HIGHLIGHTS FROM INVESTOR MEETINGS; NEARING AN INFLECTION POINT?
THE TD COWEN INSIGHT
Last week, we hosted investor meetings with CFO Brandon Nussey. We remain bullish on its strong competitive position, but we are still cautious on the timeline for a re-acceleration in organic growth. However, with the shares trading at the bottom end of the SIB range (C$7.70-C$9.25) and at <3x EV/Revenue (C2025E), a >50% discount to the peer group, we believe the risk/reward is attractive.
Impact: NEUTRAL
GenAI...plenty of interest, plenty of caution. A common question we get on Coveo is why its growth is not (significantly) stronger, given it is an AI company. Key reasons for the slower growth are both internal decisions (e.g., planned Qubit-related churn, sales organization changes) and external dynamics out of its control (e.g., challenging macro and related sluggish enterprise IT spending).
As it relates to AI demand, there is no shortage of customer interest, and AI remains a top CIO priority. However, because GenAI is so new, and it has the potential to significantly disrupt industries, customers need help getting up the curve, evaluating a lot of different solutions, and doing a lot of testing/experiments to gain comfort with security, privacy, and data accuracy concerns. This is driving longer sales cycles.
We also note that most of the early GenAI spending has been on hardware/chips/ infrastructure, LLMs, and services, with spending on GenAI software (e.g., Copilot, CRGA) not expected to begin ramping until late this year and into 2025.
Management reiterated that it is seeing more customers moving past this testing phase and are ready to go live with CRGA in the near term.
Expecting stronger results with SAP. There have been some good early wins with SAP, but management is looking to drive stronger bookings. It has hired a new SAP partnership head in Germany, while it indicated that at the Sapphire conference, SAP stated that Coveo was one of a handful of partners it was doubling down on.
Focused on better S&M execution. Mr. Nussey stated that CVO needs to generate a better return on its S&M spend, which helped lead to changes in its sales organization (e.g., separate new logo and customer success teams, CRO departure).
S&M spend fell ~4% in F2024, but is expected to increase this year as it looks to drive stronger growth, particularly in four key areas, namely Commerce, GenAI/CRGA, customer upsell/cross-sell (~70% of customers are only using one use case), and international markets. However, if growth does not reaccelerate by the end of F2025, it may look to adjust spending levels to help drive stronger margins.