Coveo Solutions Inc

TSX:CVO

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo Fourth 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 Tetu, Coveo's Chairman and Chief Executive Officer; Brandon Nussey, Chief Financial Officer; and Jean Lavigueur, Senior Adviser and Former Chief Financial Officer of Coveo.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 first 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, 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 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. Lastly, slides accompanying this conference call are available for viewing and accessible on our IR website under the News and 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. We are pleased with our fourth quarter financial and operating results in the current macroeconomic environment, as we continue to accelerate our path to profitability. We delivered financial results at the top end of our guidance for both SaaS subscription and total revenue, and we significantly beat our guidance for adjusted operating loss.For the fourth quarter ended March 31, 2023, we delivered year-over-year SaaS subscription revenue growth of 19%, and total revenue growth of 16%, both on a constant currency basis. Our continued focus on efficiency resulted in adjusted operating loss of $4.3 million for the fourth quarter, a significant improvement compared to a loss of $8.6 million last year. Our net expansion rate improved to 110% compared to 107% reported in Q3, reflecting continued strong retention rates and customers adopting additional applications of our suite of AI solutions during the fourth quarter. We also had another strong bookings quarter in commerce, with growth in excess of 40% year-over-year and one of the best quarters in terms of pipeline generation in the history of Coveo.Throughout the year, we have remained committed to our growth ambitions and further expanding our market leadership position by making strategic investments in both our people and deploy AI technology innovation. We focus on delivering high ROI solutions that leverage AI models to provide one-to-one personalized experiences and optimize business outcomes for large enterprises. This approach, which we call, to personalize and profitize has enabled us to continue growing our business even in the face of challenging macroeconomic conditions. We are particularly excited about the recent advancements and demand for generative AI and large language models or LLMs, which have opened up even more possibilities for our Coveo Relevance Cloud platform.Broadly speaking, generative AI refers to a type of artificial intelligence technology trained on massive amounts of data, to produce or generate various types of content including text, imagery, and even audio with some degree of novelty. Related to this, LLMs are a specific type of generative AI model that focuses on generating text in response to prompts and chats as it answers versus links to documents like traditional search results. Several well-known generative AI chatbots released recently, such as ChatGPT and Bing Chat builds on top of LLMs have democratized the AI paradigm within digital experiences to a broad audience. ChatGPT in particular has truly taken the world by storm. Everyone, people, consumers, employees now better understand the difference between traditional search results versus intelligent chats and answers. We view these advancements and the interest in generative AI as a strong positive for all of our lines of business.For a few years now, we have been a pioneer in the application of semantic AI and LLMs within enterprises. For example, our smart snippets technology released two years ago to many of our customers uses semantic AI and LLM features that generate relevant answers in the context of customer service, not just search results and links to documents. Our case classification feature is another example where semantic AI helps understand and guide the user towards the right solutions automatically extracted from the context.During the fourth quarter, we made an important announcement with the introduction of our Coveo Relevance Generative Answering capability, which integrates LLM technology with Coveo's Relevance Cloud platform. Our AI platform will feed generative AI with a secure index unifying multiple content sources, real-time content, contextual relevance and personalization accuracy. The interest we are seeing from our customers and partners on our initiative in this area is unprecedented and is a great validation of our strategy.We believe this is a critically important innovation for enterprises. Our customers are primarily large global brands. They deal with large volumes, variety and complexity of content, compounded by the need to globally serve large and diversified audiences of consumers, customers, or employees in a highly personalized ways. While generative AI chatbots such as ChatGPT are powerful, their current shortcomings make them unapplicable for many use cases across the enterprise, predominantly around security, truthfulness and cost.First and foremost, enterprises must prioritize protecting their brands and ensuring accurate information delivery to their stakeholders. This requires the use of up-to-date content, which is crucial when the answers provided carry significant consequences. Therefore, having access to current content is a key requirement, making solutions like ChatGPT which currently relies on older trained content from 2021 insufficient. Second, enterprises require the ability to generate answers from diverse sources of content, including those not publicly available such as internal knowledge bases. It is essential that they can derive these answers securely, ensuring that end users can access the necessary data or content from each source.Third, another key aspect for enterprises is the need to maintain a verifiable connection to the original source that generated a particular answer. This ensures proper verification and compliance, providing transparency and accountability. And finally, CIO's are conscious of the costs associated with running LLM, which currently can be 100x to 1,000x higher than traditional enterprise search solutions. Addressing this concern is crucial for enterprises to effectively manage their budgets, while benefiting from LLM technology.Coveo Relevance Generative Answering will solve these challenges to apply generative AI within crucial use cases, by ensuring that the generative AI is fed by the Coveo Relevance Cloud platform, our leading proven AI platform built over a decade, for which the role is precisely to consolidate content securely and deliver accurate, secure, and contextually relevant information. Moreover, the need for ingesting and unifying multiple sources of content across the enterprise, a key competitive advantage of the unique Coveo indexing and search technology is fueled by demand for generative AI, which now has the ability to combine pieces of disparate content to generate answers.Finally, search is not going away. Hence the search and chat channels need to deliver coherent answers, and therefore, be fed from a common index. These are all critical capabilities that we master with our AI platform. In our service line of business, for example, our customers want case resolution intelligence. We believe the combination of our secure unified indexing technology with LLMs will enable customers to leverage their own data through our platform with up-to-date, secure, and AI-powered relevant knowledge fed to large language models, resulting in more accurate responses that are securely delivered with significantly lower risk of hallucinations, and ultimately higher self-service and case deflection rates.In commerce, the ability to bring outside content beyond the catalog in the form of generated advice from buyer questions and based on their needs as opposed to quarrying products and SKUs, will help consumers find what they're looking for in more effective ways. This is why we believe Coveo is uniquely positioned to solve the challenge of bringing advancements in large language models to enterprises, given our unparalleled ability to securely ingest, index and unify massive volumes of disparate siloed content, and to use AI to generate relevance at