Coveo Solutions Inc

TSX:CVO

Good afternoon. My name is Constantine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coveo Third Quarter Fiscal 2025 Financial Results Conference Call.

[Operator Instructions].

I'll now turn the conference over to James Bowen, Head of Investor Relations. Mr. Bowen, you may now begin your conference.

Good afternoon, and thank you for joining us today for Coveo's Third Quarter Fiscal 2025 Financial Results Conference Call and Webcast.

With me on the call are Louis Tetu, Coveo's Chairman and Chief Executive Officer; Brandon Nussey, Chief Financial Officer; and Laurent Simoneau, Co-Founder, President, and Chief Technology Officer.

A reminder that many remarks made during today's call are forward-looking statements within the meaning of applicable securities laws, including, without limitation, those regarding our plans, objectives, expected performance, and our outlook for the fourth quarter and fiscal year 2025.

These forward-looking statements are given as of today. And while we believe any statements we make are reasonable, they are based on current expectations, which are subject to risks and uncertainties.

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 are included in the filings with Canadian securities regulators, including in the Risk Factors section of the company's most recently filed annual information form as well as key factors affecting our performance in the company's most recently filed MD&A. Both of which are available under our SEDAR+ profile at www.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 ratios or operating metrics used in our industry.

A discussion on why we use these measures, ratios, and 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, which may be found on ir.coveo.com and our SEDAR+ profile.

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 and Events section.

I'll start by handing the call over to Louis, who will walk us through the key highlights of our third quarter and comment on market dynamics and the growth opportunity ahead.

Following that, Laurent will provide an update on the technology's success, and Brandon will dive into our financial results and outlook for Q4 and fiscal 2025. After their remarks, we'll open up the line for Q&A

[Operator Instructions].

Louis, over to you.

Good afternoon, everyone, and thank you all for joining us today. I am pleased to share that our third quarter financial results were at the upper end of our revenue guidance range with SaaS subscription revenue reaching USD 32.3 million, total revenue improving to $34 million, and adjusted EBITDA reaching $0.6 million.

I'm also pleased to share that in the quarter, we achieved record-high new bookings in the history of the company, demonstrating continued growth momentum in generative AI, where we grew our customer base 36% on a sequential basis as well as strong growth in commerce with a record number of new clients selecting Coveo for commerce search intelligence and AI merchandising over alternatives.

We believe these results further demonstrate what we communicated over this past year that the market for applied AI is inflecting, particularly in the field of digital experiences augmentation.

Businesses have gained knowledge and awareness about the application of AI, the technical constraints, challenges, and opportunities for business gains within areas such as commerce, customer service, and knowledge experiences.

We're selling to a far more educated buyer who now understands and recognizes the uniqueness and importance of what Coveo offers.

For more than a decade, Coveo has been committed to augmenting the relevance of digital experiences through the transformative power of search, semantic, advanced applied AI, and now generative AI.

We've been successful and have unlocked substantial financial value by enabling hyper-personalization at every customer touch point and our technology augmented digital experiences that drove meaningful financial outcomes in commerce, customer service, website, and also workplace applications.

We see a market moving from this past 2-year period of discovery and experimentation with AI since the launch of ChatGPT into now a period of deployment and results expectations.

To a degree, AI has been a technology in search of problems for many companies, and we're seeing that fatigue. We're entering the, of course, it's AI, show me period where companies are eager to operationalize AI on their actual data and deliver real-world financial outcomes.

A recent January '25 BCG report found that while executives AI and Gen AI ambitions will be growing by 60% over the next 3 years, with 75% of them ranking AI as a top 3 priority, and only 25% are seeing significant value from AI.

While customers and investors have questioned where AI would be applied and whether companies like Coveo would be disrupted or rather benefit from AI, our growing pipeline and record bookings clearly indicate that Coveo is positioned as a highly differentiated market taker in applied AI.

We're witnessing demand recovery and growing momentum across our business as we can easily demonstrate that our AI relevance platform delivers superior results in key competitive areas that will be disrupted by AI within most industries.

Before diving into the details of the quarter and highlighting some of our exciting client wins, I'll take a moment to emphasize the significance of relevance for enterprises in the age of AI and the strength, uniqueness, and necessity of our AI relevance platform for our enterprise customers.

Relevance significantly augments digital experiences and is quickly growing as a competitive imperative, particularly in the age of AI. Every enterprise delivers digital experiences to all its stakeholders, websites, commerce, customer service, and in the workplace. Everyone engages digitally. Digital is table stakes, but relevance is not.

Relevance impacts business in significant ways. And if your experience is archaic, your better competitor is one click away, one browser window away. And once people experience a new digital paradigm that makes life easier, it becomes the new normal and they won't settle for less.

What people online are essentially telling businesses is simple, don't waste my time because alternatives are a browser window away.

