization platform for enterprises, one that has been recognized as a Gartner leader for 7 years, a Forrester leader for 6 years, and an IDC leader for 3 years.In turn, our platform has enabled those enterprise customers to gain a trusted AI experience advantage within their digital experiences, powered by vector and semantic search, AI recommendations, and now generative experiences that personalize and augment every buyer, every customer, partner and employee touch point, delighting users and driving high business ROI at the same time. Reiterating what you heard at our Capital Markets Day, we are emphasizing again the enormous market opportunity ahead of us to execute on and capture as we approach the start of our next fiscal year. We believe the market is only beginning to embrace AI to enable individualization and optimization of digital experiences at large scale. Business leaders increasingly understand the benefits of bringing AI to every point of experience to drive superior relevance and outcomes across commerce, customer service, websites and into the workplace. This is something not humanly possible to achieve without AI.Significantly, we're proud to announce that in December, Coveo Relevance-Augmented Generative Answering became generally available after several months of live beta tests with enterprise customers at large scale. The collaboration and trust shown by our enterprise customers in this groundbreaking platform enhancement resulted in Coveo's most successful product launch to date. We are thrilled to share that we closed transactions for Relevance-Augmented Generative Answering at an accelerating rate in the quarter. We have completed a transaction for our GenAI product across each of our solution areas, in commerce, in service, in websites and in workplace use cases. We're very encouraged by the strong demand in the market for this solution with the value we measure for our customers and with our distinctive competitive advantage in generative AI at the point of experience. This is evidenced by our continued growth in transactions and pipeline related to Gen AI and the similarly accelerating number of enterprise customers currently in the process of testing our solution.The testing and implementation of Relevance-Augmented Generative Answering has been highly successful to date, and we're pleased to report that we had additional customers that moved beyond experimentation and went live with our GenAI solution so far this year. While most of these applications so far have been in the customer service websites and workplace knowledge areas, we're pleased to report that Coveo has also officially gone live with a commerce generative AI solution at a large home improvement and construction supplies retail chain in the U.S. with our technology improving their live digital buyer experience. Customers have reported significantly superior performance when A/B testing Coveo versus other solutions tested and compared, particularly in terms of completeness, accuracy of responses and hallucinations avoidance that surpassed the performance of other generative answering offerings in the market.We believe this is due to the superior performance of our underlying AI search and relevance capabilities, which I will explain later. Moreover, our ability to control and combine AI search and results, navigation, answering and conversations, all together in one single digital experience with the security, [ currency ] and traceability of answers and across many content sources is, in our view, what enterprises need. In fact, we heard that one competing solution that we were A/B tested against actually generated negative ROI for the customer by generating inaccurate and low-quality answers, which would have increased case submissions and customer service. In summary, Relevance matters, Relevance wins, and it is a deep science.After these tests and measures, we observed and firmly believe that the integration of our generative AI solution, powered by vector search and built on top of and augmented by our leading AI search and relevance platform not only ensures rapid time to value, but also delivers a high ROI, offering unparalleled benefits to enterprises navigating this dynamic landscape, and it is available in full production now.More specifically, last quarter, we talked about how Xero Software, a leading provider of SMB accounting software with 3.9 million businesses customers across the globe, deployed Coveo after several months of tests. Xero has now reported seeing the average customer search time decrease approximately 40%. Search sessions requiring additional customer support decreased by more than 20% with the use of Relevance-augmented generative answers, on top of the existing benefits brought before by our AI search. This is something everyone on this call can experiment with yourself by visiting the Xero central website and just asking a how-to question, for example.Another large technology customer found that generative answers allowed end users to save nearly 10 minutes searching for an answer. Beyond the high financial value of this on a large scale, this is a game changer for both the customer and the employee experience as it empowers them to become more proficient instantly. We at Coveo found that across our own customer self-service experience, our self-service success rate improved by approximately 40% for visits using Relevance-augmented generative AI. This is something everyone on this call can experiment with yourself by visiting the public global Coveo partner service community at partners.coveo.com.In summary, our analysis has found that self-service success improvements from Coveo Relevance-Augmented Generative Answering could lead to an additional reduction of up to 25% in the overall cost to serve. This is on top of the double-digit self-service improvements and case reduction our customers were already seeing from our AI search platform. Folks, to be clear, this technology is ready. In our view, it's