scale for millions of users.We expect the demand for this capability to increase rapidly as the worlds of intelligent search and chat converge into a more modern digital experience paradigm that is conversational, prescriptive and advisory in nature. I'll elaborate later about our design partner and beta program, but to restate the point I made earlier, we have received unprecedented interest from our existing customer base about adding this capability when it becomes available more broadly this summer. We continue to believe enterprises will either adopt AI and digital experiences or be left behind by their competitors.According to the IDC, the worldwide AI market is expected to grow to almost $1 trillion by 2026, with AI-centric systems spending, applications where AI technology is critical to function, growing approximately 27% year-over-year. With the rapid pace of innovation in AI and large language models, these advancements are finally shining a light on the criticality of using AI and the value leading platforms such as Coveo can bring to enterprises.Additionally, our unique position in this market is getting the attention of strategic partners, and we are thrilled that Coveo became an SAP-endorsed app globally in the fourth quarter, a privilege that less than 1% of SAP's technology partners enjoy. Through this important partnership with the #1 commerce platform in the world, as measured by gross merchandise value, Coveo AI enhances the immediate business metrics of SAP Commerce Cloud and provides strong competitive differentiation while supporting the growth of SAP's cloud installed base.Coveo and SAP will jointly promote and deliver modern capabilities that meets the needs of both B2C and B2B customers for personalized AI powering search and recommendation, leading to optimized campaigns and tailored shopping experiences that drive increased revenue per visit, reduced selling costs, and increased profitability for retailers, brands, manufacturers and distributors. SAP's go-to-market team will be strongly incentivized to co-sell to customers with Coveo. We are confident this partnership will contribute significantly to our future growth, and to have already seen encouraging results, with SAP pipeline generation more than tripling year-over-year in the fourth quarter, and the fourth quarter representing the strongest SAP Commerce bookings quarter in our history. We secured new business in the quarter with well-known brands across all our lines of business, and we look forward to nurturing these important partnerships for long-term growth and strengthening the foundation and resiliency of our business.In commerce, we landed new work with a leading SaaS platform used for creating interactive real-time content for numerous industries and applications. In service, we landed new work with a multinational provider of software and hardware products for IT security. We also landed a number of deals in our websites and workplace lines of business, including with a global cooperative connecting the agriculture and energy market, and a leading global video game company that develops and delivers games, content, and online services for various platforms.In the fourth quarter, we saw a larger proportion of expand transactions from up-sells and cross-sells, underscoring the critical role our platform plays for our customers and its applicability across the entire enterprise, especially in the current macroeconomic environment. We saw a number of expand transactions across all of our lines of business, including a near seven figure annual subscription deal in commerce, which is an SAP customer, with a subsidiary of a multinational food corporation. In addition to leveraging Coveo's platform for search and recommendations for their B2C and B2B e-commerce stores, this growing partnership focuses on leveraging the best available commerce technologies to further enhance and elevate the consumer experience.We have successfully collaborated on various digital experiences initiatives in the U.S. market, their largest and fastest growing with plans to roll out these initiatives to other geographies across more than 100 websites and in over 30 languages. Also in commerce, we had another significant expand transaction with a global e-commerce technology group and brand owner based in Europe, that controls dozens of brands and has more than 200 businesses on their platform.We had previously highlighted this customer back in Q2, following a successful pilot that delivered a multi-million dollar uplift in revenue. At that time, the next phase of the partnership involved a combined go-to-market strategy leveraging Coveo's commerce and merchandising solutions as a value-added service for other retailers. Today, I'm pleased to share that we are now working with the largest retailer within this group. To date, our partnership has resulted in a 40% increase in revenue for one of their major brands, including approximately $2 million from product badging alone.We also had a number of expand transactions in the quarter from our websites and workplace lines of business. As an example, we are partnered with a global leader in pharma and life sciences to deliver a best-of-breed employee experience with a new global AI-powered intranet, since implementing Coveo's workplace solutions across a number of business units, their employee intranet usage has grown exponentially with the number of monthly users increasing more than 700%. The partnership has recently expanded to enable research associates within one of their groups to access global content delivered through a chatbot and other communication channels.During the fourth quarter, we also announced several new enhancements to the Coveo Relevance Cloud platform, that bring new innovative capabilities to customers as we continue to revolutionize and democratize the use of AI across digital experiences. As I mentioned previously, our new Relevance Generative Answering capability is the highlight, which will combine our platform with large language models to create a generative AI question and answering capability that is applicable within enterprises. We have been engaged with many CIOs and our design partner and self-service beta programs are completely full for summer availability. We look forward to reporting on our progress as well as releasing additional use cases in the future.As I mentioned on our last earnings call, we believe our release of the Coveo Merchandising Hub, which is the culmination of the integration of Qubit's technology into our platform, gives us an unmatched offering in commerce. The combined capabilities include an array of AI-powered innovations, providing insights on shopper intent, enabling merchandisers to quickly deploy the winning strategies to optimize campaigns and revenue per visit, boost specific products for revenue and showcase higher margin products.We're also very excited about our collaboration with SCALE.AI, a global AI innovation cluster funded by the Governments of Canada and Quebec, to develop additional proprietary cutting-edge machine learning and personalization algorithms, which we believe will further enhance our leadership position and increase our competitive moat in commerce. These algorithms consider factors such as margins and costs of storage, shipping, disposal, and returns, in addition to revenue generated, to optimize the end customer's full basket profitability while maximizing consumer relevance and digital experience. Our goal is to empower merchandisers with profitability-aware analytics, recommended actions, and statistical analysis, so they can make informed decisions that are driven by data and not instincts to benefit their bottom line.We also introduced several new and advanced features to the Coveo Relevance Cloud platform in the fourth quarter, some of which are included on the Slide shown. Although, I won't go through them all here, these and future enhancements aim to deliver optimized digital experiences with unmatched efficiency, scalability, and security, allowing customers to drive impactful business results and get a faster ROI, all while increasing ease and reducing total cost of ownership.With that, I will now hand the call over to Brandon to discuss our quarterly results in more detail. Brandon?

