Q2/F25: SOLID BEAT; F2025 GUIDANCE TWEAKED; CRGA GAINING STEAM
THE TD COWEN INSIGHT
Following the 14% surge yesterday ahead of the Q2 release, we think the stock could take a pause despite the solid Q2 beat, as a tweak to F2025 guidance could be viewed as slightly negative, despite it still being in-line with consensus. We reiterate our BUY recommendation; we think growth bottomed this quarter and is poised to rebound toward historical levels.
Impact: MIXED
Solid Q2 performance. Revenue of $32.7mm and SaaS subscription revenue of $31.2mm were both in-line and slightly above guidance. SaaS subscription revenue (excl. Qubit) grew ~11% y/y and 4.4% q/q (its best q/q performance in a year).
Another big Adjusted EBITDA beat. Adjusted EBITDA of $1.5mm was well above guidance/ expectations, aided by the higher revenues and ongoing cost optimization work. FCF was $0.6mm, with net cash of $120.2mm following the C$50mm SIB.
Q3 guidance a bit below consensus, F2025 tweaked. Q3 guidance was in-line with our forecast but was a bit short of consensus. F2025 guidance was reiterated, but it now expects to achieve the low-to-midpoint of the range, which is still in-line with us/consensus. However, CVO indicated that it has a lot of activity that could still allow it to hit the high end of guidance.
CRGA adoption nearing a tipping point? CRGA live customers grew >50% q/q from 30 in Q1 to ~45-50 in Q2. Many are new customers (CVO had its highest quarterly new logo wins in 2 years) and its roster includes many blue-chip companies including Nvidia, Philips, PwC, Adobe, and Pfizer (see Fig. 4).
CVO is seeing an inflection point, as more customers move beyond extensive experiments/ testing to live deployments, which is helping drive stronger bookings that is expected to strengthen further in H2/F25. CRGA represented >25% of new bookings in Q2, up from 20% last quarter.
Growth has likely bottomed. After a couple of difficult years on the growth front due to internal/external challenges, we think organic growth is finally set to start re-accelerating next quarter.
Aided by improving demand conditions and increasing CRGA adoption that is driving strong momentum in bookings and a pickup in current RPOs (3.2% q/q growth; highest in 6 quarters; see Fig. 3), we think Coveo's core platform growth is set to strengthen, with F2025 guidance implying mid-teens organic growth in Q4/F25. We think organic growth can get to >20% in F2026, helped by easier y/y comps but also recent GTM changes and increased contribution from its partner channel, including a re-engaged Salesforce, SAP, recently added AWS and Shopify, and priority investments in SIs.
Coveo has continued to be at the forefront of the AI-driven search/recommendations market, driving new innovative solutions on a timely basis, including its newest GenAI solution, Coveo Relevance Generative Answering (CRGA). Leveraging its 10+ years of AI experience, we believe the company is well-positioned to benefit from the expected strong demand for GenAI solutions, as CRGA addresses key customer concerns about deploying GenAI in their businesses with its solutions targeting many early use cases (e.g., customer service). We expect organic revenue growth to re-accelerate and for Coveo to generate stronger Adjusted EBITDA and FCF in the coming years, while its large cash balance provides significant financial flexibility, including on the share buyback and M&A front. However, we believe concerns about pre-IPO investor Elliott Management selling the rest of its shares could remain a key (near-term) overhang.