a big deal, and this is exceptional in this market. It is a game changer, and it is a gain changer.We believe our market is quickly realizing that delivering on the promise of generative AI in real time at the point of experience is now a reality but that it absolutely requires a solid search and relevance foundation to ground answers from a secure corpus of information consisting of multiple sources of content that is both current and contextually relevant. In other terms, and for those of you more familiar with generative AI, in our opinion, simply using retrieval-augmented generation, or RAG, particularly at larger scale and with more complex content, will not provide the capabilities necessary for real-time answering use cases without the kind of relevance technology that Coveo has built over a decade.Let's now talk some specifics about transactions. Among our new generative AI expansion transactions, 2 were secured with major financial services companies overseeing nearly $10 trillion in global assets. Both are utilizing Relevance-Augmented Generative Answering within the workplace solution area with one also extending its use for their website. In each instance, these enterprises chose Coveo after rigorous testing, validating our solution as a far superior alternative, including internal build options they were considering. The deciding factor was the demonstrated value through enhanced content findability, answers' accuracy and the improved experiences, productivity gains and fast time-to-market compared to alternative solutions.In our website solution area, Coveo was selected by one of the largest U.S. airlines to implement Relevance-Augmented Generative Answering on their customer-facing website. A proof of concept, developed with the help of our development and data science teams, was tested and shared internally, including with their Chief Information Officer. Through this process, they achieved fast, accurate responses to improve overall customer self-service and relieving pressure from their contact center. This customer is competing to be the most innovative airline in the industry, so it's gratifying that they have chosen us, and we look forward to their formal go-live in the near future.In service, a major U.S. cybersecurity company selected our GenAI offering to help improve their customer self-service metrics by at least 20% and to enhance their agents effectiveness. After evaluating several vendors, our customer reported that Coveo ultimately won, given our platform's unified index, tight integrations, GenAI answer superiority and our established presence within their digital properties. By enhancing their self-service portal, we aim to alleviate pressure on their contact center, allowing their support personnel to focus on the highest priority cases. As a second phase, they intend to implement Relevance-Augmented Generative Answering within their contact center to enable their agents to find more efficiently the intricate knowledge and answers they require, improving the overall customer service experience and reducing the time to proficiency for their agents.Other Relevance-Augmented Generative Answering transactions signed in the quarter include SAP Concur, Blackbaud, a leader in electronic system design and a global pharmaceutical company. We are thrilled that these major enterprises have tested and selected Coveo to deliver even more value and ROI, building upon the strong partnerships and success we've already established to date. Their ongoing partnership not only demonstrates their trust in our platform, but also how they subscribe to our vision and our fast ongoing innovation in AI experiences, fueled by our customer community of leading enterprises.Outside of Relevance-Augmented Generative Answering, in the third quarter, we secured our largest new customer land within our commerce solutions area, an exciting near 7- figure SaaS ACV deal with a global automotive company. The choice to partner with Coveo was due to the feature-rich, out-of-the-box AI capabilities of our platform, offering superior relevance and personalization to the shopping experience, supporting their goal of improving revenue per visit. We are excited to demonstrate the value we bring with our platform with an eye on introducing to them other complementary solution areas over time, including our Relevance-Augmented Generative Answering capabilities.Before I hand the call off to Brandon for the financial update and just to wrap up my comments, I want to reiterate that I could not be more excited about the opportunities that lie ahead of us as we approach the end of our fiscal 2024 and gear up for the next fiscal year. 2023 was marked by discovery and experimentation around generative AI, which also and more broadly democratized the quantum leap opportunity of AI within the enterprise, something Coveo has been specialized in and has embedded in our platform for over a decade.A recent January 2024 BCG survey of 1,400 executives revealed that AI and GenAI rank as a top 3 tech priority for 2024, and 51% put it at the top of their list, targeting greater than a 10% productivity gain and revenue uplift. These secular tailwinds in the AI space are supported by the undeniable power of AI search and generative AI at the point of experience. And we see a trend by enterprises to consolidate with leading platform vendors like Coveo, who can make this work in full production and at scale beyond the experiments and with demonstrable and high ROI.With our pipeline steadily expanding, the strong partnerships we anticipate will help to accelerate our go-to-market motion and the continued and disciplined management of our business. We believe Coveo is highly differentiated and well positioned as we look forward to fiscal 2025 and beyond, and it is our intent to capitalize on that advantage and invest for growth and market share gain.With that, I will now hand the call over to Brandon to discuss our quarterly results in more detail. Brandon?