In digital experiences, relevance refers to how well content, products, recommendations, and now with generative AI advice aligns with an online person's context and intent. AI relevance seeks to achieve maximum personalization at every touch point, delivering accurate and actionable insights.

By aligning experiences with individual needs, Coveo drives engagement, increases revenue, reduces costs, and creates significant value for our clients.

It's our firm belief that unified relevance sets the new bar as the foundation to create remarkable experiences in the future. These experiences will be generative, advisory, and recommend content and products in the context of personalization and business imperatives.

Equally importantly, search is not going away and needs to work alongside recommendations and generative AI from a common source of truth in a fully unified content, advice, and product experience.

We can do this today. Bring your enterprise to every person, maximizing every journey, ditching rules, and personas, customers expect individualization across all touch points served by numerous apps.

Consider search's power across enterprise content personalized for each customer. Imagine generative AI grounded in search and relevance, providing precise answers and advice, visualize AI optimizing commerce, scaling revenue and margins, and creating literally a million stores for a million shoppers. This is Coveo's AI capability.

Over the past 2 years, while many companies have made bold AI claims, fewer have delivered. Coveo has consistently proven that its AI relevance technology generates tangible real-world results.

Throughout a decade in AI search and relevance, and a history of firsts in the space, Coveo has consistently witnessed massive financial gains by driving more relevance into digital experiences for leading companies like Zoom, Xero, Nespresso, Caleres, SAP, F5, and many others.

Today, the integration of generative AI within the Coveo stack is even more transformative, unlocking unprecedented opportunities for all experiences, including AgentTech. AI relevance is now recognized as a critical need that Coveo fulfills. 

Achieving that relevance is complex due to the vast data needed, which sits everywhere, and is compounded by large and diverse audiences requiring personalized experiences and fragmented interactions.

This complexity requires AI to solve, especially when business outcomes are at stake. AI relevance is a real science and Coveo is at the forefront of that innovation.

We consistently rank superior in A/B tests because the key challenge for large-scale enterprises, especially in generative AI, lies in the long tail of complex content. Enterprises need scale, speed, and precision and that's where we excel.

Our enterprise customers love Coveo's superior relevance designed to easily connect to any content and deliver unified relevance everywhere, grounding AI in all their secure data.

Coveo injects coherent search, recommendations, and generative answers, augmenting experiences across the board. Customers love the flexible API-first headless architecture and its ability to connect to all their content, context, and experiences apps working out of the box in days or weeks, not months and years.

Enterprise data, content, but also context data are everywhere in databases, in documents, in customer conversations, and across multiple apps and repositories. At the same time, digital journeys are disjointed across multiple points of experience and many apps, websites, commerce, customer service, and workplace channels.

Moreover, relevance, in general, is poor, poor in every app as most do not leverage broad enterprise data, let alone powerful AI search, semantic, and generative AI capabilities.

Since we started in search personalization and machine learning in 2012, we have built the industry's leading platform that combines the power of unified secure indexing and vectorization with the precision of hybrid search, relevance, and semantics to create unified relevance from any source of data into any experience that the enterprise delivers.

What our enterprise customers love about Coveo, aside from its superior relevance capabilities is that it's designed as the one spinal ability to easily connect to any content and deliver pinnacle unified relevance easily everywhere in any app or agent, grounding AI in all enterprise data securely and at high performance.

Coveo can inject search, recommendations, and generative answering of products and content that are all coherent from a unified source of truth, augmenting experiences easily across the board.

Coveo is flexible. It's offered as an API-first and headless stack that connects the content, context data, and experiences app. It works out of the box in days and weeks, not months and years. That is why Coveo is being adopted.

These recent customers have large-scale deployments of our relevance augmented generation tech and understand the imperative for generative AI grounded in search and relevance. We're proud of this success, which proves our technology's uniqueness and value.

Laurent will soon explain the sophistication involved and why search and relevance are paramount for generative AI. For the technically inclined on the call, the hard part of RAG is R and R is relevance.

Digital experiences require grounding in powerful search and semantics to make generative AI work at scale. Overall, our third quarter results tracked well against expectations with record new bookings, reflecting resumed buying behavior and a more educated market, a market that expects results with AI. Success with customers and a growing pipeline gives us confidence in our leadership position and continued acceleration.

Our Coveo AI Commerce business saw a strong acceleration in Q3, driving product discovery, recommendations, merchandising, and generative experiences for our clients. Laurent will provide further insights shortly about our commerce innovation.

We're pleased to report strong momentum in commerce with a record number of new clients. This includes XXXLutz, Agilent Technologies, and Trek Bicycles, adopting Coveo's AI commerce stack, many acquired through our SAP partnership.

XXXLutz, the largest furniture retailer in Europe with revenues of over EUR 6 billion and over 370 stores and 24 different online shops faced scaling challenges due to their vast catalog and lack of personalization. This is why they chose Coveo.

