ChargePoint Holdings, Inc. (CHPT) Earnings Call Transcript & Summary

Good morning, everybody. We are -- well, first of all, thank you so much to everybody for participating in this event today, companies and investors. We're hosting the Piper Sandler EV Charging Day, where our goal today is to just educate ourselves and investors and clients about the subsector, learn about competitive advantages, hopefully, learn about the growth opportunities and figure out if there are some ways that we can all make some money. So with that, I'm pleased to introduce Pasquale Romano, CEO of ChargePoint; and Patrick Hamer, Head of Capital Markets and IR here. Thank you guys so much for doing this. We really appreciate it. Pat, if you could please just provide just a brief introduction of yourself, your company, your business model to get us started, then that would be great.

Which Pat?

Pasquale. Yes, you.

There's 2 of us unfortunately or fortunately, actually, Pat, I don't hold a candle to Pat. So first of all, thank you for having us, Kashy. I really appreciate being here to just spend a little time with folks in this forum to talk about EV charging. ChargePoint is a 15-year-old company. Very early in the space, we actually -- the company was actually started before the first EV shipped. So we've seen the entire market unfold. The company focused from the beginning on the business model that it currently has at its core, although it's evolved its go-to-market quite a bit in terms of variations on a theme with respect to offerings. You've seen even as recently as last week or the week before when we made the announcement with Goldman Sachs Renewable Power, which is another path to market, another way to engage effectively with our products and services at ChargePoint. So we just keep adding to the mix in terms of the engagement model. But the core of it is based on a couple of fundamental tenets. First of all, when you transition from an electric -- from a gasoline vehicle to an electric vehicle, the fueling model changes and the reason that it changes is because you don't have the constraints of liquid fuel. That's the key is to understand that electricity is pervasively and safely distributed everywhere. Gasoline can't be stored safely and dispensed safely everywhere. It's an environmentally controlled dispensation system that we've developed in the globe to support the last 100 years of transportation on gasoline. So it's very easy to get stuck in the mental model of mapping on a one-to-one basis, gasoline fueling with electric fueling. So that's the first tenet of ChargePoint is, hey, you don't have that constraint anymore to rethink it. The second big pillar to consider is that vehicles are one of the poorest investments we all make as consumers, they're 96% of the time parked, only 4% utilized. They're exactly the asset that in business school you're thought not to invest in. So dramatically underutilized asset that has depreciation characteristics that are not great. But we need it. So we've all conditioned ourselves to just look the other way and do this. But because they're parked and electricity is pervasively distributed you're going to onboard most of your fuel while you're parked. Now I'm sure we'll get into this, Kashy. So I don't want to get into too much in the introduction here, but I wanted to kind of set up the conversation on our business model because what we recognized from the beginning are those 2 critical facts. And as we've evolved our business model, we've evolved it in the direction of enabling every parking lot out there to be a place you can onboard fuel while you're doing something else because in the world of EVs, you don't have to go somewhere to go somewhere. You don't need that gas station anymore, unless you're going beyond your battery range, and that's a key. I'll pause there.

Well, you've sort of -- in your -- well, first, thank you for the introduction, you sort of combined my first question with my next question, which is, to your point, all -- most of us or all of us are used to the traditional internal combustion engine model or used to the fueling infrastructure of the 20th century, right? And so maybe help us out with your vision, fast-forward 10, 20, 30 years, how do you think infrastructure for electric vehicles develops within the U.S.? How do you think this business -- how do you think the infrastructure evolves?

Yes. So I think it's interesting wherever a media gathering at ChargePoint tomorrow, and I've got some prepared remarks for that. And I draw some analogies in my prepared remarks, and I'll give you a little preview because I don't think anyone here is going to be there. But the...

It's recorded. So...