[Brandon Nussey, executive]

Thanks, Louis. To echo some of Louis' commentary, I'm pleased with how the company has performed in the third quarter and encouraged by the many opportunities ahead of us. Before digging into the details, as usual, I'd like to quickly summarize some key points.We delivered SaaS subscription revenue ahead of our guidance for the third quarter and are improving our guidance for the full fiscal year. SaaS subscription revenue grew 13% for the third quarter and 18% when excluding the impact of Qubit-related churn. Our net expansion rate remains within our target of range between 105% and 115% with NER for the third quarter at 109%, excluding Qubit-related churn and 105% overall.Our adjusted operating loss also finished well ahead of guidance, and we are improving our full year guidance for adjusted operating loss as we continue to tightly manage our OpEx. As Louis mentioned, we saw a nice uplift in new bookings in the quarter, including an improved mix of bookings with new customers. We are especially encouraged by the breadth of the bookings we saw. We saw an accelerating pace of orders for our GenAI offering, which represented approximately 20% of total bookings. We signed several new customers pursuant to our early SAP partnership, and bookings in Europe were the highest they've been this fiscal year and were more than double year-over-year. So this quarter was good validation that we're making progress with some of our key growth drivers as we look to reaccelerate our revenue growth within the opportunities we are seeing. Of course, this quarter is just one data point, and we have continued work to do.Now, getting into the details for the third quarter, SaaS subscription revenue was $29.9 million, an increase of 13% year-over-year. And total revenue was $31.8 million, growing 11% year-over-year. Excluding the impact of legacy Qubit churn, SaaS subscription revenue grew 18% year-over-year. In Q3, we saw a healthier mix of both land and expand bookings in contrast to a higher proportion of expand bookings in previous quarters. We are optimistic these will open future opportunities for expanded growth to these new customers via the sale of additional use cases and solution areas, including with Relevance-Augmented Generative Answering. Overall, SaaS ACV growth was largely in line with our SaaS subscription revenue growth, both including and excluding the Qubit churn, and all 4 of our lines of business continued to grow double digits year-over-year.Our net expansion rate as at December 31 was 105% compared to 106% we reported in our second quarter results. When excluding the legacy Qubit churn, our NER was 109% for the third quarter, a solid indicator of our existing customers continuing to find success and buy more from us.Third quarter gross margin remained consistent with last year at 77%. Adjusting for share-based payments and related expenses, adjusted gross margin was 78% for the third quarter, also consistent with a year ago. Product gross margin was 81% in the quarter, consistent with the prior year, and adjusted product gross margin was 82% for the quarter, also consistent with the year-ago period. These metrics continue to be great indicators of the strong unit economics inherent in our business model.Adjusted operating loss for the quarter was $1.7 million, once again, a significant improvement compared to the year-ago period, which was $3.9 million.For the 9 months of fiscal 2024, we have used only approximately $400,000 of cash to fund our operating activities, placing us well on track to achieve positive cash flow from operations in our coming fiscal 2025.At the close of the third quarter, our cash reserves stood at $163 million with no debt. During the third quarter, we used approximately $3.3 million of cash to repurchase shares under our NCIB.I will finish with guidance. In light of the company's strong performance this quarter, despite lingering macroeconomic challenges, we are increasing our full year guidance for SaaS subscription revenue to $118.0 million to $118.5 million. For the fourth quarter, we expect SaaS subscription revenue to be between $30.2 million and $30.7 million. We are also increasing our full year total revenue guidance to $125.6 million to $126.1 million. For the fourth quarter, we expect total revenue in the range of $32.1 million to $32.6 million.Due to our ongoing efforts around efficiency, for the year, we are improving our adjusted operating loss guidance by 20% at the midpoint with a new range of between $7.5 million to $8.5 million. For the fourth quarter, we expect adjusted operating loss of between $2 million to $3 million. Both our fourth quarter and fiscal '24 guidance assume FX rates roughly in line with where they are today for SaaS subscription and total revenue growth and adjusted operating loss.I'll wrap by highlighting that in the 9 quarters since the company's IPO in 2021, Coveo has demonstrated its ability to tightly manage operating expenses and stay responsive to market conditions. Adjusted operating expenses over this time period has remained more or less flat in terms of dollars, resulting in significant leverage in operating expenses as a percentage of revenue, while continuing to deliver adjusted product gross margins in excess of 80%. Said differently, Coveo has proven it can deliver operating leverage. As we look ahead, given our position as a leader in this market that we believe is now seeing increased customer buying activity, our attention will be on beginning to drive an acceleration in bookings growth rates to ensure we capture the market opportunity we are seeing.And with that, operator, you may now open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Richard Tse of National Bank Financial.

