Q1/F25 PREVIEW: LOOKING FOR THE LIGHT AT THE END OF THE TUNNEL
THE TD COWEN INSIGHT
Similar to past quarters, we expect in-line to better-than-expected Q1/F25 results. We believe the focus will be on the Q2/F25 guidance and any changes to F2025 guidance, particularly for revenue/SaaS subscription revenue, as investors try to gauge the trajectory of an expected rebound in organic growth. With the SIB completed, we believe an Elliott- related overhang could limit (near-term) upside.
Event:
Q1/F25 Results: Wednesday, August 7, 2024, after market close. Conference Call: 5:00 p.m. ET (Dial-in: 1-800-836-8184; Webcast: Link). Impact: NEUTRAL
In-line revenue forecast; Adjusted EBITDA slightly above. Our $32.2mm Q1/F25 revenue estimate is in line with consensus. Including our $30.4mm SaaS subscription forecast, our revenue estimates are also in line with guidance. Driven by the expected higher Qubit- related churn and to a lesser extent the soft bookings last quarter, organic growth is expected to further decelerate into the mid-single digits.
Our Adjusted EBITDA estimate of ($2.0mm) is modestly ahead of guidance/consensus. Aided by solid cost-optimization work, Coveo has consistently beaten guidance/consensus on Adjusted EBITDA since its IPO, often by wide margins. Partly due to higher seasonal (HR- related) expenses and the elevated Qubit-related churn, Adjusted EBITDA is expected to turn negative in Q1/F25, but turn back positive in Q2/Q3.
Rebound expected in H2/F25. We expect organic growth to remain in the mid-single digits in Q2/F25 before seeing a stronger rebound in H2/F25. This is consistent with CVO's F2025 outlook, specifically ~11-15% y/y organic growth on its Coveo Core Platform (excluding Qubit), which would imply core platform organic growth reaching at least the mid-teens in Q4/F25.
The brighter H2/F25 outlook is aided by an expected increase in bookings from CRGA and its SAP partnership. AI continues to be a major focus for SAP. In its Q2/24 results, SAP stated AI had a direct impact on its bookings and in every ERP and LOB deal closed. Also, ~20% of all deals in Q2/24 included premium AI use cases (more details in TD Cowen's take here).
New CRO should help deliver stronger sales growth. Last week, Coveo appointed John Grosshans as Chief Revenue Officer, effective immediately. At Palo Alto, he led global
sales for its cloud native security solutions. Our partner, Shaul Eyal, who covers Palo Alto Networks, believes that Mr. Grosshan's departure from Palo Alto is a notable loss, given his extensive experience and track record.
More details on the new CRO. Mr. Grosshans joins Coveo from Palo Alto Networks, where he was CRO and SVP, Prisma Cloud, and he has >30 years of global sales management experience in numerous SaaS verticals, including senior executive positions at AWS, Oracle, SAP, and Avaya. His strong track record includes leading companies to >$1bln in revenue in four instances, leading global sales teams of >600 people across all go-to-market functions, and playing a key role in nearly 10 acquisitions. One of those instances was Prisma Cloud, which is Palo Alto’s second largest division with >$1bln in ARR and is expected to be its main growth driver and engine.
We believe Mr. Grosshans should also be able to leverage his experience selling to large enterprises (Coveo’s focus) and strong partner/SI relationships.
Google reverses its decision to phase out cookies. Earlier this week, Google announced its plan to keep third-party cookies in its Chrome browser, following years of pledging to phase them out. The company now intends to offer users the option to enable or disable cookies.
Although cookies enable companies to learn more about visitors to their site and thus allow them to provide some personalized experiences, Coveo’s AI-driven relevance platform allows customers to provide an even more customized experience, even if the visitor opts out/turns off the cookies setting. Management does not believe this development will have a material impact on its Commerce business, and neither do we.