I know. I know. There's no announcement here, Kashy, so we're fine. If you remember the days of BlackBerries, which the financial community has only recently transitioned off of. The days of the BlackBerry were such that everyone assumed because they had spent so long with a little plastic keyboard that, that was just what you had to have on a phone until you realize that there was a shift, a fundamental shift to the Internet in your pocket, and then all of a sudden, we said, well, we're fine typing on little screens because we get so much more out of it. The gas station is a perfect analogy to the [indiscernible] keyboard on your BlackBerry. It's what you assume you're always going to need until you see the next thing. So what consumers tell us when they drive an EV is the minute, a couple of days into driving an EV, this is liberating. I don't need to have this chore in my life of going somewhere a gas station to go somewhere, wherever I want to go. I don't have this extra chore every 5 days. And by the way, you're a little yellow lights on, always on the most inopportune times, you're late for a meeting, et cetera. So what's interesting is that I don't think driver behavior -- EV driver behavior, I should say, is going to evolve that much because it's already -- they've already told us over the last decade, EVs have been out there for a decade. They've already told us over the last decade, what the preferred fueling model is. A lot of it is going to come in while your sleep, a lot of it is going to come in while your parked at work, assuming -- and work will change, but you'll still spend a good amount of time in and out of the office and employers are going to offer that as an employee benefit. By the way, it's about the cost of giving you coffee for your employer. So it's a weigh down on the Pareto list of employee benefits. And by the way, it has outsized ESG alignment with employee bases. So employers really are keen on engaging their employees in that dimension. It's a lot -- it has a lot more impact than a yoga instructor and free sandwiches in the cafeteria from just an alignment for good between businesses and their employees. And then you've got all the retail establishments, city parking, et cetera, where you're going to be basically occupying your time around town, topping up your car like a phone is exactly what EV drivers have been telling us over the last decade, we have all the data that hasn't really changed. Battery sizes have evolved, but the data hasn't really changed in terms of behavioral contents, and we don't expect it to change much on a go-forward basis. Everyone is enamored with how do we get back to the gas station. And my question is why do we want to and EV drivers are saying exactly that to us over the last decade. We don't want to go back to that model. When you're driving beyond your battery range, it's critically important to be able to onboard fuel quickly. It's critically important. And you'll see some things that we're doing here, the GSRP announcement is just one element of it, to make that fueling and convenience sector enabled to support the EV population when they're driving beyond their battery range, critically important. So fast charge has to be fast in that setting. But in all other settings, just onboard while you're doing something else. That's the key. And that's where it's, I think, Kashy, is going to continue to go. It's not going to change. It's going to continue to evolve just as it has evolved over the last 10 years.

That's super helpful color. So if I could summarize, if we're thinking about, say, the city of Houston or New York, you're basically saying home charging, workplace charging and then a few in retail and then for city to city, intercity driving, then you need -- that's where you really need the in-store retail model?

Yes, you really need -- Yeah, you need, and it changes a little bit. So there's some fundamental physics about EV charging and batteries. It's not going to get to 5 minutes or less, which is how long the gasoline pumps go at about close to 20 gallons per minute. So they're pumping quite a bit of fuel in your fuel tank quite quickly. It's not getting there because that would -- the equivalent there is about a 2-megawatt power level per port, which if you have an 8 pump gas station and just converted it, assuming you could apply 2 megawatts consistently to a battery and not wear it out and have it actually accept that for its whole charge cycle, all of those things are very far in the future. And I question whether we ever need them to go into that direction. But if you could do that, you would need 16 megawatts in an 8-port station on a peak basis. And so if you consider what you would need from a substation infrastructure perspective, just to get back to a model that we don't care about, right? We don't want to go -- why do I want this chore. I can onboard it while I'm sleeping, while I'm working, while I'm shopping, while I'm doing other things. So if you can reduce it to just the long-haul driving problem set, it's about 10% of the fuel and far less than 10% of the stations, but it's about 10% of the fuel. And that data is not just ours. That data is coming from auto manufacturers, et cetera, we're all seeing that the fast charge fuel amount over a long term is about 10%.