[Richard Tse, analyst]

Congrats on the quarter here. With respect to your customers sort of signing these generative answering deals, what has really been the biggest hurdle when it comes to their decision making? Is it kind of just understanding the technical risk or really just doing the diligence? Or is there something beyond that?

[Louis Tetu, executive]

Richard, I think you mentioned them. When you look at 2023, when generative AI really hit the world by storm, enterprises all rallied to try to adopt the technology, but basically tried to figure out what were the risk implications, what were the cost implications, what were the relevance implications. Obviously, big brands, for instance, cannot hallucinate, and they need to make sure that from a security and compliance perspective, the -- whatever they deploy, in fact, will not breach any of that. And so, it's been mostly along those lines and really testing, testing, testing. As you know, we've announced Relevance-Augmented Generative Answering back in early 2023, and we've announced that we would launch and that we were going to launch, and we did tests with multiple enterprises back in June, which is really what we did. And so, throughout these tests, they were able to look for things like security, like relevance and traceability of answers and accuracy, and basically measure through A/B testing how it would generate ROI in terms of how much better these types of solutions, this technology would be relative to the status quo and really assess the ROI. So this is essentially what took the time. And once they were able to confirm that security was not compromised and compliance was not compromised and that hallucinations were avoided and that really the ROI was there, then this is when they started buying after confirming that.

[Richard Tse, analyst]

Great. And then my second question, from an order of magnitude perspective, can you give us a sense of what that dollar value of your pipeline is from the generative answering product? And then, I guess, related, the mix of that pipeline between new and existing customers?

[Louis Tetu, executive]

Well, it's -- so I'll separate the answer into 2. Our strategy, which, in hindsight, has been the right one, has been to approach our existing customers with Coveo Relevance-Augmented Generative Answering. And the reason was that they already had in production, the platform that provides basically the indexing and what we call here at Coveo, the relevance stack that is so important and so mandatory to feed a large language model and ground answers into real secure and relevant content. So initially, we went to our existing customers. And so, naturally, the vast majority of that pipeline today is with existing customers. However, I can certainly qualify the fact that our ability, which we believe is unmatched in the market right now in that space, is creating a lot of leverage for our new customer lands or acquiring new customers, as customers see not only the powerful platform that we have, but the huge opportunity to expand that platform into generative. So while today -- so the direct answer to your question is, today, the majority, 80% plus of our pipeline is with our existing customers, and we have approximately -- we have basically dozens of tests out there right now with large enterprises and certainly north of 50 active opportunities at various stages. We expect that this technology, the integration of this technology into our platform will continue to help grow our new opportunity, our new customer pipeline as well.

[Operator]

Your next question comes from Adhir Kadve of Eight Capital.

[Adhir Kadve, analyst]

Great. You guys have mentioned right at the end of Brandon's prepared remarks, some increased customer buying activity. But then, you're also saying the macro is a little bit tough out there. Can you give us a sense of how sales cycles are progressing? Are customers still kind of just in that wait and see mode? Or are you seeing some green shoots that they're much more willing to kind of accelerate their buying opportunities?

