Coveo Solutions Inc

TSX:CVO

Earnings Call Transcript 2024-Q4

[Operator]

Good afternoon. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo Fourth Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] Thank you.

I'll now turn the line over to [ Lorne Gorber ], Coveo Investor Relations. Mr. Gorber, you may begin your conference.

[Unknown Executive]

Good afternoon. Thank you for joining us. With me to discuss Coveo's Q4 2021 results are Louis Tetu, Coveo's Chairman and Chief Executive Officer; and Brandon Nussey, Chief Financial Officer.

A reminder that some remarks today will be 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 2025. These forward-looking statements are given as of June 3, 2024. 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 from those expressed or implied. Coveo disclaims any intent or obligation to update our forward-looking statements, whether as a result 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 the Canadian securities regulators, including in the Risk Factors section of the company's most recently filed annual information form as well as in the key factors affecting our performance section of the company's most recently filed MD&A, both of which are available under our SEDAR+ profile at sedarplus.ca and on ir.coveo.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 metrics and where applicable, a reconciliation schedule showing IFRS versus non-IFRS results are available in our press release and our MD&A issued today. Please note that unless otherwise stated, all references to financial figures made today are in U.S. dollars.

Finally, presentation slides accompanying this conference call can be accessed on our IR website under the News & Events section.

I will turn the call over to Louis first to review the operational and strategic highlights of our fourth quarter and full fiscal year before Brandon takes you through the financial details and provides our outlook for Q1 and fiscal 2025. We will then open the line to your questions.

So with that, Louis?

[Louis Tetu, executive]

Thanks, Lorne, and thank you all for joining us today. I'm pleased to report that Coveo's fourth quarter exceeded the high end of our guidance on revenue and is well ahead of our guidance on the bottom line. We're reporting positive adjusted EBITDA and strong positive cash flow from operations, a full year ahead of our previously announced plans. This caps a year where we grew the SaaS subscription revenue line on our core Coveo platform by 19% and did so in a year where we also became operating cash flow positive for the first time.

Underneath these high-level metrics, I'm very encouraged by the amount of interest we're seeing in our solutions, as demonstrated by our pipeline generation which for fiscal '24 was our strongest year ever. We're seeing interest in our solutions coming from both our existing base of customers along with new prospects. In fact, in the fourth quarter, nearly half of our new pipeline was from net new companies. This, for Coveo, is an important signal.

During 2023 and early 2024, our market came to a holding pattern due to both hype and uncertainty around generative AI when enterprises were in discovery mode around AI, predominantly due to a mix of fear of missing out and fear of messing up. Enterprises are now more knowledgeable about AI and its significant opportunity, and have seen the significant impact Coveo AI is having on our customers' business results, particularly with our new generative AI solutions. Now we sense a readiness to move into production, and our decade-long presence in the enterprise AI space, coupled with our differentiated technology and proven track record of delivering significant results, makes Coveo a trusted partner to invest with.

On the customer side, we capped off another year of strong customer unit economics with adjusted product gross margin reaching a new high of 83% in our fourth quarter, growth retention rates exceeding 95% for fiscal '24 and a net expansion rate of 107% for fiscal '24, both when excluding the Qubit acquisition product. I attribute the strong customer loyalty to our relentless focus on driving superior business outcomes for our customers, our exceptional technology and our rapid pace of innovation.

I believe our mission and innovation for this market is both unique and differentiated. As a reminder to investors, we are a recognized leader in the application of AI and generative AI to tailor digital experiences in real time, in commerce, websites, service and workplace experiences for enterprises.

Coveo is at work when a person is live online, interacting with an enterprise to buy, fix or learn something. Our enterprise customers often deliver millions of such experiences every week to consumers, dealers or employees. And we help them tailor with AI at every point of interaction, and we also use AI models to maximize the business outcomes of each of those interactions.

Our ability to democratize AI and productize generative AI revolutionizes and raises a new standard for the way enterprises serve digital experiences. Our fundamental belief is that enterprises will either embrace AI at every point of experience or they will soon compete against it. And that the double-digit quantum leap in efficiency will create a very important competitive divide. In simple terms, it will be soon hardly impossible to compete against AI-powered experiences that drive deep personalization, provide advice and optimize business outcomes in real time in areas such as commerce, customer service, websites or workplace.

This new digital interaction paradigm will become the new expectation where people online will be able to obtain advice and gain proficiency in ways otherwise not possible while enterprises will maximize outcomes in real time using AI model. We call this the AI experience advantage, and it is our view that this market will grow very fast.

The public launch of ChatGPT took the world by storm. It became the catalyst for an unprecedented interest from enterprises globally in adopting AI. This is unlike anything we've ever seen before. Throughout fiscal '24, we've observed every enterprise trying to distill the AI and generative AI opportunity, learn and understand the implications of this disruption on consequential issues, such as data security, compliance, currency of responses, hallucinations, costs, ROI and practical applications of AI. We responded to this by partnering with our customers and rolling out market-leading innovation in generative AI, in line with our mission to bring AI to every point of experience.

