Coveo Reports Second Quarter Fiscal 2024 Financial Results

SaaS Subscription Revenue⁽¹⁾ grew 15% year-over-year to $29.4 million

Reports second consecutive quarter of positive cash flows from operating activities and Adjusted Operating Loss⁽²⁾ well ahead of guidance

Coveo Relevance Generative Answering™ general availability expected

MONTREAL and SAN FRANCISCO – November 6, 2023 – Coveo (TSX: CVO), a leading provider of enterprise AI platforms that enable individualized, connected, and trusted digital experiences at scale with semantic search, AI recommendations, and GenAI answering, today announced financial results for its second quarter of fiscal 2024 ended September 30, 2023.

“It continues to be an exciting time for the company,” said Louis Têtu, Chairman and CEO of Coveo. “Since the launch of Coveo Relevance Generative AnsweringTM in the first quarter, we’ve seen promising results from early adopters within our existing customer base, including leading companies like Xero, as we move towards its general availability in December. Interest in our enterprise-grade generative AI offering continues to be high, and we believe we have a tremendous opportunity to capitalize on our proven, trusted, and leading AI platform to deliver significant value to our enterprise customers.” 

Second Quarter Fiscal 2024 Financial Highlights
(All comparisons are relative to the three-month period ended September 30, 2022, unless otherwise stated)

• SaaS Subscription Revenue⁽¹⁾ of $29.4 million compared to $25.5 million, an increase of 15%.
• Total revenue was $31.2 million compared to $27.9 million, an increase of 12%.
• Gross margin was 78%, an increase of 2%, and product gross margin was 82%, consistent with last year.
• Operating loss was $10.2 million, an improvement compared to $11.6 million, and Adjusted Operating Loss⁽²⁾ was $1.0 million, a significant improvement compared to $4.7 million.
• Net loss was $6.5 million compared to net loss of $9.9 million.
• Cash flows from operating activities were $0.8 million for the quarter and $1.8 million for the first 6 months of fiscal 2024.
• Cash and cash equivalents were $167.8 million as of September 30, 2023.
• The company completed the purchase of 3,706,194 of its subordinate voting shares (including 480,000 multiple voting shares on an as-converted basis) at C$8.50 per share under its substantial issuer bid (the “SIB”) launched May 30, 2023, for an aggregate purchase price of approximately $23.8 million (C$31.5 million). On July 17, 2023, Coveo also launched a normal course issuer bid (the “NCIB”, and together with the SIB, the “Repurchase Transactions”) to purchase for cancellation up to 2,559,247 subordinate voting shares of the company over the twelve-month period ending on July 16, 2024. During the second quarter of fiscal 2024 ended September 30, 2023, Coveo purchased for cancellation a total of 940,000 securities under the NCIB, for aggregate consideration of $6.7 million, and a total of 4,646,194 securities repurchased for aggregate consideration of approximately $30.4 million (C$38.2 million) under the Repurchase Transactions during the quarter.

Second Quarter Fiscal 2024 Business Highlights

• Net Expansion Rate⁽¹⁾ of 106% as of September 30, 2023. Net Expansion Rate was 111% excluding customer attrition from customers using certain deprioritized legacy Qubit product capabilities⁽³⁾.
• The company signed its first five order forms for Coveo's enterprise-ready Relevance Generative Answering™, an extension of its AI platform that combines Large Language Model (“LLM”) technology with secure indexing and AI relevance capabilities. Coveo Relevance Generative Answering™ is now live across Coveo’s own customer self-service experiences, and Xero also became the first Coveo customer to go live with the solution for self-service.
• Coveo and Caleres earned the Best Personalized Shopping Experience award at the 2023 Glossy Fashion Awards. Caleres, a global footwear company, implemented Coveo’s AI platform across its branded websites, enhancing the shopping experience with AI-driven search and personalized product recommendations. This significantly improved product discovery and boosted search-driven revenues, reflecting a focus on modernizing the digital shopping experience.
• Coveo won the 2023 Cyber Security Award for Most Innovative Digital Experience Cloud-Native AI Platform. Coveo's AI platform is designed to meet strict security requirements, including HIPAA, AICPA SOC 2 Type II, and ISO27001. This award reinforces Coveo's position as a trusted provider of secure generative AI solutions for enterprises globally.
• Customers named Coveo Best Enterprise Search Vendor for the third consecutive year in SoftwareReviews’ 2023 Emotional Footprint Report. The recognition reflects Coveo's excellence in customer satisfaction, with high ratings in respectfulness, efficiency, security features, productivity, client-friendliness, time-saving, and trustworthiness.