[Louis Tetu, executive]

Well, as we mentioned before -- thank you for the question, Adhir. As we mentioned before, and I'll let Brandon complete [ your qualified ], but if -- 2023 was an interesting year because for us. It was a combination of the macroeconomic backdrop we all see and that pretty much every tech company experienced, combined with a massive disruption in the search industry. We knew -- we were confident, I would say, that we would benefit ultimately from that massive disruption, as enterprises were, generally speaking, much more interested in adopting AI, but we still had to go through that year of testing, experiment and really the market really learning the possibilities and so on, and improving the results. So this is really what we've seen. I think right now, there's no question that every software company, every tech company that I know, at least, will tell you that there is still a macro environment on the backdrop that is still not as good as it used to be. We see the effects of that predominantly in terms of the length of the sales cycle.On the other hand, as I mentioned on the call, referring to the Boston Consulting Group recent January 2024 executive survey, AI and GenAI in particular are a top 3 tech priority for 89% of executives, and 51% of executives put it as #1. So, needless to say, the macro environment sort of compensates -- sort of that set of priorities sort of compensates the macro environment. So the short answer to your question is, we're seeing -- we're continuing to see cautious purchases, elongated sales cycles, but we're seeing definitely a growing interest, a growing demand for AI, and in particular, a growing interest for companies like Coveo, who actually can deliver beyond the experimentation and really show massive results.

[Adhir Kadve, analyst]

Excellent. And then, just maybe on the SAP channel, what sort of progress are you seeing with customers in that channel? We'll call it -- I think you launched the product in April, so call it, 9-ish month post launch. What is the progress there that's really getting you excited?

[Louis Tetu, executive]

Yes, we're definitely seeing -- obviously, we've launched this in April and proceeded to execute on the -- it's called the endorsed status with SAP, which again provides the SAP sales team with full commission and full quota credit for selling Coveo as if they were selling an SAP product, which is quite significant. We obviously went through the summer period and then some further enablement. And we're very happy with our progress last quarter with the SAP. We signed 3 significant SAP deals in the quarter. And we believe the momentum is building from a growing pipeline and our collaborative go-to-market opportunity. The typical sales cycle, Adhir, in our sector for enterprise deals like those with SAP customers is approximately 9 months. So we're really seeing the initial cohort of pipeline deals since the partnership, and we certainly expect that to continue with a very healthy number of opportunities across both business-to-business and business-to-consumer.

[Operator]

Your next question comes from Doug Taylor of Canaccord Genuity.

[Doug Taylor, analyst]

Once again, a lot of great qualitative commentary -- case study, suggesting the GenAI product is gaining momentum. It's fantastic to hear. You provided the figure of 20% of your new bookings being GenAI-related. Perhaps I could ask you to help, now with the benefit of a couple of months from launch, bridge us this enthusiasm and this momentum and customer interest into a subscription revenue growth reacceleration, which is obviously a key watch item here for everyone on the call.

[Brandon Nussey, executive]

Doug, thanks for that. Yes. So as we've said in prior quarters, of course, it's our expectation that not just GenAI, but the other growth drivers we have underway, whether it's SAP, commerce market in general and some of the other areas, you're going to see that first hit bookings, so we provided some commentary there today on this was a good quarter in terms of new bookings, and then, of course, that will come into revenue over the ensuing 12- month period. We're off to a good start here. If we can keep up strong bookings performance, we're going to see the revenue follow. So we'll keep you apprised as to how we're doing there, but this is one quarter of validation for us anyway.

[Doug Taylor, analyst]

Well, forgive me for trying to get a little bit more quantitative data out of you there. But while I've got you, Brandon, adjusting operating losses continue to track better than your guidance, I think, better than the top line would suggest. So maybe you can you speak to some of the areas of success or a positive surprise, if there is any, you're seeing in your profit metrics?