[Brandon Nussey, executive]

Thank you, Louis, and thank you again, everyone, for joining us on our fourth quarter and year end conference call, my first of what I hope to be many. I'm thrilled to be here and joining Coveo at this exciting stage of the company's history. I'm also grateful to Jean for his outstanding leadership and for leaving me with a world-class G&A function. He and his team have built a solid foundation for the company's continued growth, and I will strive to make it even better.As mentioned earlier, there is heightened interest in our offerings, driven by continued advancements in AI and LLMs, and our focus on high ROI use cases for enterprise customers. While we remain cautious in the near-term due to the overall macroeconomic environment and its effects on sales cycle lengths and enterprise spending overall, we are pleased to see promising leading indicators across our business, such as growth in our pipeline as Louis mentioned previously, and early success with our new strategic relationship with SAP.I am further encouraged by the number of customers that are buying more from us, indicating that customers are seeing value from using our platform. This demonstrates the critical nature of our platform and how we can help drive positive ROI during these challenging economic times. As Louis mentioned, commerce bookings again led the way with growth in excess of 40% year-over-year, and included a close to seven figure transaction in our EMEA region. And as with past quarters, on an annualized contract value basis, all of our lines of business continued to experience double-digit growth.Moving on to our fourth quarter results, SaaS subscription revenue was $27.1 million, an increase of 19% year-over-year in constant currency, and total revenue came in at $29.1 million, growing 16% year-over-year also in constant currency. Current SaaS subscription remaining performance obligations as of March 31, 2023, came in at $95.3 million, growing 18% year-over-year. Importantly, our net expansion rate as of March 31, 2023, improved to 110% compared to 107% we reported in our Q3 results. The improvement relates to the higher proportion of expand versus land transactions we saw in the quarter, as well as our continued strong gross retention rates. We expect NER to remain within our target range of between 105% and 115%, as our gross retention rates remain high and we have good visibility on up-sells and cross-sells.Moving to our operating results. Our fourth quarter gross profit percentage improved to 77% compared to 73% 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 fourth 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, a 1% increase compared to the year ago period.Operating loss for the quarter was $8.8 million, a significant improvement compared to a loss of $19.4 million last year. Adjusted operating loss for the quarter was $4.3 million, also a significant improvement compared to $8.6 million, and meaningfully ahead of previous guidance due to strong expense management and a favorable FX environment. For fiscal '23, we are very pleased to have improved our adjusted operating loss by almost $13 million compared to our guidance at the beginning of the year. Our cash used in operations for the year was $6.3 million, a significant improvement compared to $35.4 million a year ago.Finishing with guidance. Our guidance reflects an appropriate degree of near-term caution given the well-known challenges in the overall macro environment. As mentioned, we believe we are well positioned to benefit from the significant interest around LLMs and how Coveo's solutions can help enterprises capitalize on this opportunity, and we are seeing many promising signs from our customers and strategic partners such as SAP. We also anticipate our business momentum to accelerate as the year progresses. Our guidance further reflects our continued prioritization of our path to profitability, while making the investments needed to capture the opportunities in front of us.With that in mind, for the first quarter of our fiscal year 2024, we expect SaaS subscription revenue to be between USD27.9 million and USD28.4 million, representing growth of 16% to 18% year-over-year. Total revenue in the range of $29.9 million to $30.4 million, and adjusted operating loss in the range of $4 million to $5 million. Our first quarter 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 in the comparable quarter last year.For the full fiscal 2024, we anticipate SaaS subscription revenue to be between USD118.0 million and USD120.0 million, representing growth of 15% to 17% year-over-year. Total revenue in the range of USD127.0 million and USD129.0 million, and adjusted operating loss in the range of $13 million to $15 million, with expected cash used in operations of less than $10 million. We continue to track well towards our plans to achieving positive operating cash flow in our next fiscal year, being fiscal 2025.Our fiscal 2024 guidance 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 license and maintenance revenue, which represented approximately $900,000 of revenue last year. And also reflects the impact of churn from certain customers using standalone Qubit products that we anticipate will not migrate to the now integrated Coveo offering. This churn is one time in nature and primarily affects fiscal '24 only. Excluding these items, our core growth rate on SaaS subscription revenue for fiscal '24 is forecasted to exceed 20%.Lastly, today we announced the launch of a CAD40 million substantial issuer bid and also announced our intention to apply to the Toronto Stock Exchange and launch a normal course issuer bid upon completion of the substantial issuer bid. As of March 31, we have approximately $198 million in cash and cash equivalents, an undrawn $50 million revolving credit facility, and no debt. As we guided in the past, we estimate we require less than $15 million to achieve positive operating cash flow by the end of fiscal 2025.We believe we have capital available for investments, including potential M&A activity, and as such believe this is an action that will drive significant shareholder value, given what we believe to be the depressed valuation of our public stock. We believe we are finding the right balance between a clear line of sight to profitability and making the necessary investments to capture leadership in a very exciting time for the company,With that, operator, you may now open the line for questions.