Trek Bicycle was significantly influenced by our SAP partnership, enabling us to demonstrate Coveo's AI power. Trek recognized the value of our seamless integration and commerce platform's flexibility to manage personalization at scale across their multiple brands and geographies.

The third quarter also showed continuous momentum with Coveo Relevance augmented Generative Answering and strong sequential customer count growth. Verisk Analytics, a data analytics and risk assessment firm, adopted our solution across multiple business lines.

Our platform will support customer self-service for extreme event services. Verisk valued our enterprise-grade capabilities, flexibility, scalability, and security, plus our ability to reduce support costs and improve satisfaction with an easy-to-use, out-of-the-box solution.

A large Australian DIY hardware and garden center chain retailer selected our solution to create generative shopping experiences, doubling their investment with us. They're pioneering Gen AI use cases.

We've proven here to be not just a technology supplier but a trusted partner for AI commerce innovation, driving customer experience, revenue, and margins for them. These are just a few of several other examples of existing customers such as SAP, Vanguard, and Edward Jones, who expanded their use of Coveo's generative AI solutions during the third quarter.

Turning now to our partners. The third quarter saw accelerating traction from our SAP Commerce Cloud partnership. Half of our new commerce logos were influenced by our SAP alliance, demonstrating the strength and value of our global collaboration.

In March '23, we launched Coveo for SAP Commerce Cloud on the SAP store, bringing AI-powered search, recommendations, and personalization to storefronts. SAP chose Coveo as an endorsed partner offering sales incentives to their sellers given the importance of our AI within SAP CX.

Building on that commerce momentum with SAP, we've expanded our partnership in customer service. SAP certified a new SAP-endorsed Coveo app for SAP Service Cloud, enabling enterprises to leverage Coveo's AI search and AI relevance models across SAP Commerce Cloud, SAP Service Cloud, and SAP CX.

Our AI-driven experiences help SAP customers find products, resolve issues, and access support content, driving engagement across the entire customer journey from purchase to service.

We look forward to continuing that innovation with SAP, helping customers unlock AI-driven experiences. We also see progress in our Shopify alliance, offering AI-driven search recommendations and personalization for large merchants.

As their needs evolve, Coveo AI and Shopify will deliver intelligent commerce experiences at scale in both large-scale enterprise B2B and B2C commerce.

Integrations between Coveo and Shopify were introduced at NRF in New York this January, a large global commerce conference with a positive reception. We're deepening our Shopify work and are excited about the growth opportunities.

Our AWS partnership is also now in full execution, targeting joint accounts with sales incentives. We're co-selling with AWS in high-growth industries like high-tech, financial services, retail, and many others.

Finally, we're also continuing to invest in our partnership with Salesforce and their agent force teams, in particular, to scale Coveo's capabilities for large-scale requirements within agent tech and knowledge areas.

In summary, Coveo's leadership continues to strengthen through the speed of innovation of our AI relevance platform, driven by real-world tangible benefits we've delivered to leading enterprises globally.

Looking ahead, the momentum from a transformative fiscal '25 continues as we secure new customers, expand partnerships, execute on customer value delivery with our platform, and continue to gain market recognition.

As AI's role grows and enterprises demand results from AI, we remain excited about our future and position as a leader in this fast-evolving landscape.

In anticipation of this accelerated growth and the inflection we see in market demand, we continue to focus on the expansion of our leadership team and the strengthening of our execution. With our business on a strong trajectory, a robust pipeline, and accelerated bookings, we're confident in our ability to seize growth opportunities.

As we scale and strengthen operations, we're making some thoughtful adjustments to our leadership structure to support our next phase of growth. Before I hand the call over to Laurent, I'd like to take a moment to address the leadership transition and redeployment plan we announced today.

As part of our strategic succession planning and commitment to strong corporate governance, we're separating the roles of Chairman and CEO. Effective April 1, '25, I'll take the full-time role of Executive Chairman; and Laurent Simoneau, our Co-Founder, CTO, and President, will step into the position of Chief Executive Officer.

Laurent has been the driving force in shaping Coveo's vision and driving our technological innovation and differentiation, and I'm confident his leadership, vision, and stellar reputation with customers will take Coveo into its next phase of growth and innovation.

My personal commitment to Coveo is unwavering, and my energy will now be 100% focused on business development with Coveo's customers, partners, and the many growth opportunities that are available to us.

In addition, John Grosshans, our Chief Revenue Officer, will transition to the role of Chief Operating Officer, enhancing our operational capabilities as we continue to scale.

Lastly, Marc Sanfacon, Co-Founder of Coveo and current Senior Vice President of R&D, will transition to the role of Chief Technology Officer. This transition reflects our commitment to positioning Coveo for long-term success. I look forward to working with Laurent, John, Marc, the leadership team, and all our amazing Coveo colleagues to pursue our growth as a market leader.

