Coveo Solutions Inc. (TSX: CVO)
Outperform, C$13.00 price target
We expect Coveo to report Q2 revenue towards the high end of guidance, in line with consensus, given the company’s conservative guidance. Backlog (i.e. RPO) growth is likely to trough in Q2. We believe that backlog growth is likely to reaccelerate in 2H/FY24, given Coveo’s SAP partnership and new GenAI offering. Maintain Outperform rating, as Coveo is positioned to benefit from AI and is trading below peers.
Coveo is scheduled to report Q2 on November 6. Coveo is reporting Q2/FY24 (Sept-qtr) results on November 6, after market close. Conference call is scheduled for 5:00 p.m. ET. Dial-in: 1-888-664-6392; webcast: here.
Q2 revenue likely near the high end of guidance. Coveo provides conservative quarterly guidance; the company has averaged actual quarterly revenue 4% above consensus in the 7 quarters since its IPO. We expect Q2 revenue of $31.3MM (+12% Y/Y), in line with consensus and at the high end of guidance ($30.8-31.3MM). On operating leverage and prudent cost management, we expect adj. EBITDA of -$0.7MM, ahead of consensus (-$1.0MM), and up from -$1.8MM Q1. Similarly, we forecast adj. EPS of $0.00 (consensus at -$0.02), up from -$0.02 in Q1.
Forecast Y/Y SaaS revenue growth slows to 15% Q2 due to Qubit churn. Qubit churn is likely a >400-500 bps headwind to Q2 SaaS growth, up from 300-400 bps Q1. As a result, we forecast SaaS revenue up only 15% Y/Y, down from 19% Q1. We forecast Q2 SaaS revenue up 3% Q/Q to $29.3MM Q2, which is at the top end of guidance for $28.8-29.3MM and slightly above consensus ($29.1MM). Our estimate implies 14% Y/Y CC organic growth Q2, down from 20% CC Q1. FX is likely a 50 bps tailwind to Q2 revenue, compared to the 60 bps headwind Q1.
Backlog (i.e. RPO) growth is likely to trough Q2, with re-acceleration potentially 2H. Backlog (i.e. RPO) growth is likely to remain sluggish Q2 and likely flat with Q1 (i.e. -4% Q1), given churn of legacy Qubit customers (~300 bps headwind Q1) and macro uncertainty leading to smaller deal sizes. We believe that backlog/RPO growth may re-accelerate 2H due to deals from Coveo’s new partnership with SAP (announced March 2023) and potential conversion of GenAI pilots. 45 large enterprise customers are currently piloting Coveo’s GenAI solution, and general availability early CY24 implies new deals are possible Q4/FY24 or sooner. Notably, customer Xero has already launched a beta version of Coveo’s GenAI solution.
Peer Elastic reported Q1 revenue above consensus and raised FY24 guidance. On August 31, enterprise search provider Elastic (NASDAQ: ESTC) reported Q1/FY24 (July-quarter) revenue increased 17% Y/Y to $294MM, ahead of consensus at $285MM. Q2 guidance for $303- 305MM revenue was also slightly ahead of consensus at $302MM. Elastic raised the low end of its FY24 revenue guidance to $1,242-1,250MM from $1,238-1,250MM previously, with the mid-point ahead of consensus at $1,243MM. On the conference call, management highlighted that the macro has been “stable” Q/Q and expects macro conditions to remain “unchanged” moving forward. Elastic is seeing “increased engagement” with customers regarding GenAI.
Anticipate Coveo to reiterate FY24 guidance. We believe Coveo is likely to continue to provide conservative guidance. We expect Coveo to guide to Q3/FY24 (Dec-qtr) total revenue of $32.3-32.8MM (14% Y/Y mid-point) and SaaS revenue of $30.1-30.6MM (+15% Y/Y mid-point), bracketing consensus at $32.5MM and $30.4MM, respectively. We see SaaS growth re- accelerating Q4/FY24. On new sales investments, we expect adj. operating loss guidance for - $3.3MM to -$3.8MM, bracketing consensus at -$3.4MM. We believe the company is likely to reiterate FY24 guidance for SaaS revenue of $118-120MM (16% Y/Y mid-point), total revenue of $127-129MM (14% Y/Y mid-point), and adj. operating loss of $11.5-13.5MM.
Net cash to decline on share repurchases. We forecast -$4.7MM operating cashflow Q2 down from $1.0MM Q1 on seasonal working capital outflows (~$6MM Q/Q headwind). After nominal capex, we estimate FCF of -$4.9MM compared to $0.9MM in Q1. During the quarter, Coveo repurchased 3.7MM shares through its substantial issuer bid (average price of C$8.50, C$31.5MM total capital deployed). As a result, we anticipate Coveo’s net cash position to fall to $162MM ($1.56/share) down from $190MM in Q1.
Maintain Outperform rating. We believe Coveo provides investors with a compelling long- term growth opportunity. Coveo is only trading at 5.0x CY24E EV/S, below peers at 8.3x. We believe catalysts for valuation multiple expansion are: 1) re-accelerating RPO and SaaS growth; 2) visibility regarding new high-profile Gen AI customer wins; and 3) improving profitability