[Operator]

[Operator Instructions] Your first question is from David Kwan from TD Securities.

[David Kwan, analyst]

I guess, first off, can you talk about I guess the mix of new business, whether it's mostly coming from existing customers, more than what we've seen in the past, just given the macro environment?

[Brandon Nussey, executive]

Yes, I'll take that one. Yes, as you heard in our comments and as you see in the NER results for the quarter, we have had a nice quarter of expand transactions. Tougher economic times of course, it's a lot easier to see your existing customers adopt more of the platform and we certainly saw that in the quarter, we just reported here today.

[David Kwan, analyst]

You guys have done a great job on narrowing the adjusted operating losses. I think you've really focused on trying to generate some strong operational efficiencies. I was wondering like, is there much more that you can do from that standpoint going forward, and to what extent do we see that the beat this quarter driven by that versus maybe some kind of end-of-year adjustments?

[Brandon Nussey, executive]

I'll take that one as well. I mean, look, I think being an efficient company during times like this has been a priority that this team has prioritized and certainly something we will continue to prioritize. Of course we're balancing what is -- what we think is a really exciting time in the company's history right now, with all the interest around generative AI and how that can help as it pairs up with Coveo Solutions. The SAP partnership is off to a wonderful start as well, and of course, we want to make sure to give that all of the energy it deserves as well. So, we are trying to balance the investment needs of the business to make sure that we take advantage of these opportunities, but of course path to profitability and efficiency is something we will continue to be quite vigilant on, so our guidance reflects that.

[David Kwan, analyst]

That's helpful. Maybe a couple for Louis or Brandon if you want to jump in, just on the competitive environment, curious to see how much has changed kind of since the started this year at least since we last talked, yes, just given the seemingly plethora of gen AI announcements that have come out from kind of your traditional competitors, but even some non-traditional ones?

[Louis Tetu, executive]

Right. I'll take that one, David. Look I -- there is no doubt that this is a technology that as we said in the call, has taken the world by storm. But for us it's good news because we've been in AI platforms and deploying AI for the purpose of, in fact providing better answers to customers and employees, and so on, that's what the search is all about, and as you know, in the area of relevance. So, a, what this has created is a very broad understanding I would say of AI as a paradigm shift, as a paradigm breaker, #1. #2 is, as enterprises are feeling the need I guess, and starting to think about how to deploy generative AI, they are naturally pointing to issues around relevance, so security matters. You cannot generate an answer.The big enterprises we deal with won't risk their brands on an answer that would be hallucination as they call it or inaccurate or generated from pieces of data across multiple platforms, that wouldn't be securely accessible, and without -- they need verifiability, linkage to the source of truth and etc. So, David, these are problems that we've been working on for a decade, and we also have been working with LLMs for a few years now. So this is music to us and that's evidenced by the unprecedented interest we get from our customer base following the announcement of Coveo Relevance Generative Answering.