On the whole, backed by a solid capital position and exceptional team, customer results, and strategic leadership, we're well prepared for continued success in the fourth quarter and into fiscal '26.

With that said, I will pass the call over to you, Laurent.

Thanks, Louis. This is an exciting time for Coveo, and I'm thrilled about the momentum and innovation driving us forward.

I'd like to take a moment to highlight the strength of our platform. As Louis mentioned, we've been advancing AI-relevant science for over a decade into one single platform.

We achieved this through a powerful combination of hybrid and semantic search, AI-powered relevance, and generative AI, all seamlessly integrated into a single platform.

In the platform diagram available on Slide 26 of our earnings presentation, the middle section highlights the Coveo Relevance Augmented Generation layer or Coveo RAG. Coveo's core relevance includes lexical, semantic, behavioral, and intent-aware ranking models.

It can also optimize and balance these models and additional factors towards a specific outcome. For instance, in commerce, it is now possible to optimize relevance for conversion, revenues, or even profits. This is also where the most relevant content passages are identified to ground responses, whether using our built-in LLM or as of this quarter, third-party LLMs and AI applications seamlessly integrated via our passage retrieval API.

Thanks to our powerful yet flexible RAG infrastructure, customers and partners can create experiences like this one on Slide 27 that integrate generative answering, semantic search recommendations, and next-best questions for both content and product discovery.

It can also enrich the Chat and agent experience, entering consistency between search and Chat channels. A leading customer like Dell leverages Coveo across multiple touchpoints.

In service, users receive detailed answers to their questions, powered by the most relevant content from our hybrid search. Users can also explore knowledge content through a more traditional search interface. This experience is available in multiple languages, ensuring consistent support for Dell's global audience.

Finally, we have extended this approach to commerce. For instance, a shopper can search and navigate for products about surfboards. This is a classic product discovery example.

But as seen on Slide 31 of our earnings presentation, if the shopper seeks advice or guidance in the same experience, Coveo generates a response grounded in the actual content available in the store.

Based on that content, Coveo also suggests the most relevant product categories to map the shopper's interest. We are excited to begin rolling out this new capability to customers this quarter and look forward to its impact.

In conclusion, I want to extend my deepest gratitude to Louis for his exceptional leadership in the CEO role over the past 14 years. Under his guidance, Coveo has grown into a leader and trusted partner for global enterprises looking to integrate AI into their operations.

I'm also grateful that Louis will continue to play a crucial role as Executive Chair, focusing on strategic initiatives, long-term opportunities, and global business development with our customers and partners. His experience and vision will be invaluable as we navigate this growth market together.

With a strong leadership team, a clear vision, and an unwavering commitment to our customers, Coveo is poised for an exciting future. I look forward to working closely with our employees, customers, and partners as CEO to continue driving innovation and delivering impact at scale.

I will now turn the call over to Brandon to discuss our Q3 financial performance and outlook in more detail. Brendon?

Thanks, Laurent, and congratulations. I look forward to continuing to partner with you, Louis, John, Marc, and the rest of the executive team at this exciting time in the company's growth journey.

Before getting into the details, as I reflect on the quarter, I'm pleased with the bookings momentum we are seeing, and I view this as the most important signal in our business.

I communicated at the start of the year that based on what we are seeing from our customers and pipeline activity, we expected to see increased booking momentum in the second half of the year, and our third quarter was a great quarter of validation.

We've now put together back-to-back quarters of encouraging new bookings with Q3 being our strongest ever. It was a quarter where we saw good breadth in new bookings across all aspects of the business with commerce, GenAI solutions, and international markets leading the way. I'll get into some of those details shortly.

As I look ahead, I see the opportunity for this momentum to continue, which puts us well on track to reaccelerating overall reported growth in the coming quarters.

I pay most attention to our Coveo core SaaS subscription revenue line to show this reacceleration, and I encourage investors to do the same. This grew 12% in the quarter and is showing the initial signs of our rebound.

At the consolidated level, our growth rates are affected by the Qubit revenue stream, which as communicated previously, we expect it to largely churn in the year as we prioritize our investments. Consolidated growth rates lag as a result, but this is temporary only as we are now most of the way through this churn.

I'd also like to highlight upfront some important context to understanding our Q4 revenue guidance. Our guided revenue range incorporates two important variables. First, the impact of foreign currencies on our revenue; and second, since we recognize revenue on a daily basis, the impact of Q4 has two fewer days of revenue than Q3 and one fewer day than the year-ago period.

Adjusting for those items on a constant currency, constant days basis, our Q4 guidance at the midpoint would imply approximately 13% year-over-year growth for the Coveo core subscription revenue, showing continued improvement in our underlying growth rates.