Got it. Okay. Well, maybe one final macro question before we get into the company-specific stuff. Everyone broadly acknowledges that EVs are the future and depending on who you believe will have 20 million, 30 million, maybe more than 30 million electric vehicles on the road over the next 10 years based on your interactions with the utilities and what you see on site after these EV chargers are installed, do you get the impression that the electric grid is ready for all this? Or do you think that a lot more money needs to be -- or a lot more capital needs to be deployed on the actual electric grid to enable this coming EV revolution?

So let's unpack that a little bit. It's an important topic, I think, to just clear the fog around. First of all, regardless of EV charging or not, the grid needs some upgrades. It's a modernization. It is not how should we compactly say this. It is not digitally monitored and maintained in a [ 21st 3-way ] right now in the United States, especially. And so it needs that level of upgrade, it needs to make sure -- we need to make sure that we're cybersecurity protected, all those sorts of things. So those upgrades need to happen. With respect to the rate at which we need to build and change the distribution and transmission infrastructure. It's a nonissue relative to EVs, relative to EV. So I'm going to a couple of points to support that. And by the way, I was at a dinner recently with several notable utility CEOs and the general consensus was this isn't a problem. And the reason that it's not a problem is a couple of things. First of all, we are in a precipitous load decline situation on the grid for the last -- over the last decade. We've seen load due to energy efficiency improvements decline. Now we have a couple of things that are on the minds of most utilities in that we are transitioning transportation, which is a lot of energy. But that's going to take over 20 years. Your own statistic 20 million to 30 million EVs on the road that's less than 10% of the cars and light-duty trucks on U.S. roads. So everyone focuses on the new car sales rate. It's really great that it's penetrating into new car sales as fast as it is, but we're very happy with that. But even if 100% of EVs tomorrow were sold is -- 100% of cars tomorrow were sold as electric, it's a 20-year change-out cycle. 15 million to 17 million cars sold a year, divide it into 280 million, you get around 20 million, right? So it's not a fast change out cycle. You've got load decline. Yes, you've got transportation moving energy in, but it's being eroded -- that energy increase is being offset by the continuous energy efficiency. And then you have one more thing that's also flipping from fossil fuel generally to electricity over time, and that's heating, air conditioning has been there, but heating will likely move in the direction of heat pumps. So that will move some additional load, too. It's not as bad as transportation load, but it's the other factor. So the 2 growth forces in the electric rate are transportation and heating, and the rest of the grid is eroding with respect to load just because we're getting a lot better at making the things we have used for 100 years, more efficient: LED lighting, the insulation, green building with better windows, et cetera, all these things are improving things. So we don't need to build much transmission infrastructure, distribution infrastructure at the front end of the cycle. It's such a slow moving variable that if we have some rearrangement to do, we've got plenty of time to do it. We do need to streamline permitting things around utility rearrangement and upgrades because there's going to be a lot of electrical contracting activity to basically get the endpoints positioned for charging for electric vehicles. So there's some policy streamlining we have to do, but that's easier and then there's the labor element with respect to getting enough trained electrical contractors, so looking at the source of supply of labor and really streamlining the certification process because these are good paying jobs. So we're going to be creating a lot of good paying contracting jobs. And if you ask me, which of the 2 things I'm more concerned with, the condition of the grid doesn't keep me up at night in general or having enough trained electrical contractors 10 years into this thing to deal with all of this, it's not just EV charging, that's the bigger issue is getting the labor force reorganized.

That's helpful context. So maybe digging it more specifically into ChargePoint. I want to start on -- I want to start on the GSRP agreement from last week and your broader go-to-market strategy as well. Obviously, -- first off, maybe walk us through the GSRP agreement. Why did you enter the deal? Maybe help us with some quantification or some implications to your business? Are you open to more deals? Just maybe give us the elevator pitch on this GSRP deal and why it's important?