[David Kwan, analyst]

That's helpful. And maybe one last question. On the Coveo Relevance Generative Answering, you talked about it being much lower cost relative to other gen AI, can you provide some more color around that, can you quantify that?

[Louis Tetu, executive]

Well, the ability of the current -- of the Coveo platform without generative AI to index broad sources of data and essentially bring it contextually relevant using AI to a specific set of customer answers allows us to narrow the data corpus and the problem to the -- to a data corpus that is manageable and then to apply an LLM on that. Large language models and generative AI in a way is going to become a commodity, because it's broadly accessible. It's really what you feed it with, and the cost of running on a large corpus of data, GPT-4 openly or so on, is significantly higher than the architecture that we propose.

[Operator]

Your next question is from Ittai Kidron from Oppenheimer.

[Ittai Kidron, analyst]

Louis, thank you for the detailed overview of generative AI and how you work with it, and I guess addressed the shortcomings of it. I guess my question is, this is a point in time, what are the odds that if you and I will talk 12 months from now, generative AI continues to evolve and address a lot of the shortcomings, isn't there a concern where that it could displace or disrupt some of the value at least in the eyes of your customers, perhaps reduce somewhat of the value that you bring to them? What is the risk that you see with generative AI to your business?

[Louis Tetu, executive]

We always monitor that risk and personally and with many of my colleagues, we've been in tech for closer to 30 -- more than 33 years, so innovation never stops and you never know where it will come from. But I'll say a couple of following -- a couple of things. #1 is, in order to apply generative AI within the enterprise, we talked a little bit about some of the shortcomings, etc., you need to -- you need -- there is a certain number of components you need. First of all, generative AI will fuel the need for sourcing content and pieces of information from disparate content sources. This is a Coveo strength and it's not easy. Connectivity to CRM information, knowledge basis, data records, ERP, et cetera, et cetera, is not easy to do securely at scale within a large corporation. As you know, we have a background in search, you need that kind of background to do that.You then need a leader of software to enrich and enrich that index essentially and contextualize it. Then you need to apply AI on top, both on the data side and on the personalization side. Ultimately, we've been applying Semantic Search for a few years now, dealing with pieces of information, paragraphs and et cetera, as opposed to more lexical types. And now you need to feed that into generative AI. So, I'm saying Ittai, everything is possible. Everybody -- anybody can reinvent this. But the Coveo platform is the cumulative work because it's a single platform that's constantly improved. As you know, it's the cumulative work of working for a dozen years in AI with some of the largest data sets coming from some of the largest corporations in the world, including most of the leading tech companies.So, I guess it's a way to answer your question is that it takes a lot to apply this at enterprise-grade and at the scale of a global enterprise in our view. And that's true for certain types of use cases, certain types of -- if you're in a cart and you want to use generative AI to generate a recipe using broccoli or vegans, I guess that's non-consequential. But if you're an airline manufacturer with compliance, trying to answer a customer with accurate information that is traceable, there are veracity issues and security issues, that's where we come into play and that's not easy to match.

[Ittai Kidron, analyst]

And then as a follow-up on your plans to buy back stock here, one would have thought that with the market and economy doing what they're doing, you'd have more M&A opportunities. I mean, should we interpret this to mean that you just don't really see that many good interesting things out there? Help me think about this.

[Brandon Nussey, executive]

It's Brandon here. No, look, quite the opposite, actually. We do see lots of interesting opportunities out there. Of course, there's always a meeting of minds that has to happen on valuation, which remains a challenging dynamic for everyone, I think. But look, the decision to do this is based on $200 million in the bank, $50 million of available line of credit. We've drastically pulled forward our path to profitability. So, we're going to spend less than $10 million this year and operating cash flow, less than $15 million in aggregate to get to positive cash flow.So, our intent is to still invest in the right areas, but we just see significant opportunity to drive shareholder value with this, which shareholder values and a healthy share price is an important part of an M&A agenda, as well and what we see is undervalued stock out there and a good use of capital to help trying to award shareholders right now.

[Operator]

Your next question is from David Weiss from Scotiabank.

[David Weiss, analyst]

So, just in terms of your generative AI answering solution, would you potentially be leveraging multiple large language models or LMs? Are customers interested in that flexibility on that front? And is that also a potential differentiator in the marketplace?

[Louis Tetu, executive]

The answer is yes.

[David Weiss, analyst]

And then so just in terms of -- you mentioned very strong commerce bookings and strength with SAP Commerce Cloud, could you perhaps comment on the consumption patterns within additional key integrations with your solution, for example, Salesforce or ServiceNow? Are there other strong areas that you're seeing improvement on?