So in summary, our market continues to evolve rapidly and remains as dynamic as ever. Throughout, we have successfully maintained our revenue guidance, particularly when accounting for uncontrollable currency fluctuations, while keeping operating cash flow guidance of approximately $10 million, aligned with our initial expectations.

As we approach year-end, we are positioned for accelerating growth, which I believe reflects both strong execution and the promising opportunities ahead. As we look at the details now, SaaS subscription revenue was $32.3 million at the top end of our previously issued guidance.

Our focus is on the Coveo core, which drove SaaS subscription revenue of $31.1 million, up 12% from a year ago. This was offset by a decline of 44% in SaaS revenue for the platform we acquired from Qubit.

As communicated, we expect the remaining SaaS revenue for the Qubit platform will largely churn this year as we prioritize investments in our core, and this is trending in line with our expectations.

Total revenue was $34.0 million, up 7% from a year ago. Total revenue was impacted by the Qubit churn and slightly lower professional services revenue as we prioritize the opportunity we see with partners to deliver services.

Our third quarter new bookings were significantly higher than the prior year. Some highlights, a strong quarter for new customer additions, building on the momentum seen in Q2, and record new client additions in commerce, half of which came via our SAP partnership, success with our GenAI solution continues.

Our customer base grew a further 36% this quarter from just 90 days ago. Our GenAI solutions are being adopted across all customer use cases, which is highly encouraging.

Further, we're now seeing our initial GenAI customers buy more from us on the back of their initial success. Customers like SAP, Vanguard, and Edward Jones all increased their GenAI subscriptions with us in the quarter.

European bookings were up more than 75% year-over-year, in part due to our success with the SAP partnership. Based on the strength of this quarter's bookings, combined with a positive outlook as we look into Q4, we expect that ARR growth will exit the year in the lower mid-teens range on a constant currency basis and will outpace our reported core SaaS subscription revenue growth.

This sets up well for the reacceleration of reported revenue in the coming quarters. Turning to net expansion rates, which have been lower than planned in recent quarters, similar to many in enterprise SaaS. We saw a slight improvement this quarter, reaching 105% for the Coveo core platform.

However, as I mentioned earlier, some of our clients remain budget-sensitive. While strong new bookings have helped to offset this impact, they have been partially counterbalanced by these budget constraints.

The gross margin for the quarter was 78%, up from 77% in the prior period and the product gross margin was 82%, up from 81% a year ago. Adjusted EBITDA in the quarter was $0.6 million compared to a loss of $0.7 million a year ago and is in line with our guidance.

I'd note that included in adjusted EBITDA in the quarter were some one-time severance amounts approximating $0.5 million as we continue to optimize our organization. We remain well positioned for positive full-year adjusted EBITDA.

Cash flow from operating activities was slightly negative at $0.2 million, reflecting regular working capital movements compared to negative $2.3 million in the prior year period.

Year-to-date cash flows from operating activities were $4.3 million and we continue to track well against our guidance of approximately $10 million for fiscal 2025. We ended the quarter in a strong financial position with $119 million in cash and 0 debt.

During the quarter, $6.3 million was used to retire approximately 1.4 million shares under our NCIB. To date, we have deployed approximately $80 million to repurchase a total of $13.8 million of shares and share-based awards.

I'll wrap up by discussing our guidance. The guidance is based on the FX rates in effect at the end of the third quarter, which have proven to be quite volatile of late. In general, the strengthening U.S. dollar is beneficial to Coveo given approximately 80% of our revenue is in USD and roughly half of our OpEx is in Canadian and other non-USD currencies.

However, a strong U.S. dollar does serve to reduce our reported revenue growth rates. Based on our FX assumptions, we currently anticipate approximately $0.4 million of currency impact to fourth-quarter subscription revenue. This amount is subject to change based on how the actual FX rates play out in the quarter.

Additionally, as we recognize revenue on a daily basis with 2 less calendar days in Q4, we can expect a quarter-to-quarter impact of approximately $0.7 million less in subscription revenue that will get recognized as compared to Q3.

So with that pretext for the fourth quarter, we're expecting SaaS subscription revenue of between $32.3 million and $32.8 million. Total revenue of between $34.1 million and $34.6 million and adjusted EBITDA of $0.0 million to $1.0 million.

As I mentioned, on a constant currency, constant day basis, the midpoint of our guidance would indicate approximately 13% year-over-year growth for the Coveo core SaaS subscription line.

For the full year, we expect SaaS subscription revenue between $126.3 million and $126.8 million, total revenue between $133.0 million and $133.8 million, and adjusted EBITDA of $0.3 million to $1.3 million, which is in line with our previous communications.

In closing, I'll end where I started. I'm pleased with the momentum we're seeing. Bookings are growing and our growth rates are beginning to improve. We have a solid pipeline of opportunities ahead, and I believe we're well-positioned to end our fiscal 2025 strong.

And now, operator, you may open the call for questions.

