Coveo Solutions Inc T.CVO

RBC Raise Target

[retiredcf]

Their upside scenario target is $20.00 GLTA

February 5, 2024

Coveo Solutions Inc
GenAI demand overpowers macro headwinds

Our view: Coveo reported Q3 SaaS revenue above consensus, raised FY24 guidance, and saw bookings growth reach the highest level in nearly two years. Despite macro headwinds, Q3 momentum reflects a strong pace of deals following the release of Coveo’s GenAI enterprise search offering in December. We believe GenAI is likely to help re-accelerate Coveo’s SaaS growth. Maintaining Outperform, raising price target to C$15.00.

Key points:

• Q3 revenue slightly ahead of expectations. Revenue was $31.8MM (11% Y/Y, ~16% excluding one-time Qubit churn), slightly ahead of RBCe/ consensus of $31.4MM/$31.2MM. SaaS revenue was $29.9MM (18% Y/Y excluding one-time Qubit churn), also marginally above RBCe/consensus of $29.6MM/$29.4MM. Adj. EPS was -$0.02, matching RBCe/consensus of -$0.02.

• GenAI wins fuel highest bookings growth in almost two years. Based on disclosed RPO, Q3 SaaS bookings rose 26% Y/Y, jumping from 4% Q2 and -20% FY23. The surge in new wins reflects general availability of Coveo’s GenAI offering on December 15 and conversion of early-access customers. GenAI accounted for 20% of Q3 bookings and Coveo signed >7 GenAI orders Q3, up from five last quarter. In addition to GenAI momentum, Coveo saw several new deals related to its SAP partnership, and bookings in Europe doubled Y/Y.

• Raised FY24 guidance reflects stronger than expected GenAI uptake. Last quarter, Coveo slightly reduced FY24 guidance given macro-related delays in closing new deals. Despite the sustained headwinds from macro, Coveo raised FY24 revenue guidance to reflect the stronger than expected new GenAI momentum. Coveo now sees FY24 total revenue at $125.6–126.1MM (12–13% Y/Y), up from $124.5–125.5MM previously, with SaaS revenue of $118.0–118.5MM (15% Y/Y) vs. $117.0–118.0MM previously. Coveo also guided to adj. operating loss of $7.5–8.5MM, an improvement from $9.5–10.5MM previously. We increase our FY24/FY25 revenue estimates to reflect the company’s strengthening growth.

• Growth likely to accelerate over coming year. We forecast Coveo’s SaaS growth to accelerate through FY25, particularly as new GenAI deal momentum is likely to continue and Qubit churn is likely to diminish through the year. We forecast Coveo’s SaaS growth to rise from 13% Q3/FY24 (Dec-23) to 25% Q4/FY25 (Mar-25). Coveo reiterated its target to achieve positive operating cashflow FY25; however, given new sales investments, we believe profitability is likely to remain modest. Our FY25 FCF forecast declines from $10MM to $3MM.

• A GenAI beneficiary trading at 4.2x sales. Coveo is trading at 4.2x NTM EV/S, below peers at 11x. We believe catalysts for valuation multiple expansion are: 1) re-accelerating RPO and SaaS growth; 2) visibility regarding new high-profile GenAI customer wins; and 3) sustained positive cashflow. We roll forward our target valuation from CY24e to CY25e; our revised C$15.00 price target equates to 5.8x CY25e EV/S (previously 6.3x CY24e).