Coveo Solutions Inc T.CVO

RBC

[retiredcf]

February 8, 2024

Coveo Solutions Inc
On the road with management

Our view: We hosted investor meetings with Coveo’s Chief Business Officer, Nicholas Goode, and Head of IR, Paul Moon. The meetings increase our confidence that Coveo is likely to see sustained strong bookings momentum over the coming quarters, despite macro headwinds, which is likely to translate into stronger SaaS growth 2H/FY25. We believe high- profile customer wins and re-accelerating growth would lead to an upward valuation re-rating of the stock. Maintain Outperform, C$15.00 price target.

Key points:

• GenAI appears likely to drive an inflection in growth. The magnitude of the upswing in bookings Q3/FY24 (highest in two years) appears to have surprised management, as the company raised FY24 revenue guidance just one quarter after lowering it due to macro headwinds. We believe Coveo's bookings momentum is likely to continue to rebound as: 1) the company sells its GenAI offering into its install base; 2) its partnership with SAP ramps; and 3) new customer interest rises as a result of increasing awareness for Coveo's GenAI offering.

• First mover advantage. In only two quarters since the beta of its GenAI offering in June (generally available in December), Coveo has signed more than 10 enterprise GenAI deals, with 4 already live. Early feedback is positive, as customer Xero disclosed 20% additional case deflection and 40% reduction in customer search time. Coveo indicated its GenAI offering is outperforming competitors (primarily homegrown, platforms) during customer testing. Coveo's fundamental competitive advantage is the accuracy and relevancy of its enterprise search technology.

• GenAI flywheel. Coveo has experienced solid pipeline growth over the last several quarters. As more customers go live with Coveo’s GenAI, we believe sales cycles may shorten and conversion rates may increase, improving bookings momentum. While service is the primary GenAI use case, commerce is an emerging opportunity. The company is already testing its follow-up question feature, which further improves functionality and may allow Coveo to encroach on the chatbot market.

• Increased investments, SaaS growth rebound appear likely 2H/FY25. In light of the GenAI growth opportunity, Coveo is planning to increase new sales investments, but is still targeting slightly positive cashflow in FY25. Due to one-time legacy Qubit churn and the ratable nature of SaaS revenue, SaaS growth is likely to remain depressed 1H/FY25, but then ramp 2H/FY25. Our estimates call for SaaS revenue growth to increase from 16% 1H/FY25 to 25% 2H/FY25. Management appears to be open to disclosing other metrics to help investors quantify the company's growth momentum.

• A GenAI beneficiary trading at 5.3x sales. Despite the rally since Q3 results, Coveo is only trading at 5.3x 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. Our C$15.00 price target equates to 5.8x CY25e EV/S.