Subsequent Highlights

• Coveo announced more than 15 innovations to its platform, enhancing digital experiences across commerce, service, website, and workplace applications. These advancements solidify Coveo’s position as a leader and enable enterprises to excel in an ever-evolving digital landscape. These comprehensive updates comprise cutting-edge AI and generative AI models for better customer experiences and business outcomes. They expand interoperability with connectors and integrations, empower business users with modern UI frameworks, accelerate development with full-stack tools, and ensure enterprise-grade security and resiliency.
• Coveo announced early access to Coveo Relevance Generative Answering™ for B2B and B2C commerce enterprises, offering them an enterprise-scale generative answering solution for commerce. This innovation, part of Coveo's semantic search and AI recommendations platform, empowers customer experiences with AI-driven question-answering capabilities, fostering customer engagement and knowledge discovery in Ecommerce.
  
  

Financial Outlook

Following two consecutive quarters of positive cash flows from operating activities, the Company is ahead of its previous commitment to achieve positive operating cash flow in its next fiscal year (fiscal 2025).

These guidance ranges, including the timing to achieve positive operating cash flow, are based on several assumptions, including the following, in addition to those set forth under the “Forward-Looking Information” section below:

• Achieving expected levels of implementations and other sources of professional services revenue.
• Maintaining planned levels of operating margin represented by our Adjusted Gross Profit Measures(2) and Adjusted Gross Margin Measures(4).
• Expected financial performance as measured by our Adjusted Operating Expense Measures(2) and Adjusted Operating Expense (%) Measures(4).
• Stabilization of ongoing headwinds, including those related to economic and geopolitical factors, impacting sales cycles, pricing, and the ability to generate new business.
• Our ability to attract and retain key personnel required to achieve our plans.
• Similar foreign exchange rates, inflation rates, interest rates, customer spending, and other macro-economic conditions.
• Our financial outlook does not include the impact of acquisitions that may be announced or closed from time to time.

1. SaaS Subscription Revenue and Net Expansion Rate are Key Performance Indicators of Coveo. Please see
   the “Key Performance Indicators” section below.
2. The Adjusted Gross Profit Measures, the Adjusted Operating Expense Measures, and Adjusted Operating Loss are non-IFRS measures. Please see the “Non-IFRS Measures and Ratios”  section below and the reconciliation tables within this release.
3. Net Expansion Rate excluding legacy Qubit-related attrition. This customer attrition represents subscriptions of certain legacy Qubit customers using Qubit’s product capabilities for non-core use  cases that ultimately decided to not renew their subscriptions.
4. The Adjusted Gross Margin Measures, the Adjusted Operating Expense (%) Measures, and Adjusted Product Gross Margin are non-IFRS ratios. Please see the “Non-IFRS Measures and  Ratios” section below and the reconciliation tables within this release.

Q2 Conference Call and Webcast Information

Non-IFRS Measures and Ratios

Coveo’s unaudited condensed interim financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board. The information presented in this press release includes non-IFRS financial measures and ratios, namely (i) Adjusted Operating Loss;
(ii) Adjusted Gross Profit, Adjusted Product Gross Profit, and Adjusted Professional Services Gross Profit (collectively referred to as our “Adjusted Gross Profit Measures”); (iii) Adjusted Gross Margin, Adjusted Product Gross Margin, and Adjusted Professional Services Gross Margin (collectively referred to as our “Adjusted Gross Margin Measures”); (iv) Adjusted Sales and Marketing Expenses, Adjusted Research and Product Development Expenses, and Adjusted General and Administrative Expenses (collectively referred to as our “Adjusted Operating Expense Measures”); and (v) Adjusted Sales and Marketing Expenses (%), Adjusted Research and Product Development Expenses (%), and Adjusted General and Administrative Expenses (%) (collectively referred to as our “Adjusted Operating Expense (%) Measures”). These measures and ratios are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures and ratios are provided as additional information to complement IFRS measures by providing further understanding of the company’s results of operations from management’s perspective.