[Brandon Nussey, executive]

Yes, I've been really, really pleased with a couple of areas, actually. The ongoing focus on the gross margin line, which to me is the most important long-term driver of efficiency. So lots of good work happening there, whether it's LLM consumption costs, just general hosting costs and so on. The team has done a nice job of squeezing out efficiencies at a return there. And then it's a company that's done a really good job of just identifying what are the most important things, ensuring those things are fully funded, and really challenging on other areas of expense beyond as to how do we get more efficient in those other areas. And so we've seen success on the G&A side. You'll see that in the numbers. We've seen success in certain sales and marketing activities as well, where we've been able to fund the things that really matter and deprioritize other areas. That's allowed us to keep the overall envelope largely unchanged, but make sure that we're still putting money into the things that are long-term growth oriented for us.

[Operator]

Your next question comes from Thanos Moschopoulos of BMO Capital.

[Thanos Moschopoulos, analyst]

Louis, can you update us in terms of your SI partnerships, any recent developments, and then, just more specifically, in terms of the role they're playing in GenAI, whether they're starting to be advocates for your solution, or whether maybe you're a bit of cross purposes because maybe some of them would rather custom build something for the customer [indiscernible]?

[Louis Tetu, executive]

Yes. Thank you for the question, Thanos. If you think about GenAI, first of all, GenAI is a very broad space, right? And Coveo specifically, what we're talking about, as you're very well aware, Thanos, is the application -- specifically the application of AI and generative AI at the point of experience. So think about real-time digital experiences across these use cases that we always talk about, so whether someone wants to buy something, fix something or so on. And this is a major transformation. And so, if you go back to your question about systems integrators, there is no question that enterprises are turning to systems integrators right now to gain, basically, knowledge and advice relative to the areas -- the main areas of transformation of generative AI. At the time -- at this particular time, as we speak, we believe from everything I read and from what we see in the market, there are a number of use cases that are at the experiment side in Gen AI, a lot of them in marketing, content creation and et cetera. But it is now well known that it can really move the needle dramatically also in areas such as R&D, obviously, with Copilot, and lastly and importantly, for us, in digital experiences. And so, this is basically a major transformation.So, to your point, Thanos, systems integrators have 2 choices. And the headline is there is absolutely a renewed interest from systems integrators around Coveo, but interestingly enough is that it's much more strategic than ever before. So some of the large ones are really engaging with us at a much more strategic and higher level within their organizations and see us as a platform, which we are, as a platform to essentially conduct or support the digital transformation of their customers around digital experiences to create these AI search recommendations and generative experiences across their digital properties. And so, we're seeing definitely a renewed interest, and you can expect us to invest more into this whole area of our go-to-market strategy, which is working with systems integrators. And yes, they do, for your question, recommend us as a core platform. So they either have the choice of building it themselves using, let's say, an elastic or those kinds of toolboxes, or recommend a solution like Coveo, which is out of the box and not out of the toolbox, which they have a tendency to prefer.

[Thanos Moschopoulos, analyst]

Great. And maybe a related question is, in terms of the OpEx investments you plan to be making now that the demand environment is looking a little bit better, you alluded to one of them, the channel enablement. But what other areas you're prioritizing over the next year?

[Louis Tetu, executive]

Yes. I'm going to start, and Brandon, feel free to complement, but a number of areas. I think a lot of it revolves around obviously our innovation. We're continuing to invest in our core innovation, in our data science teams and so on, as we have -- we feel we have a competitive advantage today that we want to continue to increase. The rest of the investment is really into go-to-market. So we're investing in account management and -- because we believe that every one of our customer needs our new innovation, and so there's a significant cross-sell and upsell opportunity there. And if you remember, at our Capital Markets Day, we talked about the size of the installed base, but fundamentally, out there, if you think about our penetration, we see about 21,000 large and midsized enterprises in our target regions. And so, we're really only penetrated 3%. And so, all the investments we're going to make there are around marketing, raising awareness, expect to see our brand out there much more and expect us to invest in sales as well, and obviously, in account management as well. So, as I said at the close of my commentary, expect us to invest gradually as we see this market reopen and as we see, especially, the stronger demand for what we do, of course, we will be there to invest in those areas.

[Operator]

Your next question comes from Taylor McGinnis of UBS.