[Operator Instructions]

Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

First of all, congrats to Louis and Laurent on your new roles. And if we talk about the end market, I guess the acceleration in the booking momentum you're seeing is certainly encouraging. But at this stage, what would you say are the key constraints to growth?

I mean, if we look at the ARR growth that you're guiding for the exit of the year relative to the size of your market opportunity and your market position, I think we all agree that you have a business that has the potential to be growing a lot faster.

So at the moment, what do you see are the constraints? Is it still a function of the spending environment and some residual impact from that as you kind of alluded to maybe some customers still kind of working through the noise and we're now kind of getting through the logjam and understanding the benefits of AI. What are the factors in growth at the moment?

Right. I think, Thanos, thanks for the question. Factors outside of our control, such as volatility in markets, given the climate right now, and so on, I'll focus on a constant basis, we can control.

For us right now, the way we look at it, it's really all about execution, all about investing and continuing to grow our go-to-market infrastructure now that that the timing is right, that we're seeing the inflection.

So as we speak, I think that's the major constraint in answer to your question. We believe the market demand is here. We believe that Coveo is differentiated. We believe that consumers, buyers, not consumers, but the buyers, the enterprise buyers are much more educated and really understand the value of what we do and the importance and the unique aspect, as we mentioned. And so it's really a question of our ability to invest in our go-to-market infrastructure on a global basis.

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

I just want to echo the congratulations on the change in leadership. Just a follow-up question. Just in regards to new bookings and new logo announcements, obviously, it sounds like there's a pickup there. Could you comment on the size of the wins that you're seeing and if they're converting at the same size as typical or if there's maybe a built-in expansion into those deals?

Paul, it's Brandon here. Yes. No, the deals are what we're seeing in terms of deal sizes are comparable with what we've seen in the past. Our model here is, we typically land in one use case or one area and then we grow those over time.

We are seeing customers adopt more and more. One of the comments we made on the call was some of our initial Gen AI wins are actually increasing now in terms of coming back and rolling out to other parts of the business or expanding their usage, which is really encouraging.

And so over time, we do expect to be able to grow these accounts. But I'd say, overall, the average ARR per customer is ticking up a little. We've got work to do there, but certainly not getting any smaller.

And if I can just echo or piggyback on to Louis's comments earlier and I realize the playback on the call was a little quick earlier our apologies for that. But look, we expect to end the year low to mid-teens in terms of ARR growth rates. We think that sets us up well to see growth continue to improve as we get into fiscal '26. We've always thought that this starts with bookings momentum.

We thought bookings momentum would start the back half of this fiscal year. Really encouraged by what we saw in Q3. Q4 looks to be an encouraging quarter as well. We've always said this reacceleration in growth rates will be linear, not step function, and we think we've made a nice step forward here in the back half of this year and optimistic for fiscal '26.

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

My first question, I want to touch on commerce. Between SAP and Shopify, you guys obviously have some big heavyweight partnerships in place. And it's good to see that contribution building from SAP. Can you talk a little bit about how are your typical deal sizes trending for partner-led deals versus your direct deals? And what are the natural expansion opportunities for a typical commerce customer with Coveo?

Yes. Very good question. Obviously, when customers see an integrated solution and the joint commitment of 2 significant vendors working together, that gives some certainly pricing strength and conversion strength.

And clearly, that's what we're seeing and we're only starting there. At a high level, the adoption of AI in commerce is accelerating. I would say it's going to be hard for anybody in commerce, whether it's B2B or B2C to compete without AI, and that will unfold within the next 12 to 36 months.

So we're seeing a lot of opportunity. Our motion, as Brandon mentioned, is clearly a land and expand. I think we're getting much more sophisticated in terms of measuring and understanding the value that we create. In the commerce area, you can easily A/B test.

So think about routing a part of the audience through a set of algorithms or no algorithms versus another portion of the traffic to Coveo and measuring things like conversion, cart sizes, average revenue per visitor or customer and more evolved things that we've been working on such as margins and profit.

And so there's a lot of room here given the value that's being created by AI to expand and gain more pricing power and greater customer value over time.

And then the second question, maybe for Brandon. Brandon, what was the ARR growth this quarter? And when you look at recent booking trends and really what's shaping up in the pipeline, how is the mix of net new versus expansion deals starting to trend? I'm just kind of curious, will growth continue to be driven by net news? Or is expansion supposed to play a bigger role in growth ahead?

I'll start with the former. This quarter, was a weird quarter in that the currency volatility that hit the markets really happened at the tail end of the quarter. So not a lot of FX impact on revenue in the quarter, but ARR valuing that at the quarter end had an impact.

So to answer your first question, ARR growth rates are roughly in line with SaaS subscription revenue growth rates for the quarter, which is why I gave some color or context on the call as to where we expect the year because I think that's the important launching point now that you have our Q4 guide as to how we'll start fiscal '26.