We believe these use cases in service, commerce, websites and workplace digital experiences will become some of the most important and high ROI application for enterprises. We also believe that the AI experience economy will soon create an important competitive divide, a true catalyst for our market. In other terms, enterprises will be competitively compelled to embrace AI to deliver the digital experiences people expect and maximize their margins in near real time, or they will compete against AI-enabled companies.

In fiscal '24, our customers and prospects progressed from initial discovery to ideation and experimentation. We are proud to be one of the first and the few companies that have completed the full cycle from innovation to deployment and measurement and full production, and now even to public customer advocacy, as you will find on our website. Many large and global enterprises are now live in production with our relevant augmented generative solutions with some already speaking publicly about the remarkable business benefit they are achieving with it.

We now routinely measure substantial gains with our generative AI technology and real life use cases, giving us confidence about the inflection and acceleration of a new monetization phase. Overall, we have more than 75 generative AI projects at various stages of deployment, experimentation or negotiation, including those that have already signed contracts and are now in production, and many others in the pipeline.

The pattern we see in our go-to-market globally is that enterprises are evaluating and testing Gen AI solutions with great scrutiny on their ability to handle different types of customer questions and digital experiences. They want to manage the risks associated with data security, compliance, hallucinations and while also assessing the business cases and ROI. In my view, this heightened level of customer diligence ultimately benefits Coveo in the mid- to long term as we have proven repeatedly now that we outperform our competition in technology performance, security, relevance and accuracy for enterprise-grade use.

Our success and the differentiation of our platform stems from our extensive use of AI for more than a decade to personalize relevance in customer and employee search and recommendations experiences. Our powerful secure indexing, semantic search, vector graph and AI relevance technology became the crucial foundation to power composable AI search and generative experiences.

In simple terms, this means only accurate, relevant content, secure and current is used to ground and engineer the prompt to a large language model. We believe this is a unique technology that we refer to as relevance augmented generative answering. This results in higher trust and accuracy from Coveo responses, full traceability and lower cost compared to solutions that do not have the extensive AI relevance layer that we built over more than a decade.

One year ago, amid the generative AI disruption, I made the comment that Coveo would be last to hype and first to result. I believe we are largely succeeding at this. Our performance in AB test and high ROI for customers has resulted in exceptional win rates for us in competitive generative AI situations. Our Gen AI wins with companies like United Airlines, Dell, SAP, Concur, F5, Xero software and many others, after extensive testing and side-by-side comparisons are what gives me this confidence. Being able to show concrete and tangible improvements in business outcomes like case deflection and double-digit contact center volume reduction within weeks is fundamentally what our customers love, and we're proud to see some stand up and publicly boast about their remarkable results.

Our commitment and success in innovation was recently acknowledged by Gartner, where Coveo was recognized as leader in product search and discrete ranking highest of all vendors and ability to execute. In addition, the report stated that Coveo has a differentiating vision with its use of AI with rich functionality in AI models that customers can configure easily.

A recent January '24 report by the Boston Consulting Group concluded that 89% of executives ranked the deployment of AI and Gen AI as the top 3 tech priority for 2024, a topic BCG's CEO himself says he has never seen grow that fast in size and relevance. The expectations are about Gen AI can deliver 30% efficiency and effectiveness gains in several areas. According to a recent Gartner report, improving the digital experience alongside conversational AI are ranked as among the few very strong business value patterns for AI use cases.

Of course, to make sure we capture this market opportunity, we need to continue to be innovators in our space. As we've always maintained, subscribing to our platform means subscribing to our AI innovation. This is because 100% of our customers use the exact same platform, which is continuously enhanced from the collective feedback of our customers by our team of 280 developers and data scientists.

I want to highlight a few generative AI customer wins and bookings in the fourth quarter. We landed a new deal with one of our largest customers and one of the largest tech companies in the world. Coveo stood out among other solutions considered during the beta phase as the ideal solution for rapid transition to production with generative answering in their global customer service area.

The value Coveo Gen AI brings is substantial. By greatly improving customer self-service with accurate generative answers to their specific problems, customers can accomplish more on their own, reducing the number of cases that require agent's assistance. This not only enhances customer satisfaction and loyalty, but also significantly reduces the cost to serve.

We also secured a significant win with a leading financial software company by offering relevant augmented generative AI to enhance their employee knowledge experience across the entire enterprise content. In a competitive bake-off process, we won over a competing workplace-focused solution due to Coveo's evident provision of AI search accuracy and answer generation tailored for the workplace environment. We won several other generative AI deals in the service and workplace areas, partly also due to our ability to quickly deploy our technology on customer data and launch testing quickly, often within days and to demonstrate improved customer satisfaction cores and reduced service costs.

Within B2B commerce, we won significant new business with a global distributor of security products and services. Due to our AI search capabilities and comprehensive platform, we were chosen over a key competitor due to several factors, including a straightforward pricing model and the platform flexibility for future scaling. These wins, among many others, are examples that yet again underscore Coveo's commitment to delivering leading edge and effective solutions that meet the evolving needs of our enterprise customers and drive tangible business outcomes.