[Taylor McGinnis, analyst]

So you said that you saw record bookings across both new and existing customers, but could you maybe disaggregate the 2 -- between the 2? It looks like excluding Qubit that NRR fell another 2 points. So can you just comment on the linearity you saw in the quarter? Did macro headwinds strengthen in the quarter and then maybe started to stabilize towards the end? It just looks like top line growth is capable of [ dropping ] in the second half of 2024. So I think it would just be helpful to get some more color on what you're seeing, excluding maybe some of the AI tailwinds.

[Brandon Nussey, executive]

Taylor, I'll take a crack at that. There's a few concepts in there, but I'll take a crack at that. In terms of constitution of bookings, first of all, it was a good quarter of new bookings. I think we said our best in so far this fiscal year and prior fiscal year, much healthier balance of new versus existing. We mentioned winning our largest ever land transaction with a global automobile manufacturer and several other nice wins in the quarter. So it's a much healthier mix towards land. I wouldn't say there was anything unique about the linearity of the quarter, this quarter. It behaved like most other quarters do. But to your point, we are overcoming the Qubit churn, which was towards the end of last fiscal quarter was where we felt that the most. There was more Qubit churn in the current quarter, as we've talked about previously. And so, that does show up in the overall growth numbers and will weigh on the annual growth in the back half of the year with Qubit in there. Excluding Qubit, 18% growth on the SaaS subscription line this quarter, more or less in line with the prior quarter.

[Taylor McGinnis, analyst]

Perfect. And maybe just a quick follow-up. In terms of what's driving that new business momentum, can you provide some color there? So is it really around the AI story coming to life? Is it like partnerships ramping, maybe macro feeling a little bit better? Any couple of things that you would point to that really drove that new business activity?

[Louis Tetu, executive]

I think, Taylor, I can take that. Thanks for the question. This is Louis. Look, first of all, I would point to really 3 things. Number one is the AI in general, the demand. What ChatGPT has done is not only get people excited around ChatGPT, it has sensitized, democratized the idea that AI is a different digital experience paradigm and that everybody, including enterprises in particular, should get really serious about it. And while that might sound a general statement and so on, we really feel that. We really -- companies now are very serious about that. And this is -- Coveo is a company that's been more than a decade. We started in machine learning in 2012. You know what, until 2018, 85% of our customers were tech companies. Most companies didn't really care about that. And so, now, this is -- there's real traction around AI as a topic and increasingly as a necessity. Number two, generative AI in particular, and specifically at Coveo, our ability -- to our knowledge, we are one of the first companies, if not the first in our specific area, to have completely closed the loop. So we announced the rollout. We announced that we were rolling out dozens of tests. We tested, customers concluded, bought, deployed and fully measured. And one of them, in particular, has closed the cycle and has actually publicly announced their results, and we have a lot of others in the making. And so, that's very unique.And of course, companies who want to make GenAI real have to look for companies like Coveo who can actually prove that they can make that work at large scale. And so, that's really number two. And number three is the fact that our ability to complement because let's not forget that GenAI for us is a new capability but it's not a new product in the sense that it is a complement to our platform. What we do with generative AI would not be possible unless we had worked for a decade on creating a strong relevance platform, very strong connectivity and all that. And I know that might sound like geek talk, but it's really, really important. If you don't understand the user at the other end, if you don't know that Taylor is at the other end, understand your context, your intent, your behavior, you cannot deliver -- you cannot drive a large language model in a way that is grounded in facts and relevance. And the fact that we can do this, and this is starting to be -- started to be known in the market, is a huge driver also for new -- will be and is starting to be and will be a huge driver for new land customers, new logos because they know that we have the full capability, integrating search, answering, conversations and recommendations and personalization all in one. And to our knowledge, this is pretty unique in the market.

[Operator]

Your next question comes from Suthan Sukumar of Stifel.

[Suthan Sukumar, analyst]

Congrats on a solid quarter. On the GenAI signings that you've secured to date, curious what have the initial scope of these deals looked like in terms of initial solutions and use cases that are supported out of the gate? And how might that be different between existing versus net new customers?