So, low to mid-teens in terms of anticipated ARR growth as we exit this year is what we're currently seeing. We made some comments on the call. The mix of new and existing was actually a pretty good quarter across both of those. So we did see continued momentum from last quarter's Q2 was a great quarter for new customer adds.

Q3 is also a very good quarter for new customer adds, but also a good quarter and expansion this quarter. So the overall ratio looked a lot like historical norms, but sort of the height of the bars of both of those continue to build, which is what we want to see.

We think we've got a great opportunity to not only grow share but also grow into the white space in the customer base. So it was a good quarter across the board in that respect.

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

Could you talk about how you're seeing the growth rates change and maybe looking out going forward as it relates to the different lines of businesses that you've got? Obviously, it sounds like commerce is growing pretty strong and service is probably as well. But just any additional color you can provide from that standpoint would be great.

Yes, Dave, I'll start and pass it over to Brandon for additional comments. But at this stage, we have 2 incredible horses in the race, I would say, in this AI for experiences race.

Indeed, the commerce part, I just commented on the last question, how important commerce was. and how much of an imperative it's going to become as it's going to be almost impossible to compete in commerce against an AI-enabled merchant.

In the knowledge area, what we call at Coveo, the Knowledge area, we couldn't be more excited with the perspective of generative AI, in particular, in combination with search.

Initially, when generative AI came out, people thought you could just pop up a chatbot and forget search. The reality is it's really the confluence of the 2. Search is not going away. People still want to search.

The response from search channels needs to be entirely coherent with the response that you get from a generative experience a set of advice or answers or a conversation. And so you're really seeing the merger of those, and that's quite exciting. And unless you're strong at search and relevance, as we said, in order to make any LLM work, and we've seen deep-seat lately and et cetera.

The reality is, we at Coveo have said for more than a year now that, in our view, LLMs, albeit a very sophisticated technology would get commoditized. And I think we're seeing that.

So the reality is Coveo's strategy has been BYO LLM, bring your own. We don't really mind. What's important is the work upstream of the LLM to ground the LLM into the relevant corpus of data and basically the context information. And this is what we do.

So, we're very excited about the knowledge area as well. And in areas like B2B commerce, and I'll close on that, in areas like business-to-business commerce, we're seeing the confluence of knowledge and commerce.

These are companies that have sometimes contact centers for commerce where customers call to get advice on complex products et cetera. And so there's a lot of confluence between the content world and the product catalog world. And we're ideally positioned, obviously, among other things, to handle that.

So, it's quite exciting in both areas, and we couldn't today tell you which one will grow faster than the other. We just know both are going to grow fast.

Your next question comes from the line of Taylor McGinnis from UBS.

Maybe just on the inflection that we've seen in some of the metrics. I know in the past, you guys talked about some churn downsizing and rightsizing amongst the customer base. So one, are we largely through those headwinds and the inflection that we're seeing in bookings and NRR, is that just getting through those hurdles? Or maybe you could talk about that and the momentum that you're seeing in the business? And what's the bigger driver?

Yes. So you're right, Taylor. We did talk starting a few quarters ago about just some churn situations we were navigating through during the year.

As you saw in the quarter, NERs ticked up ever so slightly this quarter, which is good to see. We'll be a couple more quarters before we work our way through the balance of that given NER is a rolling 12 or rolling 4-quarter calculation.

But yes, I think we've had to digest some specific events this year and are encouraged to see NER tick up in the quarter. That's quite disconnected from bookings where I think from the start of the year, we were looking at our pipeline.

We were looking at what we were hearing from customers at the time. And we felt like this was a market that was going to start to move from experimentation to adoption, and that was going to benefit us.

So I think there are 2 distinctive things, though are generally heading in the right direction. Certainly, bookings are, and we're optimistic that we're through some of those specific events on churn as well.

The next question is from the line of Richard Tse from National Bank Financial.

Congrats on all the appointments here today. Even before today, I think over the course of the past year, there have been some management changes. And I'm just trying to understand whether and what initiatives brought on by those sorts of new members of the team have been impactful in terms of driving these record bookings. Or is it pretty much just a market thing?

I'm trying to sort of separate the 2 because I know that some of the new team has been pretty instrumental in terms of being a bit more aggressive, I guess, on the market, but maybe I'm wrong, but that's the question.

Okay. Hi, Rich, no, look, we'd like to take a little bit of credit for the performance of the company here. But of course, you need a market. And AI has been one of those markets, as we described, that has been probably for the first time in my career, not that my career is more relevant, but I've been personally for more than 30 years in enterprise software.

And I have never seen a period where technology became a focus for the sake of technology and so much power was put in the hands of developers and it's almost like companies almost forgot the fact that technology is there to reduce risk, increase revenue, reduce costs or drive consistency, and that was always the case.