[Louis Tetu, executive]

What we're seeing, David, in the current environment, it's kind of interesting. So on the one hand, in the Knowledge Solutions area, service, workplace, to a degree websites, we're seeing a tremendous amount of renewed interest for search now given the catalyst of generative AI. On the other hand, from a sales perspective, we're seeing the most traction in commerce for the simple reason that companies are really, really focused on revenue. And our approach is 100% directed -- ROI focused and directed at demonstrating beyond any doubt to customers that when they invest a dollar with us, they get far more return in terms of increases in sales and et cetera.So, as soon as you put AI in commerce, you increase revenue. So, in a tough economic environment, needless to say anything that is an extremely compelling story around revenue increase precedes, takes over. We do have a similar sales motion and value proposition in service where we can demonstrate that we cut costs and increase Net Promoter Score and customer satisfaction at the same time by delivering, as you know, self-service intelligence and so on. And that's also -- all these Knowledge Solutions and Workplace Solutions are also growing healthy, as Brandon mentioned. But there's no question that commerce right now is the driver. And we're obviously investing aggressively given that now we're aligned with the largest e-commerce vendor in the world.

[David Weiss, analyst]

And then you had mentioned in your prepared remarks some strong traction with Coveo Merchandising Hub. Could you perhaps provide us with an update in terms of how that's contributing to new wins and potential upsell and cross-sell as well?

[Louis Tetu, executive]

Well, I think the biggest of those wins is the SAP Endorsed status, which, again, only a few handful of technologies in the world enjoy that status. And that demonstrates, in fact, the leadership of our solutions and so on. We don't break down revenue by product portion or module as you know. But we can certainly say that from our perspective, it's mission accomplished as far as the integration of Qubit, which really, for a big part, was the embryo of the Merchandising Hub into the broader Coveo platform. And how that helped us gain leadership into retail, in particular, B2C and fashion retail.

[David Weiss, analyst]

And then last one here, hopefully, quick for me. In terms of the government awards due to the scale AI program that you've disclosed, it looks like it was about $1.4 million in the quarter. Is that sort of the run rate that we can expect for the duration of that program on a quarterly basis?

[Louis Tetu, executive]

Yes, it's a total envelope until 2020 -- the beginning of 2024.

[Operator]

The next one is from Taylor McGinnis from UBS.

[Taylor McGinnis, analyst]

Maybe just to look at the outlook. So, the 1Q subscription revenue guide at the high end implies sequential growth of 5%, which is higher than the 3% sequential growth in 4Q on both subscription revenue and current staff RPO. So, I guess what have you seen in the last two months that give you comfort in this outlook? And Brandon, since you're new to the role, can you provide a little bit of color on your approach to the guidance and how it might differ from what we've seen in the past?

[Brandon Nussey, executive]

So, I don't think you should expect much of a change in tone or approach from me vis-a-vis guidance. I share the conservative DNA that Louis and Jean and the team here have tried to always convey. So, you'll get more of the same from me in that respect. In terms of the sequential growth, I think we've talked about the things we're seeing in the business. On the one hand, the many positive indicators around customer interest and our relevance generative answering product that's coming down the pipe when the SAP momentum we're seeing at an early sign and then just momentum within our existing base of customers buying more of the platform. And of course, offsetting that is -- it's just -- it's not easy times out there. So, particularly on the land transactions at significant size. Those are a little more challenging in this environment, but we're seeing success and some customers starting smaller and growing over time. So, it's all of those factors that lead to the overall guidance.

[Taylor McGinnis, analyst]

And then Louis, can you maybe talk about the ability to monetize these generative AI-powered solutions that you guys are introducing? I know you talked a little bit earlier about parts maybe being commodity. So I guess, how are you thinking about that as well as balancing some of the associated costs you mentioned?

[Louis Tetu, executive]

I love the question because, in fact, I personally, and I think we are of the view that a lot of the things that you hear out there have not quite found a way to monetization and frankly, immediate deployment or practical application were the opposite. I think what Coveo Generative Answering is providing is something that companies need today that they want to deploy. And Taylor, we expect, although we haven't come out with exact pricing, we expect it to be incremental pricing as part of the solution.

[Operator]

The next one is from Paul Treiber from RBC Capital Markets.

[Paul Treiber, analyst]

Just the comments you made in regards to your pipeline are quite encouraging. Just in regards to your '24 outlook, how much impact -- or can you quantify the uplift to your guidance related to that pipeline or just from the new generative answering product?

[Louis Tetu, executive]

I'll take that at a high level and perhaps Brandon if you have anything to add. As I just mentioned with Taylor, we haven't come out yet with pricing for generative AI. So right now, we consider this as part of the normal course of business and solutions. So, the answer would be no. We haven't quantified it yet because it's a little early. We know that customers are willing to pay for it. We know that it's incremental to our Knowledge Solutions in workplace and service -- customer service area mostly. This is where customer service is probably one of the areas within the enterprise where generative AI will be used the most. But no, we haven't quantified it.I think if you look at our growth story right now, it's just a balanced and responsible view between what we do in customer service workplace, potentially even -- we think that our generative AI, our relevance generative AI functionality and story really is going to improve even our competitive position in that area, combined obviously with the strong prospect for commerce, especially given the global distribution channel that we enjoy right now where we're working in particular with SAP, but also others.