[Louis Tetu, executive]

Well, interestingly enough, we pointed to Xero before. So we started testing -- I'll use that one because it's public, and I'll qualify the other one. But if you think about Xero, we started testing back in June, July in New Zealand on a part of their traffic. And then, as we realized and we both realized the value of this, we started deploying, and they asked us to deploy all the way to today, which is essentially global. So the scope can be quite large. As we said, Suthan, in the call, we have now landed use cases in all 4 of our business -- lines of business, which is pretty remarkable, so -- which means in practice that we have use cases in websites, some of them North American, some of them global. We have use cases in customer service, such as Xero. We have use cases in commerce, and we have use cases in the workplace area, where, as we announced that we signed 3 major financial institutions, 2 of which have very large deployments for workplace. So think about financial advisers, for instance, getting much more sophisticated answers instantly on very complex topics, for example. So it's pretty much across the board. But I will say that due to the nature of Coveo, which we deal with large and global enterprises, all these deployments have in common that they're all very large. The content sources are multiple. The volume of content is large, and the audience is very large and diversified and sometimes across the world.

[Suthan Sukumar, analyst]

Great. Second question I had was on the SAP channel. It's good to see some of that early momentum start to play out. Do you see an opportunity to expand the relationship with SAP beyond commerce? And if so, would there be kind of a similar ramp-up effort? Or could you leverage some of the education work that's been done so far?

[Louis Tetu, executive]

Well, obviously, SAP is a small 110,000 employee organization. We're obviously not working exclusively with SAP. We work with other software companies as well, as you know, some of the market leaders. But as it relates to SAP, in particular, of course, there are many other opportunities. And I think we're still in the process of getting to know each other. We're having early success, and we're seeing growing success together. And yes, beyond commerce, there are clearly other opportunities working together as there are with our other partners such as Adobe or Salesforce or others.

[Operator]

Your next question comes from David Kwan of TD Securities.

[David Kwan, analyst]

My question is on the adjusted operating loss guidance for Q4. That's up from Q2 and Q3. I know you talked about some incremental spending on the sales and marketing side, for example. And maybe that's also in conjunction with the ramps of CRGA and SAP. But just want to get a better sense of should we expect kind of like your cash OpEx spend start to ramp up here after a couple of years now being in a relatively tight range?

[Brandon Nussey, executive]

Yes. It's a tight balance we're walking here. I'd say that somewhat facetiously, but we are going to look to continue to make sales and marketing investments that drive growth in bookings. We feel like with the customer buying activity, our position in this space, with the product where it is, that's appropriate investment from the company right now. So we do expect OpEx to start to march up. It will be geared towards growth-oriented investments. But look, we expect revenue to march up as well. So we continue to, at this time, plan to run that positive cash flow for next year, but we're not trying to maximize that cash flow. What we are trying to maximize is the company's position to win in this space. And so, that will mean making smart sales and marketing investments as we look ahead.

[David Kwan, analyst]

That's helpful, Brandon. And just on CRGA, could you comment on what the GA pricing is? And I know it's still a little bit early here, but are you seeing minimal impact on your gross margins from CRGA, just given the higher cost with these LLMs? And are you seeing from the pricing of the LLMs as it seems like they're becoming more commoditized? Are you seeing the pricing get more competitive and hopefully help improve your margins?

[Operator]

Pricing is largely the same as when we launched. So we're still aiming for around 40% of the customers' ACV for the relevant product line. So we're finding that hold pretty well. We are still learning as it comes to consumption and entitlements and what that means against cost of sales. As we get real volume and real-world experience, as we've always said, we'll look to optimize and manage that. So far, it has been manageable. As you see, it's not showing up in any meaningful way in the numbers yet. It's just something we'll keep an eye on as we go forward.

[Louis Tetu, executive]

David, I think we continue to believe that we've taken a technical approach to offer a cost-effective solution. And we're pricing based on what we call generative QPMs, which is sort of a consumption unit of generative events. So the pricing sort of aligns here with the cost. So we don't expect, at least from what we see today, that -- let me rephrase that. We expect that we will keep our strong margins, as Brandon mentioned, from everything we see right now.

[Operator]

Unfortunately, we have run out of time and we cannot ask additional questions. We thank you for attending. And I would now hand over the call to Louis Tetu for final comments. Please go ahead.

[Louis Tetu, executive]

Thank you, operator. And on behalf of Coveo, thank you all for attending our third quarter earnings call. And with that, operator, please feel free to end the call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.