So we're glad to see that back, and that's a key factor. But also, as we kept growing throughout this period, we really top-graded the company, and we mentioned that on previous earnings calls.

We top-graded the company and we invested in leadership. And our leadership bench is significantly stronger than it was. The appointment of John as CRO last year was a game-changer for the company.

No secret here why John is being appointed as COO is because leaders such as John and other leaders in the company, we hired leaders who have been where we're going. And so they are leaders who have managed significantly larger organizations, in the case of John, CRO at Palo Alto Networks and AWS.

And so have managed significantly larger teams, global execution, and much larger portfolios. And this is certainly a key reason overall. And we're glad that as we strengthen the company, it's starting to show.

As you know, our business model shows gradually because it's ratable in the future, but it's definitely starting to show in the metrics.

[Operator Instructions]

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

I wanted to ask a question on the guidance. And so I fully appreciate all the commentary on the guidance and kind of the puts and takes for the next quarter with the days in the quarter and Qubit and really appreciate all that.

And so the question really comes from last quarter, I think something that was said was the guidance was -- or you expect the full year to come in at the lower end to the midpoint or to the middle part of the range of the prior guide.

And so when I look at the third quarter performance, I'm just trying to square how much conservatism is still embedded in the guide and the potential for full-year results to end up above the updated guidance range today.

Yes, last quarter, we said that we expected to come in at the low to midpoint of the annual guidance range. If you take a look at our annual guidance provided here today, if I just take the SaaS subscription line where we focus primarily, take the midpoint and add roughly $400,000 of currency, which is new information that happened in the quarter, you come out to $127.0 to slightly more than that, which to me is right in line with what we said last quarter.

So in last quarter, and I think for a number of quarters now, we've been saying that we're confident that we're going to see bookings begin to improve, begin to inflect. And so, we've incorporated that into our outlook as we build. And from my perspective, we're executing well on what we've said, and we remain optimistic about what's ahead.

And maybe just a follow-up here and more of a philosophical question. Lots of news on the Gen AI front on a weekly basis, but I think 2 things that happened over the past several weeks have been pretty interesting, and curious to get your thoughts.

One, with the DeepSeek news that came out a couple of weeks ago and then just yesterday, Sam Altman from OpenAI posted up a blog post about how the cost of AI is dramatically falling and should continue to fall in the future. And so really curious to hear your thoughts on how Coveo is positioned in a world where the cost of leveraging Gen AI tools is coming down rapidly.

Well, I think we're very well positioned because we always saw, Koji, particularly the LLM layer, which we leverage a lot, and the model layer as a set of tools essentially that we use.

We're talking about enterprise here. And what's important to remember is that it's not so much about the AI tool that you use. You can use Anthropic, you can use Cohere, you can use DeepSeek, you can use OpenAI. They all have their specificity. And of course, we all know there's a lot of innovation in that space. But where do you ground it? Where do you ground it? What about the enterprise data? What about security? What kind of corpus are you going to feed AI? What kind of context are you going to feed AI in order to get an output?

You're not talking about writing a poem on an iPhone here. You're talking about providing customers in particular, and digital stakeholders, with a high degree of precision. As we said on the call, AI within digital experiences, in particular, needs to be measured in the long tail.

So a lot of what you see out there, including from large vendors are things like there's a demonstration of a chatbot that says, how do I change my password? That's the easy part. The tough part, and if you look at the economics of customer service, for instance, 95% of the cost of customer service is in the long tail.

They happen with 5% of the customers. That's where your reputational issues are. That's the hard part. And that's when you need high degrees of precision that are driven by search and relevance engines, and you need high degrees of performance across massive amounts of content from everywhere.

And so this is what larger enterprises understand. So it's not that I often compare, and I'll close on that, I often compare AI engines to semiconductors. An Intel chip or a GPU is a very sophisticated piece of technology, but it remains, to a degree, a commodity. And it's a bit of a dichotomy to say that.

It evolves very quickly, but it's all the engineering you put around it to put it to use. And like software in the past, as I mentioned before, software is coming back to its actual application. What problem does it solve? And of course, it's AI, but how do you use AI with all the data to actually solve very specific intricate problems? And that's the emergence that we're seeing right now.

Investors over the past 2 years have flocked to the silicon layer and to the hyperscaler layer and then thought that everything, of course, would come from the major application vendors. But there's a whole emergence.

You're going to see a lot of emergence of the applied AI space, from reading your tumor image to personalizing your commerce experience, those are practical applications of AI that are specialized, and that's exactly where Coveo is.

There are no further questions at this time. I would like to turn the call over to Louis Tetu for closing remarks. Sir, please go ahead.

Well, thank you very much. As we said, we're very pleased with our momentum, and we look forward to speaking with all of you and to the quarter ahead and the year ahead, of course. And again, thank you for attending today. With that, operator, you can close the call.

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