[Paul Treiber, analyst]

And secondly, can you elaborate on competition and then also the feedback you're having with partners? These LMs, they've opened up APIs and a number of software companies are directly integrating with them. So, when you look out at the market, if these LMs commoditize and are available everywhere and has become a basic function in all software, do you see the markets are bifurcating into like a commoditized generative AI interaction or work chatbot and then at a higher level of the market where you would operate.

[Louis Tetu, executive]

Actually, I mentioned it before, Paul, this is such a good question. Generative AI is almost already commoditized. You can -- but it's what do you want at the outcome and what do you feed it with in order to get there. What companies are concerned about is not their ability to generate -- to apply -- to use generative AI, they're concerned about answering their customers with the wrong answers. They're concerned about security breaches. They are concerned about how to use, how to apply practically generative AI, which, to your point, is almost a commodity and will improve in a way that is -- that protects all their compliance, their verifiability, the linkage to the sources of truth. And again, that is cost-effective -- in a way that's cost effective. That's what we're focused on.So -- and remember that the Coveo customer is a customer that wants to cut across multiple sources of content in order to create a unified index that will then serve the generative AI function. So, none of the stack, the large stack vendors or the software vendors that at least we know cut across multiple sources of content. This has always been a key differentiator. So, we're differentiated in two ways. One, we understand how to cut across multiple sources of content at scale with high performance and more importantly, with the utmost level of security and compliance. And number two, we understand how to apply AI on top of that to make sure that -- to ensure accuracy, veracity and linkage to sources of truth. And that's a very -- we think that's very unique.

[Operator]

Your next question is from Richard Tse from National Bank Financial.

[James Burns, analyst]

It's James Burns sitting in for Richard, he is traveling right now. But I was just wondering on the Professional Services gross margins, they were up meaningfully year-over-year. Is there just -- are you guys still kind of targeting 20% range? Or is there room for that to improve beyond that moving forward?

[Brandon Nussey, executive]

Yes, I'll take this and Jean, if you wanted to weigh in as well. But we do target that 20-plus percent range. That is more or less what we're forecasting for the year. Jean, if you're there, any comments on the year-over-year?

[Jean Lavigueur, executive]

No, no, that's correct, Brandon. You're right on. So, right now, as you know, certainly, when it comes out Professional Services, our goal is certainly to empower our network of SI partners that work with us for -- to implement our solution. Of course, there are certain large customers that prefer to work directly with us, more complex projects, will do so. So certainly, right now, the #1 goal for us is not so much to drive more margin from Professional Services, but rather to enable a large global network of SI partners. So, the 20% rent should be expected as well moving forward, and it can be a bit lumpy with some of those larger projects sometimes that we close in time to time.

[Operator]

The next one is from Koji Ikeda from Bank of America.

[Koji Ikeda, analyst]

Louis and Brandon and Jean, I wanted to ask you a question on net revenue retention. In the quarter, 110%, up 3 points sequentially, so nice result there. But I think you mentioned in the prepared remarks you still expect it to be in that 105% to 115% range. So, the question here is, has net revenue retention troughed as of the last quarter? Or are you seeing anything out there? Or maybe what should we be thinking about that could drive net revenue retention to contract again?

[Brandon Nussey, executive]

Yes. So we remain comfortable with the 105% to 115%. It does -- depending on timing of renewals and so on, you'll see that also depending on the mix of bookings in a given quarter, you'll see that oscillate. The only thing I, Koji, I do want to make sure, call to your attention in our prepared comments, we may note of some, I'll call it, one-time churn that we're -- we expect to encounter as a result of our completion of the integration of Qubit now into the core platform. We are forecasting that a subset of these customers on some niche functionality that Qubit used to have may not do the migration over to the core platform. So, we're forecasting conservatively on that. And that could have some lumpiness in some of the quarters in fiscal '24, but we expect to fully digest that in fiscal '24.

[Koji Ikeda, analyst]

And just a follow-up here. The subscription growth, looking at the first quarter guide, full year guide and just taking the commentary that you expected to accelerate. The question here is, how much of the growth is back half weighted, second half weighted? And what is giving you the confidence if it's that back half weighted to be able to achieve that?