Brandon will get into the specifics shortly, but as we look ahead to fiscal '25, I am optimistic that we're getting past the period of disruption in our market and through the inflection point. According to Gartner Research, we're now beyond the peak of the AI hype cycle. With forced enterprises to filter through the noise, gain the necessary knowledge, verify claims, applicability and use cases, this did lengthen decision-making cycle during a period that was also a challenging macro environment. I believe fiscal '25 is the year where we will start to see customer experimentation turn into monetization for the few in the industry, like Coveo, that are delivering real results for real customers at scale.

We think we are well positioned to capture our share of this very significant market opportunity and have confidence in our growth drivers. We also see the opportunity to improve our own execution as we head into fiscal '25. While our market was disrupted, we did not sit idly by. And have made significant changes to improve our operations, retool our go-to-market teams and drive efficiency for scale as evidenced by our operating leverage performance.

We've created new teams that will focus on customers and improve our net expansion rate. We've brought new leadership into our international regions and created more focus on new logo acquisition within sales. We've also appointed a new executive and built a substantial internal education team and enablement infrastructure necessary for scale and consistency of our global team members and partners. I am confident that we have made the necessary moves here to scale the company to be ready as the market inflects. And that while it will take a couple of quarters to really start to show up in our numbers given our revenue model, we will accelerate our bookings drought.

Our outlook incorporates our decision to focus all of our innovation energy into the Coveo core platform and continue our wind-down and integration of the platform and IP that was acquired with Qubit. This has already paid off, as recognized by the above-mentioned leadership with Gartner and Commerce search and discovery. We do expect this will lead to further churn in that customer base in fiscal '25, which will have a brief impact on our short-term top line revenue. We will be a more focused and efficient company as a result, however, focused on capturing the important opportunity where we're well positioned.

To wrap, I want to underscore my enthusiasm for the significant opportunities ahead in fiscal '25 and beyond. In 2024, our focus on generative AI innovation with our customers marked a successful and significant step forward, democratizing AI and Gen AI's potential within the enterprise, an area Coveo has excelled in for over a decade since we started in AI in 2012. With our pipeline expanding, our partnerships strengthening with large enterprise software companies and systems integrators, tangible customer results, competitive wins and disciplined business management, Coveo is uniquely positioned for success. And we're committed to leveraging this advantage to drive growth and capture market share.

With that, I will now hand the call over to Brandon to discuss our Q4 financial performance and outlook in more detail. Brandon, take it away.

[Brandon Nussey, executive]

Thanks, Louis. Before digging into the details, I will summarize some key points for the quarter and our outlook for fiscal 2025. First, we delivered a quarter with SaaS revenue at the top end of our previously issued guidance and have given further breakdowns this quarter of our SaaS revenue to clearly show the contribution from the Coveo Core platform and the platform we acquired from Qubit. SaaS revenue from Coveo's Core platform grew 18% in the quarter and 19% for the full fiscal year. This was offset by a decline of 30% from the Qubit platform, which as discussed in prior calls, is declining as we prioritize investments in our core.

We've made excellent progress on our path to profitability. Our adjusted operating losses improved by 81% year-over-year. We recorded our first quarter of adjusted EBITDA profitability, and our operating cash flow was positive $4.2 million for the year ended March 31, well ahead of our plans to meet cash flow profitability in our fiscal 2025 year.

And finally, today, we are introducing guidance for fiscal 2025, which factors in the following: First, our continued focus on Coveo's core platform versus the platform acquired via Qubit. And consequently, we expect the Qubit SaaS revenue to further reduce throughout fiscal 2025. Second, our optimism that fiscal 2025 will be a year where we accelerate growth. However, our guidance will stay cautious, particularly at the low end, as we look to see some of the customer interest in our AI solutions turn into greater order flow. And finally, the growth we'll build as the year progresses with Q1 being our low point for growth rates and the second half overall being stronger than the first half.

So let's dig into some of the details. SaaS subscription revenue was $30.7 million in the quarter, up 13% from a year earlier. Within this, SaaS subscription revenue for the Coveo core platform was $28.7 million, which increased 18% from a year ago. This was offset in part by the previously communicated churn in the platform Acquired from Qubit, which contracted by 30%. For the year, SaaS subscription revenue was $118.6 million, up 15% from a year earlier and was 94% of total revenue. The Coveo core platform contributed $109.1 million of this total and grew 19%. Total revenue was $32.6 million for the quarter, an increase of 12% from a year ago. For the year, total revenue was $126.1 million, up 13% from a year ago.

Looking at the bookings performance in the quarter. After encouraging Q3, we did see Q4 buying behavior revert back to slower customer decision cycles for some of the reasons Louis referenced earlier. Importantly, we did not see a material change in any of our win/loss rates in the quarter, but instead of a significant portion of the pipeline pushed out to future quarters. A bright spot in the quarter was bookings for our generative AI solutions, which constituted over 20% of total new bookings again this quarter. As Louis mentioned, we now have more than 75 projects underway in various stages of evaluation with customers and are seeing strong win rates with these customers and decision cycles so far. This gives us ongoing confidence in one of our most important growth drivers.