Yes. So we've been -- so let me zoom back actually. So I think all companies have to go through an analysis and a bit of self-evaluation as to how they want to serve a market, and we've decided and have not come off this position that we want to serve the market as a technology company providing network licenses to our biggest value-add our software systems and chargers. But we want to stop short of owning assets because that's completely return on assets model that's completely different company. The way it accesses capital is different, the way that it's measured financially is different. That's big balance sheet, project investing. It's a very different, a very different animal. But we have to look at that world and say, how do we service it and how do we partner with that because we don't want to become that, but we respect the need for that. And so how do we partner with an organization of a financial institution, et cetera, that is focused on project investing in particular and is willing to take the leap into EV charging to essentially enable the fueling and convenience sector. You saw most -- and its unlinked, but you saw the Starbucks-Volvo announcement that was also made a couple of weeks ago. That's a perfect candidate for this. As you go to a fueling and convenience brand, well, in that case, not a fueling brand currently, but one that could be a fueling brand of tomorrow. And you, you give those brands in a capital-light way, a balance sheet-light way of getting into the market, but not losing their brand control or their ability to tie that in with their customer loyalty systems and the way that they want to engage their customers and every brand has their own vision for that. And so what we provide is the glue, right? So our software systems have the APIs necessary for brands like Starbucks, for example, to integrate their mobile environments. We're connected to the car because we're powering a lot of [indiscernible] systems, API integrations with auto OEMs. So we can glue the feeling and convenience brand to the vehicle over time. That's our vision there to basically create an amenity-driven navigation system that allows you in the EV world to pick what you want to do while you're refueling on that long trip, right, not stop short and just tell you where you can refuel, but tell you what you might want to do to allow you to bias your decision based on what you might want to do. If you have your kids in the car, it might be in and out burger. If it's just you or you and your partner, you may want a Starbucks, maybe you need to just reload some bottled water and you need a convenience store. You want to basically have an amenity-driven system to enable you to do that. And what GSRP does is it gives us 2 anchors, 2 engagement abilities to do this. And I think it's the first, but it won't be the last of this kind. One is totally owned and operate on the part of GSRP for qualifying sites that are going to have the utilization to make this all pencil. And -- but it stopped short of putting the GSRP brand. They're not trying to create a fueling and convenience brand, they're just trying to profit from fueling, right, using their business model. So imagine now if you're fueling a convenience brand and someone comes to you and says, "Hey, look, I'll do the whole thing for you at these sites. I'll do the whole thing for you. You can put your -- work with ChargePoint, you can integrate your loyalty system, you can put your brand on the stations. We can make this look just like pick your fueling and convenience brand, your brand out there to the driver. We'll cover the whole thing. Construction, everything. We'll set the price. We'll build -- through ChargePoint, we'll build the drivers. And the driver is not aware that this is not your fueling network, but we're just going to enable all that for you". That's one model. I think super powerful in the early days. And by the way, combine that with federal and state level grant money and now you can lever that money up. So you've got a very powerful engagement model right there. The other option is, hey, if you want to set the price because you want to subsidized energy in order to have the crossover business at the site, be more enabled by that. So you want to make your money on a $7 coffee and not a $7 charge, because one side is more profitable than the other or one has a better fit for how you want to engage your customers, then go ahead, we'll finance the whole thing, you'll have a fixed payment. It's balance sheet-light for you, you can get into the game and you can also take those 2 and mix them in a portfolio. So some sites that have enough traffic to justify the utilization can be done purely in the owned and operated model from GSRP. Some could be done on the finance model, you can mix the 2. And then finance model, we're also taking into fleets. I know we haven't talked much, Kashy, about fleets, but we're taking that into fleets as well, they can fully finance the infrastructure. So again, stay very balance sheet light. And if you think about a lot of delivery service providers out there that are subcontractors to the big delivery giants. That's a very easy way for them to stay balance sheet light as well. I mean they have the counterparty credit. So there's a lot of really interesting pull forward, we think, in the deployment of this infrastructure that right now doesn't have the utilization to really get people off the sidelines. And I think this is where fueling and convenience goes. This gets those brands off the sidelines, and that's what's so important about this.