[Brandon Nussey, executive]

It is -- we do expect the -- we're in beta right now with our Relevance Generating Answering product. We -- that's a controlled beta with a handful of customers. We'll look to expand that as the year goes. So we're seeing, as you heard, hopefully, loud and clear on this call, lots and lots of interest from our customers on how they can get involved and participate and we anticipate as that becomes GA, that will unlock bookings opportunities for us. But that is going to be something that builds over the course of the year.Likewise, with SAP. I mean, we just announced that in March and we're -- you're hearing lots of enthusiasm from us on the early signs there. But that too will build and ramp as the year goes. So, we do have some of those kicking in, in the back half of the year. And of course, offsetting that is some of that one-time churn that we expect to digest as we go. So, those are the dynamics in the guidance.

[Operator]

The next one is from Kingsley Crane from Canaccord.

[William Kingsley Crane, analyst]

I'll just ask one. So Louis, we've spoken before about the importance of a platform that factors in customer profitability into the relevant algorithm. I noticed you mentioned some of these features in the scale AI portion of the deck. So, how does the IP work in this case? Is this an area where you continue to fine-tune and extend your leadership? And then how are customers responding to this differentiation given your comments on customers' focus on revenue.

[Louis Tetu, executive]

The answer to the last question is extremely well. That's what they want. The world of electronic commerce, the world of e-commerce has greatly evolved over the past, I would say, 5 years from a world that was really focused on conversion. Anything that led to a conversion in the cart in a shopping cart was viewed as a positive. I think companies are now realizing that in fact, there's a lot to think about beyond conversion. If you have too much inventory in the warehouse of something, probably you want to show it a little more to buyers, right?If you can detect return rates, some of the customers are -- big companies are starting to think about the impact of return rates, propensity of return, for instance, on products. So, there's an overall cost component, there's inventory obsolescence, supply chain component and there's a profitability component. And to be honest, only AI can deal with those multiple constraints all at once. And it's reasonably easy to make the argument but there are not a lot of companies standing in the world that actually can achieve that. And this is why we're focused on that. Needless to say, the value creation coming from that in terms of revenue and profitability is very, very significant. So, the net answer is companies -- again, we only deal with large global enterprises that do oftentimes billions online and -- or billions in sales. And they're very, very serious about this topic.

[Operator]

The next one is from Suthan Sukumar from Stifel.

[Suthan Sukumar, analyst]

First question for me is on the pipeline. When we think about the expansion in your pipeline, given all this, this increased market attention around AI, how would you characterize the -- some of the discussions that you're having with prospects? Are these discussions more exploratory? Or are you seeing more urgency in these prospects discussions?

[Louis Tetu, executive]

No. First of all, what we call pipeline as Coveo has a certain set of criteria that meets real genuine interest. And so we're very pragmatic about how we look at pipeline. Look, there's no question that this is a time where if I can say something, this -- what happened in the past few months is not about -- is not about ChatGPT. It is, in a way about generative AI and et cetera, in many ways, that's what has taken, as we said, the world by storm. But it is about the interest and suddenly the democratization of AI. People suddenly realize that AI is there, is there to stay. And as frankly, we tell our customers, our belief is, if you're a large enterprise, you're either going to adopt AI or you're going to compete against someone who does. And it's going to be brutal and binary.And so we're seeing increase in pipeline activity because there are very few companies. Coveo has been at it for a dozen years. We started working in machine learning in 2011 and so we've got a lot of experience. Like anything else, it's about the intricacies and the devil is in the details and how you practically deploy it. So, there's a lot of maturity and experience. There are not many companies in applied AI that have deployed this successfully that are ready to go tomorrow and et cetera. And so suddenly, when companies do their research and et cetera, of course, they see us in digital campaigns and et cetera, but they naturally gravitate towards the people who -- the firms who can do this. And as I said, they're not that many standing.

[Suthan Sukumar, analyst]

And one last one for me, just quickly on the strength and expansion activity this quarter. Can you try some color on sort of what solution areas or [ usage pair ] sort of driving that increased upsell cross-sell activity within the base?

[Louis Tetu, executive]

Again, in new business, we're seeing a lot of commerce. I mean we had a great quarter in platform and workplace solutions as well and we continue to see a lot of expand. So, that's sort of the mix today. As we basically launch and conclude our beta program on gen AI and price this solution and so on, we expect an important pickup in that area as well.

[Operator]

There are no further questions at this time. Please proceed.

[Louis Tetu, executive]

Very good. Well, in closing, thank you, operator. In closing, I'll say these are exciting times in the business of AI because its novelty and power are suddenly broadly understood and in our view, will soon be expected by consumers, by people everywhere, employees and enterprises will need to deliver on it. We believe that our market is at an inflection point that Coveo is at the right place at the right time and that demand for AI-powered personalized and optimized digital experience will grow very quickly and to be expected from large enterprises.So, we've been at this for more than a decade. We've been bringing AI to help leading enterprises deliver relevant answers and recommendations to millions and billions of people with uncompromised security and accuracy that they expect. And so, we're very proud of what we've accomplished in the last year and it's been a decade in the making and we really look forward to even more success.I want to thank you again for attending this call and to all our shareholders for your continued support of Coveo. And with that, operator, you can now end the conference call.

[Operator]

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