Gross retention rates for our core Coveo platform continued to be strong at approximately 95% for the year, which I view is very healthy compared to our peers and enterprise software. As a result of slower new bookings seen in the quarter along with some discrete revenue churn coinciding with our year-end renewal cycle, our ARR growth rates for the quarter were approximately 4 percentage points lower than SaaS subscription revenue growth rates, both when including and excluding Qubit's ARR, which also impacted our NER for the quarter, which while still healthy, moved to 107% from 109% last quarter. NER inclusive of the Qubit platform was 103% for the quarter.

Our fourth quarter gross margin was 79%, up from 77% a year ago. Adjusting for share-based payments and related expenses, adjusted gross margin was 80% for the third quarter, up from 78% a year ago. Product gross margin was very healthy at 82% in the quarter, up slightly from a year ago. And our adjusted product gross margin was 83% for the quarter, also up slightly from the year ago period.

Combined, these metrics continue to be great indicators of the strong customer economics inherent in our business model, with 94% of revenue coming from recurring SaaS subscription revenue which carry 80% plus product gross margins, 95% plus gross retention rates and 105% to 110% NER rates, mean we have a solid long-term business model that provides good leverage for investment in growth opportunities and/or greater profitability.

Adjusted operating loss for the quarter was $0.8 million, once again, a significant improvement compared to the year ago period, which was $4.4 million. For the full year, AOL was $6.3 million, significantly improved from $20.4 million a year ago and well ahead of our initial guidance for the year of $13 million to $15 million. This quarter, we've introduced adjusted EBITDA as our primary operating profitability measure going forward to be more consistent with our peers and given it has a closer proxy to the underlying cash flow.

Adjusted EBITDA for the quarter was positive at $0.2 million, improved from a loss of $3.4 million a year ago. And for the year, adjusted EBITDA was a loss of $2.4 million, improved from $16.3 million a year ago. To give a sense as to how much progress we've made on driving operating leverage in our business, the increase in adjusted EBITDA dollars for both the quarter and year roughly represented the increase in revenue dollars. Said differently, approximately 100% of the growth in revenue for the quarter and year flowed directly to the adjusted EBITDA line.

This was further evident in our cash flow from operating activities, which were positive at $4.6 million for the quarter and a positive $4.2 million for the full year. This improved from a use of $6.3 million for the prior fiscal year and puts us a full year ahead of our previous guidance on becoming cash flow positive. At the close of the third quarter, our cash reserves stood at $167 million with no debt.

As part of today's earnings release, you will see we are introducing our second substantial issuer bid in the amount of CAD 50 million, and further intend on renewing our existing NCIB. Given we are now firmly cash flow positive, we believe we have sufficient capital for continued growth investments and as such, this is an action that will drive shareholder value given what we believe to be the depressed valuation of our public stock.

So turning now to guidance. For the first quarter, we are expecting SaaS subscription revenue of between $3.2 million and $30.5 million and total revenue between $31.8 million and $32.1 million. For the full fiscal year of 2025, we are expecting SaaS subscription revenue of between $126 million and $130 million and total revenue between $133 million and $138 million.

Our guidance reflects in part the following assumptions: the remaining SaaS revenue at Qubit will continue to churn and reach minimal levels by year-end. There's potential for a more optimistic scenario here, but the focus of our investment dollars will be on the Coveo core platform given the large opportunity we see ahead. The revenue impact year-over-year is assumed to be approximately $4 million. Our assumptions are that bookings performance will build with second half exceeding first half as we move through the year on the back of our primary growth drivers. Consequently, SaaS revenue growth will be lowest in our first quarter and the back half should be stronger than the first half as our bookings build.

The low end of our guidance assumes we see only mild improvement in net booking dollars from current levels. On the upper end, our growth drivers start to show progress and put us in a position to return to growth acceleration, particularly as we exit the year. With these assumptions in mind, the implied SaaS subscription revenue growth rate for the core Coveo platform for the year will be in the 11% to 15% range with growth rates generally improving throughout the year.

Looking at our profitability expectations, we will continue to be prudent operators as we have demonstrated in fiscal '24, continuing our strategy of balancing improving operating margins with ensuring we're investing for our future. For the first quarter, we expect adjusted EBITDA loss of between $2.2 million and $2.7 million, reflecting additional expenses typically incurred as we begin our fiscal year. And for the full year, our expectations are positive adjusted EBITDA of between $0 million and $4 million. In addition, we will continue our focus on increasing operating cash flow and expect to generate approximately $10 million in cash flow from operations for the fiscal year.

With that, operator, we can turn it over for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Louis, if you could expand maybe a bit on the environment and help us reconcile the strong customer interest and traction you're seeing with Gen AI relative to the normalized level of SaaS growth you're guiding for the year. I'm wondering whether this is characteristic of the environment being soft from a macro perspective or whether it's also maybe a constraint in terms of sales capacity, given that you're focused on driving operating leverage? Has sales capacity been involved constraint from your perspective?