So -- and we're -- we only have a few more minutes left. And so I need to get my last question to kind of pack in a significant amount of thoughts. But -- you just talked about a pull forward. So then is the implication here that, that calendar '24 free cash flow target is biased a little bit sooner because of this pull-forward because of this agreement with GSRP. And then maybe more broadly just beyond financial targets, one of the things, I think, that a lot of people wrestle with is differentiation and competitive advantages within the sector. So if you could tie in the implications of GSRP to long-term financial targets and then maybe even beyond that, talk about what you see as your competitive advantage within this sector and how that positions you well over the next 10 years? If you can bring as a whole in with that question then that would be great.

So how much pull-forward we get remains to be seen. And remember in my opening remarks, the fueling and convenience sector while focused on fast charge, which has a higher ASP per port. So there's a lot of -- it's more -- it's only 10% of the fuel. It's more than 10% on a revenue basis because the ASP per port is much higher, but it's only 10% of the fuel that's going to come into your vehicle. And there's also a geographic coverage element you need to color on the map appropriately with way points so you can drive from point A to point B. So it's a little bit more complicated to do an analysis of that. How much pull-forward we're going to get that isn't already baked into our model remains to be seen. I don't have enough acuity to be able to say, honestly, to anyone, you or anyone in the audience that this is going to dramatically change the profitability horizon of the company. I just don't have enough acuity to see it because I can't tell. Well, it remains to be seen. And as we get into it, we'll see how much pull-forward in engagement we actually get. So that's one. Your second question was related to differentiation. So the biggest thing we think that's a differentiator for ChargePoint is where everywhere the drivers go. And we believe that you need to be everywhere the drivers go. You can't focus purely on one segment because drivers can't have a relationship with too many entities. Just look at the things that we all use, Kashy. Let's take ridesharing. How many ridesharing apps can you have on your phone before it's like, what am I going to do check 6 apps after dinner to see which is going to give me the best price for the fastest arrival rate of -- you just don't you just pick 1 or 2, and that's where you're relying on. We roam with everyone. So even though we have very large market share in North America, you can access anyone's chargers that we roam with and we run with the bulk of the networks out there. So a driver can stay in the ChargePoint app. We're powering the systems. We're plugged in tightly into the ecosystem. We're a 15-year-old company. It's completely software-driven. So that's where the stickiness is coming from, Kashy, is once you basically plant a charger in a parking lot, you expand with that company, that company -- if that company is providing new software. This is not a hardware game. Hardware is a component of it, but it is not a hardware game. We do not sell hardware without our network. So once the company makes a decision to go a ChargePoint, they're not going to have 5 networks in their parking lot. They couldn't administer, a driver would get confused when they walked in which app, which thing do I need to use to access which station. They would have to administer access policy, pricing policy, hours of operations policy, energy management policy on N different networks in the parking lot. So once you go with a network, it's like having an ERP system decision. You're staying with that network unless they're not servicing you appropriately and then you wholesale or place that whole network that's in your parking lot. So the stickiness is there, the cross-segment leverage is there, right? The integration into the ecosystem, if you look at even some of the things we've announced recently with [ VAT ] on the fuel card side, not that long ago, we made that announcement. With, as I mentioned, all of the things we're doing in Dash systems plus Android Auto, plus CarPlay, plus Google car, plus any number of other things that we're plugged into that network effect pulls businesses to ChargePoint because they know ChargePoint is integrated with everything that drivers that want to access that infrastructure in their parking lots might need. And that's the key. There's a lot of network effect and a lot of differentiation there.

Great. That's super helpful. Thank you so much, both of you, for your time today. We're coming up to the end here of the fireside chat. Our next -- for the investors listening, our next fireside chat is going to be with the Wallbox team at 10 a.m. Eastern Time. Thanks, guys, again. We really appreciate it, and have a good rest of the day.

Thank you, Kashy.

Thank you. Happy to help with any follow-up questions. Take care all.

All right. Bye.