Accordingly, these measures and ratios should not be considered in isolation nor as a substitute for analysis of the company’s financial information reported under IFRS. Adjusted Operating Loss, the Adjusted Gross Profit Measures, the Adjusted Gross Margin Measures, the Adjusted Operating Expense Measures, and the Adjusted Operating Expense (%) Measures are used to provide investors with supplemental measures and ratios of the company’s operating performance and thus highlight trends in Coveo’s core business that may not otherwise be apparent when relying solely on IFRS measures and ratios. The company’s management also believes that securities analysts, investors, and other interested parties frequently use non-IFRS measures and ratios in the evaluation of issuers.
Coveo’s management uses and intends to continue to use non-IFRS measures and ratios in order to facilitate operating performance comparisons from period to period, and to prepare annual operating budgets and forecasts.

See the “Non-IFRS Measures” section of our latest MD&A, which is available under our profile on SEDAR+ at www.sedarplus.ca for a description of these measures. Please refer to the financial tables appended to this press release for a description of such measures and a reconciliation of (i) Adjusted Operating Loss to operating loss; (ii) Adjusted Gross Profit to gross profit; (iii) Adjusted Product Gross Profit to product gross profit; (iv) Adjusted Professional Services Gross Profit to professional services gross profit; (v) Adjusted Sales and Marketing Expenses to sales and marketing expenses; (vi) Adjusted

Research and Product Development Expenses to research and product development expenses; and
(vii) Adjusted General and Administrative Expenses to general and administrative expenses.

Key Performance Indicators

This press release refers to “SaaS Subscription Revenue” and “Net Expansion Rate”, which are operating metrics used in Coveo’s industry. We monitor such key performance indicators to help us evaluate our business, measure our performance, identify trends, formulate business plans, and make strategic decisions. These key performance indicators provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We also believe that securities analysts, investors, and other interested parties frequently use industry metrics in the evaluation of issuers. Our key performance indicators may be calculated in a manner different than similar key performance indicators used by other companies.

“SaaS Subscription Revenue” means Coveo’s SaaS subscription revenue, as presented in our financial statements in accordance with IFRS.

“Net Expansion Rate” is calculated by considering a cohort of customers at the end of the period 12 months prior to the end of the period selected and dividing the SaaS Annualized Contract Value (as defined below) attributable to that cohort at the end of the current period selected, by the SaaS Annualized Contract Value attributable to that cohort at the beginning of the period 12 months prior to the end of the period selected. Expressed as a percentage, the ratio (i) excludes any SaaS Annualized Contract Value from new customers added during the 12 months preceding the end of the period selected; (ii) includes incremental SaaS Annualized Contract Value made to the cohort over the 12 months preceding the end of the period selected; and (iii) is net of the SaaS Annualized Contract Value from any customers whose subscriptions terminated or decreased over the 12 months preceding the end of the period selected.

“SaaS Annualized Contract Value” means the SaaS annualized contract value of a customer’s commitments calculated based on the terms of that customer’s subscriptions, and represents the committed annualized subscription amount as of the measurement date.

Please also refer to the “Key Performance Indicators” section of our latest MD&A, which is available under our profile on SEDAR+ at www.sedarplus.ca, for additional details on the abovementioned key performance indicators.

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss
(expressed in thousands of US dollars, except share and per share data, unaudited)

Condensed Interim Consolidated Statements of Loss and Comprehensive Income Loss
(expressed in thousands of US dollars, unaudited)  

The following table presents share-based payments and related expenses recognized by the company:

Recononciliation of Adjusted Operating Loss to Operating Loss
(expressed in thousands of US dollars, unaudited)

(1)           These expenses relate to issued stock options and share-based awards under our share-based plans to our employees and directors as well as related payroll taxes that are directly attributable to the share-based payments. These costs are included in product and professional services cost of revenue, sales and marketing, research and product development, and general and administrative expenses.

(2)          These expenses represent the amortization and impairment of intangible assets acquired through the acquisition of Qubit. These costs are included in amortization and impairment of intangible assets. It includes an impairment of customer relationships acquired through the business combination with Qubit as described in note 5 of the condensed interim consolidated financial statements for the three and six months ended September 30, 2023.

(3)          These expenses relate to non-recurring acquisition-related compensation in connection with acquisitions. These costs are included in product and professional services cost of revenue, and sales and marketing, research and product development, and general and administrative expenses.

Reconciliation of Adjusted Gross Profit Measures and Adjusted Gross Margin Measures
(expressed in thousands of US dollars, unaudited)

Reconciliation of Adjusted Operating Expense Measures and Adjusted Operating Expense (%) Measures
(expressed in thousands of US dollars, unaudited)

Condensed Interim Consolidated Statements of Financial Position
(expressed in thousands of US dollars, unaudited)

Condensed Interim Consolidated Statements of Cash Flows
(expressed in thousands of US dollars, unaudited)