[Louis Tetu, executive]

Thanos, obviously, the macro is the same for everyone, but I'd like to focus you on more specifically the dynamic on the industry, which is really the pattern we've seen here throughout the year. And to summarize, what we described is, Thanos, is Gen AI is an incredible opportunity. But at this stage, if we look back, it's been mostly around customers engaging to experiment. There was a lot of unknowns about AI and generative AI in general. Customers had to distill through the technology, its applicability, the use cases, the ROI, the impacts on things like compliance and security.

Obviously, big companies can't hallucinate. So there was a lot of, and still is a lot of, testing and experimentation. In the meantime, Coveo released obviously working solutions. And obviously, we've been able to and very proud that we've closed the cycle. But the dynamic in the industry has really been around that level of testing and et cetera, much more so than ever before.

So in addition to the macro environment that sort of you hear across the board in the software industry with elongated sales cycle and et cetera, that's probably not the primary reason in our case. It's really elongated tests and experimentation and so on. The good news is, as we said, we're seeing right now a pipeline at a record high, and we're also seeing now the inflection point of being able to complete the cycle, show many companies that have actually generated results which is obviously a driver for companies to engage and sign contracts. And so this has really been the dynamic.

On the second part of your question, Thanos, no, we're not -- we haven't constrained sales or constrained anything within the company. What we've done really is to top grade the company, is to improve our operations, improve our organizational effectiveness across the board, hire a number of new leaders in many areas, as we talked about. And so we're continuing on that path, but we're well staffed to capture the opportunity. And obviously, we're certainly very effective at hiring and growing the team and investing when we need it, especially now that the market demand is reopening. And we're not the only ones. Most companies are experiencing that phase between experimentation and the monetization phase is really only starting.

[Operator]

Your next question comes from the line of David Kwan from TD Cowen.

[David Kwan, analyst]

Could you talk about in terms of the investments that you kind of touched on this, but last quarter, you talked about ramping up the sales and marketing spend, I think, in particular, to help pursue some attractive growth opportunities. I guess, relative to that commentary, are you maybe scaling those plans back that, given some of these Qubit-related revenue headwinds, or are you still making those investments in the organization?

[Louis Tetu, executive]

David, we have -- the simple answer is we have not scaled down any sales and marketing investments. We really have right now actually a record level of activity across the pipeline and across prospects and customer conversations. A lot of the sales efforts, in fact, is linked to work around the experimentation and so on, as I described earlier. But no, we haven't scaled back at all sales and marketing investments. And as we see now the demand starting to inflect, we're certainly ready to invest in that area as a priority.

[Operator]

Your next question comes from the line of Koji Ikeda from Bank of America.

[Koji Ikeda, analyst]

Just one for me here. You mentioned in the prepared remarks you are seeing some deals maybe pushing out there taking longer. And I wanted to ask maybe some of the reasons why. More so -- actually, less so from the view of deal scrutiny from a budget perspective. And more so, are customers taking longer or maybe pausing to evaluate different options out there? And how much of the rapidly evolving generative AI and LLM narrative do you think is affecting your sales?

[Louis Tetu, executive]

Yes. No, none of the LLM narrative is affecting our sales cycle, Koji. That's a very good question. I think what we're seeing, in fact, is that companies -- it's not so much the scrutiny associated with the macro and economic environment, which is the general thing in the industry. In our particular case, generative AI is new. And with that, there are a number of unknowns for the buyers.

They're -- as you deploy, again, Coveo is -- Coveo, let's remember that Coveo is a software that works at the point of experience. We bring AI and generative AI at the point of experience. So there's someone online asking a question, trying to obtain advice or generating -- asking for a generated answer of sorts and engaging in a generative conversation. And some -- for some of our customers, as I said in the call, it's 1 million times a week.

So companies are really, really cautious about the impact on things like compliance, for instance, the ability of Coveo, for instance. We talked in the script about United Airlines, for instance. Literally, the company peppered the system for months with a bunch of questions all the way up to can I travel with my baby in the overhead bin? Well, you want to make sure that an intelligent Coveo will not answer a question like that, for instance, because there could be some ramifications. We have now customers in the financial services sector and so on.

So there is a lot of scrutiny associated with that. And this is really -- I want to convey that this is really what we're seeing here. There's a tremendous amount of enthusiasm and interest. At the same time, this is a new technology. And so companies are being very, very cautious. We've got armies of people doing side-by-side comparisons, AB test, peppering the system with a bunch of scenarios and questions and et cetera. and really taking the time. And as we said on the call, we have more than 75 large, for the most part, $1 billion and multibillion-dollar enterprises right now at various stages of testing and experimentation. Some of them live.

