Anticipate backlog (i.e., RPO) to continue to rebound. SaaS backlog (i.e., RPO) growth has been muted in recent quarters due to longer sales cycles. While customer interest is high, enterprises are taking time to test and evaluate GenAI, particularly with respect to compliance, data security, hallucination risk, and ROI. Consequently, customers have been slow to move from experimentation to full deployment of solutions. We believe Q1 backlog (i.e., RPO) is likely so show moderate improvement on a sequential basis, potentially improving relative to Q4 (+1% Q/Q) and Q3 (+2% Q/Q). Factors sustaining the bookings rebound include: 1) uptake of Coveo’s GenAI offering into its install base; 2) ramp of Coveo’s partnership with SAP; and 3) new customer interest in Coveo's GenAI offering. Coveo has 75 ongoing GenAI customer projects as of last quarter, which is significant relative to the company’s customer base (>650 enterprise customers).
Q2 guidance likely to show sequential improvement in SaaS growth. For Q2, we expect guidance for total revenue of $33.4-33.7MM (7% Y/Y mid-point) and SaaS revenue of $31.2- 31.5MM (7% Y/Y mid-point), bracketing consensus at $33.0MM and $31.2MM, respectively. We expect Q2 adj. EBITDA guidance of -$0.3MM to +$0.3MM (consensus at +$0.2MM). Coveo is likely to reiterate FY25 guidance for $133-138MM revenue, $126-130MM SaaS revenue, and adj. EBITDA of $0.0-4.0MM.
Likely Q1 adj. EBITDA is slightly negative on seasonality. In the last two years, Coveo’s profitability has been the lowest in the first quarter of the year, due to the seasonality of expenses. We expect a similar trend this year. As a result, we forecast adj. EBITDA to drop to - $2.2MM Q1, down from $0.2MM Q4, though at the high-end of guidance for an adj. EBITDA loss of $2.2-2.7MM. We believe that Coveo’s profitability will improve through FY25 as new bookings convert and drive increased revenue, along with restrained spending. According to LinkedIn, Coveo’s employees fell 2% Y/Y to 763 in Q2, which is similar to -2% Q1 and compares against a TTM average of -1%. Due to working capital (est. $4MM tailwind Q1), we forecast $4MM operating cashflow Q1, down from $5MM Q4, but up from $1MM Q1/FY24. After $0.3MM capex, our outlook calls for $3.5MM free cashflow, a decline from $4.5MM Q4, but an improvement from $0.9MM Q1/FY24. As a result, we forecast net cash to increase to $160MM Q1 ($1.56/share), up slightly from $157MM Q4.
Coveo’s SIB was over-subscribed, pushes valuation back to near all-time lows. On July 12, Coveo announced that it had repurchased 6.5MM shares at C$7.70 under its substantial issuer bid (SIB). The aggregate purchase price of C$50MM is the maximum available under the SIB. This equates to 6.2% of total shares outstanding on a non-diluted basis. Coveo's SIB was oversubscribed, with 30.1MM shares tendered, largely due to 23.7MM shares from a single tender. On a pro forma basis, as a result of the SIB, we expect Coveo’s net cash position to drop to $123MM Q2 ($1.19/share). The decline in Coveo’s share price since the announcement of the SIB reflects concerns that Coveo’s largest shareholder may continue to sell shares. Coveo is now trading at 2.5x NTM EV/S, well below peers at 8.7x and its historical average of 3.5x (range 1.8-5.4x); valuation is now within 0.7x of Coveo’s all-time historical low.
A Gen AI beneficiary trading at 2.5x sales. Coveo provides investors with a compelling long- term growth opportunity. The stock is trading at 2.5x EV/S, below peers at 8.7x. 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.