And so this is really, Koji, what we're seeing. The conversion rates, I repeat, we're seeing a very, very solid conversion rates. We're not seeing competitive losses at a higher rate of any sort. We're seeing just elongated cycles and testing cycles. But certainly, contrast -- not contrast that, but couple that with a very, very engaged and enthused customers because we've been able to demonstrate in some cases publicly now results, such as you've heard last quarter, about Xero software and talking about a reduction of more than 20% of global contact center volume within 6 weeks. So these are huge results.

And so customers, that's what customers love. And so that's really, really -- what I want to convey is this is really the -- what the pattern we're seeing and the reason. And as we show more results, the market is opening because now they know that it does work in large and complex environments.

[Operator]

Your next question comes from the line of Adhir Kadve from Eight Capital.

[Adhir Kadve, analyst]

Great. Louis, I'll ask one, maybe just on some of the commentary that you're seeing. A lot of scrutiny and given that Gen AI is such a new product and new technology, when do you see some of customers really getting comfortable with the technology? And when do you see them kind of really going from that experimentation stage to full bore into the technology because I think most of them do want to do that. And does that kind of coincide with some of Brandon's comments for more of a back half-loaded growth rates improving through the back half of the year?

[Louis Tetu, executive]

That's right. So we're starting to see it, Adhir, is the direct answer to the question. And we're starting to see it because customers now have -- there's a combination of 2 things here. So on the one hand, they have been able to test now several of them for months and so on with their own data and so on. So we've put much more effort into deploying the technology earlier, obviously, as opposed to typically you sign a contract and you spend way much efforts in deployment post contract. That's number one. But they are definitely starting to see it.

At the same time, they're starting to hear and see other customers of ours who now are public. And whether they're publicly advocating, which you'll find on our website or they are public sites. I talked about United Airlines. United Airlines is live. Dell is live within their customer support and so on. And so there are many other examples that they can't point to where they see that these companies have tested and adopted these solutions. And we're talking about massive scale here. We're talking about millions of interactions a week, as I said earlier, sometimes even more.

And so that's really -- those are really key catalysts for the inflection. Obviously, back to Brandon's comments. Our model is ratable. So as we see the bookings increase, obviously, that shows up in the revenue ratably in the future. That is the nature of the benefit of our model is extremely stable. The nature of our model is that it's recognized in the future. So we expect that inflection to start showing up in the number in the back half of the year, even more.

[Operator]

Your next question comes from the line of Paul Treiber from RBC Capital Markets.

[Paul Treiber, analyst]

Just a question just along the lines of the pickup in the back half of the year. It seems like every software company is announcing Gen AI features and enhancements to their products. Is that creating an environment of intensifying the [ FUD ] that may be out there around Gen AI? And what gives you confidence that, that bookings momentum where those conversions will come through in the second half of the year, and it may not just get prolonged -- continued prolonged going forward?

[Louis Tetu, executive]

Right. So I'll answer the 2 parts of the question, Paul. First of all, as it relates to the FUD, I think a lot of the FUD was related to the combination of the hike itself and how suddenly everybody and their mother announced something in AI combined with the sort of lack of knowledge, I say that in a positive way. But in general, AI and generative AI, in particular, was something new that companies had to learn about, discover. And frankly, we did a lot as many others, a lot of that education and so on, did a lot of handholding to help companies understand it, but more importantly, understand how to tame it, how to manage it properly to avoid issues, the kind of issues, Paul, that I mentioned before. The compliance issues and the security issues currency, currency of data and accuracy of answers and lack of hallucinations, et cetera. So that's really number one.

As it relates to FUD created by vendors in the space. The market is now starting to get very, very specific about generative AI. Generative AI is a -- and AI is a very, very broad topic. I always say, AI, Paul, as you know, can read tumor images. It can create code. It can summarize accounts or create marketing messages. Well, those are use cases that we don't do.

Coveo is about bringing AI and creative generative experiences also at every point of experience in real time when there is a user at the other end. So there are not that many players that can do that, especially at the scale that we do it. And across all enterprise data and across all experiences. That's what we believe the market needs, and that's what we're able to deliver.

There are some great Gen AI solutions out there. You look at Microsoft Copilot, but it will only work within Microsoft content and within Microsoft experiences. Coveo is really designed as a core platform that will cut across any content and be able to deliver intelligence into -- inject intelligence into any experience, whether it's an SAP experience or a sales force experience or a ServiceNow experience or an Adobe experience, it doesn't matter. And it creates a common platform that carries the signal, and the customers are really interested by that specific differentiation of Coveo. And we're highly, highly differentiated in that area and particularly in relevance.

The third element I would add is that the market -- as the market got educated, and that may sound a little more technical, but you might have heard the term RAG, which means retrieval augmented generation, as the very mechanism that is necessary in order to engineer a prompt and sort of control a large language model for the enterprise. What the market has realized, Paul, is that in order to make this work, you need much more than retrieve a augmented generation.

That's why we call what we do relevant augmented generation, which means that unless you're great at search and relevance, you can't really apply generative AI very, very effectively on the types of real-time, more complex use cases that Coveo handles. And so that gives us a lot of confidence, and we actually are able to measure that competitiveness in our win rates and in our tests against homegrown solutions and other solutions pretty much all day every day right now.

[Operator]

Your next question comes from the line of Doug Taylor from Canaccord Genuity.

[Doug Taylor, analyst]

I haven't heard as much as we normally would have at this point in the call about the SAP partnership. So I thought I'd ask you to maybe refresh us on the relationship there and how the sales pipeline is progressing and maybe comment on whether that's subject to the same decision-making delays, given I believe you said during your Investor Day that the average deal sizes there were much more substantial.

[Louis Tetu, executive]

The relationship is as good as it's ever been, first of all, Doug, and it's true that we didn't specifically call it out today because it's an ongoing relationship that we've announced earlier. This is a global relationship. As a reminder, we are -- and that we benefit from being an endorsed partner of SAP, which means that effectively, the SAP sales team gets full quarter relief and full commission for selling Coveo.

The dynamic here mirrors exactly what I just described. So what we do with SAP is exactly the same thing that we do in other types of experiences. In the case of SAP, we do it in e-commerce with the former Hybris product and then now it's called SAP Commerce Cloud, which, as a reminder, is the largest commerce software infrastructure, but measured by gross merchandise value. So we continue to do that.

Now the dynamic is exactly the same. As you deploy AI in those experiences and now generative AI because we have brought, as we announced last quarter, generative AI to commerce as well, to recommend product and compare products in a very advisory way and so on. The same dynamic of customers wanting to touch and test and experiment and discover and understand has been happening. Now certainly happy to report that our SAP pipeline right now is greater than ever. And we continue to invest heavily in that relationship. It's actually a very strong partnership also in EMEA, in particular. And so the simple answer is this partnership, we expect to see it materialize on an accelerated pace in fiscal '25.

[Doug Taylor, analyst]

And then one small follow-up for me. I believe in your prepared remarks, Brandon, you spoke to some isolated churn. I believe you called it discrete churn related, I believe, to the core Coveo platform. Can you just expand a little bit on what's going on there for us?

[Brandon Nussey, executive]

Sure. You would have heard from us as well that our gross retention rates for the year continued to be very healthy, 95% plus. But we do have a renewal cycle that coincides with our own year-end. And so in our fourth quarter, the extent we're getting churn for the year, that tends to be when we're getting it and there's a chart in the investor deck that kind of shows that trend line. The one item that we did lose a customer in the financial services space.

We got caught up in what was a multi-hundred million dollar cost savings initiative for them. So we did get caught up in one of those that resulted in a lost customer. And outside of that, just sort of ordinary course churn that we would see. You never want any churn, but ordinary course churn that we would see. And as I mentioned, 95% overall GRR rates, so remains at a good level for the company.

[Operator]

Your next question comes from the line of David Weiss from Scotiabank.

[David Weiss, analyst]

So with respect to the guidance for the full year. Regarding Qubit term, I'm just trying to understand that a little bit further. So the estimated -- I think the $4 million impact related, I believe, mostly to that, was that -- is this related to additional customers that have agreed to move to the new solution originally, so that would be now, I guess, Coveo merchandising hub? And then they decided, I guess, at some point in Q4 not to renew. I'd appreciate any commentary on the dynamics there. And maybe any additional color on the expected loading of that churn through fiscal '25?

[Louis Tetu, executive]

So thank you, David. So when we purchased Qubit, we purchased, obviously, the company for essentially 2 reasons: to bring IP into our commerce core platform, and bring substantial talent, obviously, in the AI space for e-commerce. We never agreed with any customer that they would necessarily keep -- stay with us or convert, albeit we've been successful with some of them and could be successful with others as well.

I think the decision that we've made here was to -- and I would say we always called out Qubit separately for that reason. The decision here that we've made, which we believe makes the company better is to really focus on one single platform and to accelerate that transition. And that platform, the Coveo platform, is significantly broader in scope than the Qubit product per se. So some customers see this as something they're interested in. Some customers see the Qubit functionality as the only thing that they needed. And the fact that we're not materially investing in it obviously tends to accelerate that.

On the flip side, this is an important strategic decision for us for 2 reasons. Number one is the focus on the core Coveo platform. And we're certainly proud to report, and we've announced that, that in the new Gartner report for commerce, I forgot what it's called, the commerce intelligence or commerce search and recommendations or search and discovery for commerce, Coveo is a leader and actually the highest in ability to execute. So I think it's fair to say that the analysts were pretty impressed with that. And part of this is because of the injection of the of IT of Qubit in the core platform, or some of it, and certainly some of the talent and so on focused on that.

Number two is the importance. I could not understate and I cannot overstate the importance of generative AI as an area of focus and as an area of demand and interest and differentiation for the company right now. And this requires some of those kinds of -- I wouldn't say bold decisions, but decisions to really focus on that because we see an extremely large opportunity and probably not a whole lot of time, in fact, that this will unfold in our view, very, very quickly.

And so for these reasons, the decision was made to not to so much accelerate the churn of that, but certainly go to these customers and talk to them about the bigger picture of generative AI and the overall integrated Coveo platform as opposed to specifically the Qubit product. And so that's the result. We feel that overall, it's a onetime event and that it's pretty lower significance relative to our overall revenue. And Brandon, I don't know if you want to add some color on that.

[Brandon Nussey, executive]

Yes. So the assumptions, and we did break out some of these numbers for you all, $2 million of revenue in the fourth quarter ending March. And we're going to assume that, that quarterly revenue gets down to, I think I said, a minimal amount on my prepared comments by the end of the year. We quantified there's $9.5 million of Qubit-related recognized revenue in fiscal '24. And the trajectory to answer the question, we're going to assume the revenue impact of that churn as we peel it off the books, looks like about a $4 million impact to that number. That's what's in the assumptions.

[Operator]

Your next question comes from the line of Suthan Sukumar from Stifel.

[Suthan Sukumar, analyst]

Just on your Gen AI pipeline. I mean, this continues to build here, 75 up from 50, last update last quarter. Could you guys confirm how many customers you have live today on Gen AI, and what's been changing with respect to the scope of deals and pricing? I mean more specifically, are you seeing an extended upsell and higher value pricing opportunity with new deals to date?

[Brandon Nussey, executive]

Suthan, we didn't break out the actual number of closed order forms. We're trying to give just flavor on direction and what we're seeing out there, so we didn't give that specific number. In terms of pricing, we continue to -- it's not priced at -- that is a limiter, at least what we're finding anyway. So we continue to kind of lead with that 40% ACV and go from there based on customer negotiations. But again, it's not price. It's more of the dynamics that Louis has talked through earlier on the call.

[Louis Tetu, executive]

I think, Suthan, if I can add additional color here. Just echoing what Brandon just said. The key for us is to -- as we see the competitive advantage of Coveo and the results we're getting, the key for us is to continue to print more of those and build a critical mass of success stories that then we can get that -- take back into the market and gain price power. The prices are already well in the very healthy range in terms of margins and so on. But we think as we demonstrate and quantify because we have financial analysts on staff that actually understand how to quantify the benefits of what we do. We certainly have an ambition to gain some price power because the value that gets created from Gen AI right now is so substantial. It's nothing we've ever seen. Hence, why we're so focused on it.

[Operator]

Your last question comes from the line of Richard Tse from National Bank Financial.

[Richard Tse, analyst]

Okay. louis, I think in your prepared comments, you said half of your pipeline is coming from new customers. Could you give us some color on those prospects? Is that sort of opening up new verticals and use cases because of generative [ AI ]? Or is it sort of along the same lines as the use cases that you were selling to and the verticals you were selling to before?

[Louis Tetu, executive]

So it's really along the same lines, Richard. But if you think about our business, as you know, so Coveo is one single platform that caters to the 4 key areas of digital experiences that enterprises deliver which in order is websites; transactional commerce; obviously, B2B, B2C; then customer service; all the way to the contact center and workplace applications, which are really the 4 cornerstones of where digital experiences are delivered. Within that, obviously, an area like websites tends to bring much more horizontal prospects in nature across multiple verticals, I would say.

And in the area of commerce, obviously, you're talking about retailers and distributors and brands predominantly on the B2C side, and then manufacturers and distributors on the business-to-business side, so aftermarket parts and things of that nature. In customer service, our traditional verticals in -- we're very strong in the tech industry, manufacturing and the financial services sector in particular. And within workplace area, it's pretty horizontal, but workplace always tends to be more of an expand motion for us as opposed to a land motion. Companies are really investing right now and improving their revenue, which AI can deliver on and improving their customer satisfaction and reducing cost to serve, which remain the bread and butter of Coveo on all these fronts.

So we're not seeing any much difference. But we're definitely seeing an acceleration because of generative AI, because of the value of generative AI and how it changes experiences so much that companies, as I mentioned in my prepared remarks, are at a point where they almost fear this. They don't want to compete against this because they understand that it's such a game changer and a game changer, really on both fronts, Richard.

Just maybe to add some color on the new business. What we're seeing, last year, when ChatGPT came out, no new company were buying. And we knew that right out of the gate, which is why Coveo still did a good year within its customers. So what we did immediately was to work with our customers. We already have, as you know, marquee accounts across the world. And so our first and I think the right reflex was to collaborate with our design teams and so on with our customers, the who's who of software and tech companies and the who's who of many verticals right across the world. And so a lot of the activity and so on came from those.

Now that the market, as we said, is starting to be more educated, there's real demand and it is materializing. And we see it. We happen to correlate that with our pipeline, and that's why we say we're very enthused by the fact that half of our pipeline now comes from new accounts who are now interested. They see the value we bring. They see that we're one of the few companies that have been able to make this work at scale in full production, and they're now coming to us and want to engage and want to deploy. And this is really new if we compare from a year ago.

[Operator]

I will now turn the call back to Louis Tetu. Please continue.

[Louis Tetu, executive]

Very good. So thank you, everyone, for all your questions and so on. We appreciate your presence in today's call. And as always, we're available for your questions. So with that, operator, you may now close the call.

[Operator]

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